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Collaborations Quarterly – Governance Corner

Chief Executive Performance and Compensation Review

The following is from Board Fundamentals, published by BoardSource:

 

While the board is accountable to the organization’s supporters and to the public for the organization’s performance, responsibility for organizational management is usually delegated to the chief staff person, regardless of their title.  He or she functions according to the authority delegated by the board and is therefore accountable to the board for his or her performance.  In order to effectively perform its oversight role, a board must provide an annual performance review with relevant feedback to its chief executive.

The process of assessing the performance of the chief executive has three main goals according to Jane Pierson and Joshua Mintz in Assessment of the Chief Executive:  A Tool for Governing Boards and Chief Executives of Nonprofit Organizations:

  • to clarify expectations between the board and the chief executive on roles, responsibilities, and job expectations
  • to provide insight into the board’s perception of the chief executive’s strengths, limitations, and overall performance
  • to foster the growth and development of both the chief executive and the organization

Boards are often reluctant to provide a formal performance review for the chief executive.  Their reason include; a perceived lack of time, hesitation to stand in judgment over someone they consider a peer or a friend, worries about a confrontation, or their perception that there is no need because everything seems to be going well.  Without regular and thoughtful assessment, the chief executive may begin to feel invulnerable and overconfident, which may result in risky or careless actions.  On the other hand, the chief executive may feel taken for granted and unappreciated or worry that his or her performance is seen as less than satisfactory, and, as a result, may underperform or be open to offers from other organizations.

To make the assessment a beneficial process for both the board and the chief executive, a mutually acceptable format must be found.  The board must decide whom to ask for feedback, how to collect and compile the feedback, and how to share it with the chief executive. It is tempting to either look for a simple quick rating instrument, or perform an informal survey of board members’ feelings about the chief executive.  Both temptations should be resisted.  Feedback to be collected must relate to the chief executive’s job description and previously agreed-upon goals and must be collected in a systematic and evenhanded way.  To emphasize the fact that the chief executive works for the board, not just for the board chair or the executive committee, the whole board should be asked to participate by responding to questions in an assessment survey.  The assessment should also include a chief executive self-assessment.

Once feedback has been collected, a summary report must be prepared prior to the results being shared with the chief executive.  In most situations, the board chair and at least one other member of the board will meet with the executive to discuss the assessment report and its implications for the future, such as possible job description revision, remedial actions to be taken, compensations, etc.  The annual review should result in the board and the chief executive agreeing on performance goals for the year ahead and other actions needed to ensure excellent executive leadership.  These goals and action plans then become a basis for the next year’s evaluation.

Dealing with the issue of compensation should follow and be part of the chief executive’s assessment.  Clearly, the results of the assessment should have a bearing on the compensation, but other factors also come into play.  Not only does the chief executive’s compensation package depend on the organization’s financial condition, but to avoid repercussions from intermediate sanctions regulations established by the IRS, boards should collect information related to executive compensation in similar organizations and similar markets before establishing their own chief executive’s compensation.  One of the issues that emerged from the Daring to Lead 2006 study was that perceived inadequate compensation is one of the reasons many chief executives are considering leaving their current positions.

Brian Vogel and Charles W. Quatt, Nonprofit Executive Compensation (BoardSource, 2010), strongly recommend that the entire board review and approve the chief executive’s salary and benefits.  The board may delegate responsibility for producing recommendations and the data to back them up to a smaller group or committee of board members.  However, the final compensation should be approved by the board as a whole.  There is one caveat:  Only independent board members… should be involved in the final approval process.

In order to effectively perform its oversight role, a board must provide an annual performance review with relevant feedback to its chief executive.

A thoughtful, annual performance review with relevant feedback to the chief executive is necessary for proper board oversight and fosters a healthy relationship between the board members and their chief staff person.