Nonprofit CEO Contract Best Practices

It often surprises us when we hear about nonprofit chief executives working without a contract, even if they are employed by very large, sophisticated nonprofits.

Let’s start with some key data points. According to Candid, there are 12.5 million employees in the sector and “70% of nonprofits have 10 or fewer staff members, and of those, 43% are completely volunteer-run.” It is also not surprising that “Women run most organizations with annual expenses below $25 million. Men run more with expenses above $25 million.”

For all those nonprofits with paid staff, ensuring these dedicated professionals have the tools and resources needed for successful job performance and job satisfaction should be a major priority for the board. Critical support should extend beyond an updated job description and annual performance review — they should include a contract. The board’s support and evaluation of the chief executive — and their working in constructive partnership with them — is a fundamental aspect of governance. 

We often say that the most important relationship in any nonprofit organization is the relationship between the board and chief executive, and the second most important is among board members themselves. Let’s look at little deeper at data points related to these relationships. 

The 2023 Leading with Intent: BoardSource Index of Nonprofit Board Practices report share the following insights:

• 10% of chief executives plan to leave their position in the next 12 months, and 18.3% plan to leave in 12-36 months.
• 69% are moderately or extremely satisfied in their jobs.
• 69% say the board has a moderately or extremely positive impact on their personal job satisfaction.
• 71.2% have mutually agreed upon goals between the board and chief executive.
• 56.3% have had a formal evaluation of their performance within the past 12 months.
• 57.1% have a formal process for setting appropriate compensation.

If you are a nonprofit chief executive or board member, would your answers be aligned with this data? 

And, if you or your chief executive does not have a contract, here’s where to begin:

• BoardSource offers guidance on what to include in a contract. We use their insights as a guide for all our clients as it’s a best practice document.

• We recommend a three-year contract that includes details on compensation, benefits, and bonus structure. Neither chief executives nor board members should ever have to guess on matters related to compensation as it should be explicitly spelled out.

• The compensation can have a standard increase during the contract term, potentially based on cost of living, but it should also clearly state how merit raises or bonuses are determined.

• The full board, not just a committee, should understand this process, timeline, and the decision-making rationale.
  • The following were major factors for determining compensation, as reported in the 2023 Leading with Intent data:
    • 77.1% performance review results 
    • 78% organization’s performance in meeting its objectives
    • 36.7% comparable organization compensation surveys
    • 18.3% staff retention rates
    • 49.5% fundraising success

• Benefits offered beyond health insurance and retirement contributions might include items such as use of a coach, professional development, car allowance, expense account, and/or deferred compensation. We recently reviewed a contract that included a stipulation that the board had to sign off on all expenses, including mileage reimbursements. From our perspective, that feels punitive. Trust your chief executive to manage minor items and rather have a cap or some financial limit but let them operate.

• Termination, resignation notice, and severance considerations should be outlined clearly but, again, be cautious on being unrealistic. Sometimes a chief executive is recruited to another position and the maximum notice that they can give is six weeks, not six months. We’ve seen contracts that required the chief executive to pay liquated damages if they did not give 90 days’ notice. 

• Board member must pay attention to the timelines as established. Many times, contracts expire without notice and then the chief executive is left without an agreement and may be feeling negative that the matter was not addressed in a timely manner. Ensure that the governance committee is monitoring the agreement timelines and terms.

• Understand that a contract sets the tone for the relationship. Having a thoughtfully worded agreement that expresses the mutual desire to work together and to be supportive of their leadership, will serve the organization well. 

Let us know if we can be of further assistance in your efforts because we know that governance is everything and leadership matters.