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How Do Nonprofits Determine CEOs’ Productivity?

 

 

 

How Do Nonprofits Determine CEOs’ Productivity?

By: Eugene Fram           Free Digital Image

Nonprofit organizations can’t have a traditional bottom line profits. If they did, CEO productivity determination could be less complicated. Determining a fair CEO  salary or benefit based on productivity, can be a complex issue for a nonprofit board. Providing too little or too much can be dangerous for the organization and possibly the board members. Although the spadework for salary and benefits need to be done by a small committee, the entire board needs to fully agree on the rationale for the final decision.

Following are some of significant challenges that I have noted nonprofit boards face when determining what is a fair system.

• Evaluation Failure: Some CEOs might receive high  salaries because a series of boards have not effectively evaluated her/h performance. It is not unusual to find CEOs who have not been formally and effectively evaluated for years. They are held in position because they are “minding the store,” not being professional managers. It isn a comfortable position for both board and CEO.  As one CEO commented to me, ” I present the board with alternatives, they make the decision that I must implement.”

  Market Forces: Nonprofit organizations are restricted by law from providing their CEOs with excess benefits. (Section 4958 – IRS Code) As a result, the benefits offered the CEO must reflect a market level found in the geographic area and/or the person’s professional qualifications. For example, nonprofit health insurance organizations may have to compensate CEO at levels that are competitive with for-profit organizations. In my opinion, unusual CEO benefits (e.g. luxury cars) that are hard to justify market-wise are invitations for an IRS inquiry

• Board Relationships: Obviously having a good, not perfect, interrelationship with the constantly changing board membership is critical to support a reasonable  compensation level. It is especially important in association type nonprofits where the person holding the board chair position changes annually. I recently encountered one board chair who, although being very pleased with the CEO’s performance, expressed a concern that the CEO did not have good communications with board members. The chair welcomed a suggestion that the board might engage a professional coach to help the CEO work on the issue.

• Additional Benefits: Although not usual in the for-profit environment, special benefits can be offered the nonprofit CEO, especially if they relate to job performance. These can range from special insurance coverage to extensive travel benefits , educational opportunities. or even housing and entertainment allowances. If involved with fundraising, like a college president, housing and entertainment benefits may be appropriate. In some unusual instances the person’s spouse or significant other may also receive compensation for time spent to benefit the nonprofit.

• Nonprofit CEO: It is not unusual for the  nonprofit CEO to undervalue his/h own worth, especially when associated with a human services type of organization. This then keeps a cap on the whole salary scale and can make it difficult to hire capable people. Example: I encountered one CEO with degrees in human services and management areas plus 30 years of excellent experiences. Admired for his performance by peers in a nearby university, he refused to use that leverage to seek equitable compensation.

• Personality: Now doubt a positive CEO personality can be an attribute in working with boards and staffs.mAt an extreme, some nonprofit boards continue to support well-liked CEOs, even after they have been found to be involved with fraud. The board then has to be removed by state attorneys’ actions.

Summary:
Nonprofit boards can do a poor job of determining nonprofit CEO salary and benefits because of inherent challenges. Evaluating critical qualitative outcomes and impacts, like improving life quality and successful advocacy, can be daunting. Nonprofit compensation must in line with market levels and professional qualifications, or the board members may acquire an IRS personal liability if they provide excess salaries and benefits!     

Once Again! Nonprofit CEO: Board Peer – Not A Powerhouse

Once Again! Nonprofit CEO: Board Peer – Not A Powerhouse

By: Eugene Fram                Free Digital Image

Some nonprofit CEOs make a fetish out of describing their boards and/or board chairs as their “bosses.” Others, for example, can see the description, as a parent-child relationship by funders. The parent, the board, may be strong, but can the child, the CEO, implement a grant or donation? Some CEOs openly like to perpetuate this type of relationship because when bad decisions come to roost, they can use the old refrain: the board made me do it.

My preference is that the board-CEO relationship be a partnership among peers focusing on achieving desired outcomes and impacts for the nonprofit. (I, with others, would make and have made CEOs, who deserve the position, voting members of their boards!)

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Different Strokes For Nonprofit Board Folks
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Different Strokes For Nonprofit Board Folks

By: Eugene Fram     Free Digital Photo

Over decades of service on nonprofit boards, I have interfaced with board colleagues who possess a variety of performance styles and behaviors. Certain of these types seem to be common to all boards. My comments below are based on adaptations of a director classification system suggested by David Frankel, Partner of Founder Collection. *

The Eager Beaver  

This board member (30s to early 40s) has probably been successful as an entrepreneur or is, perhaps, rapidly rising through middle management in a larger organization. He/she wants to “get things done”. His/her impatience with the typically slow nonprofit rate of progress can be channeled and directed by the CEO or Board Chair. Discouraged by lack of action, this director may quietly exit the board on the pretext that work pressures have increase. On the other hand, if properly nurtured, this category can offer substantial leadership contributions.  

The Checked-Out Check Writer 

Serving on a nonprofit board has likely become a family or company tradition for some directors. (Some local nonprofits are now about 100 years old or older.) Regardless of the person’s dedication to the mission, nonprofit board service becomes part of this director’s DNA. Often they develop into respected leaders and can be conduits to modest or substantial donations. In addition, they have access to interpersonal networks that are useful in recruiting other able board members. This cohort should be valued and their contributions, acknowledged.

The Vanilla Director 

This is a director who attends meetings regularly, occasionally makes an interesting comment. He/she is dedicated to the mission of the organization and can make substantial financial or other contributions. One such director I observed, volunteered to assist the staff with a difficult field problem.  According to Frankel, these directors are “less critical and offer encouragement…. ” However, like many other nonprofit board members, across behavioral types, avoid rigorous discussions at board meetings. If substantial conflict appears between factions of the board on a major issue, they may resign instead of taking an unpopular stand.

The Nonprofit Entrepreneur

This is a director who has a substantial understanding of the nonprofit sector. He/s has served on other nonprofit boards and is dedicated to the nonprofit’s mission. He/s has a desire to help move the nonprofit to its next level of service to clients. He/s often brings bold or different perspectives to the board and management. She/h knows that to achieve growth and improve client services, it is necessary to “sell” ideas to other board members, as well as the CEO. It’s important that the nonprofit entrepreneur and CEO are on the same page in terms of the organization’s future and potential to serve clients. If not, the CEO, unfortunately, may view the entrepreneur with his/h “fast track” style as a disrupter.

An overview of nonprofit boards tends to focus on the unique set of skills and work experience they bring to the table (doctors, professors, accountants, full-time homemakers etc.) A closer look at the board suggests another layer of classification i.e. individual styles, motivation and behaviors. Herein is challenge and opportunity to develop meaningful board experiences for each individual who has said “yes” to the call to service.*

* https://hackernoon.com/eight-people-youll-meet-on-your-board-of-directors-8963863d4a03  

How Can A Chief Operating Officer (COO) Advance Your Nonprofit Organization?

How Can A Chief Operating Officer (COO) Advance Your Nonprofit Organization?

By: Eugene Fram                Free Digital Image

In my decades of involvement with nonprofit boards, I have encountered several instances in which the CEO has failed to engage the services of a COO–when this addition to the staff was clearly needed. In each case and for whatever reasons, this reluctance to act left the nonprofit organizationally starved.

This means that the CEO continues to handle responsibilities that should have been delegated, some of which a predecessor may had assumed during the start-up stage. I once observed a nonprofit CEO with an annual $30 million budget personally organize and implement the annual board retreat, including physically rearranging tables/materials and cleaning the room after the retreat! When top leadership is deflected in situations at this level, client services and the general health of the organization is likely being negatively impacted.

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Nonprofit Boards Should Consider the Implications of Artificial Intelligence (AI)

Nonprofit Boards Should Consider the Implications of Artificial Intelligence (AI)

BY: Eugene Fram           Free Digital Image

AI is rapidly being implemented in many environments, some with aggressive intensity. Walmart, for example, will be replacing 7,000 jobs with artificial intelligence powered technology. Foxconn will be replacing 60,000 factory jobs with machines. * While this is a minuscule portion of Walmart’s total employment, it presents a new reality—machines create fascinating outputs that require less energy to produce and do so at lower costs. They are capable of making decisions, regardless of skill level. *

What Nonprofit Skill Levels Might be At Risk

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Questions For Nonprofit Board Meetings—And Why They Are Needed

Questions For Nonprofit Board Meetings—And Why They Are Needed

My greatest strength as a consultant is to be ignorant and ask a few questions. – Peter Drucker

By: Eugene Fram

Knowing the right questions to ask at a nonprofit board meeting is a critical part of a board member’s responsibility. Following is a list that, as a nonprofit director, I want to keep handy at meetings. * I also will suggest why I think each is important in the nonprofit environment. Compliance and overviewing management alone do not guarantee success.

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The Enron Debacle, 20 years Ago—2021 Lessons for Nonprofit Boards?

 

The Enron Debacle, 20 years Ago—2021 Lessons for Nonprofit Boards?

By: Eugene Fram                Free Digital Image

In 2001 Enron Energy collapsed due to financial manipulations and a moribund board. It was the seventh-largest company in the United States. Andrew Fastow, the former CFO and architect of the manipulations served more than five years in prison for securities fraud. He offered the following comments to business board members that, in my opinion, are currently relevant to nonprofit boards. (http://bit.ly/1JFGQ6T) Quotations from the Fastow article are italicized.

• One explanation of his downfall was he didn’t stop to ask whether the decisions he was making were ethical (moral).

Nonprofits directors and managers can find themselves in similar situations. One obvious parallel is when a conflict of interest occurs.  In smaller and medium sized communities, it is wise to seek competitive bids, especially when the purchase may be awarded to a current or former board member or volunteer.

Board members and managers themselves can be at personal financial peril, via the Intermediate Sanctions Act, if they wittingly or unwittingly provide an excess salary benefit to an employee or an excess benefit to a volunteer or donor. Examples: The board allows a substantial above market salary to offer to the CEO. Also the board allows a parcel of property to be sold to a volunteer or donor at below market values.  See: https://www.irs.gov/charities-non-profits/charitable-organizations/intermediate-sanctions

One subtle area of decision-making morality centers on whether a board’s decision is immoral by commission or omission. Examples: In its normal course of client duties, the board allows managers to travel by first class air travel. Obviously, resources that are needed by clients are being wasted and morally indefensible. On the other hand the moral issue can come in to play, if the nonprofit is husbanding resources well beyond what is needed for an emergency reserve. The organization, in a sense, is not being all it can be in terms of client services or in seeking additional resources. Overly conservative financial planning, not unusual in nonprofit environments, can result in this latter subtle omission “moral” dilemma. Overtly, universities with billions of dollars on their balance sheets have been highlighted as having the issue, but I have occasionally noted smaller nonprofits in the same category.

• He (Fastow) said he ultimately rationalized that he was following the rules, even if he was operating in the grey zones (area).

There can be grey zones for nonprofits. Example: IRS rules require that the nonprofit board be involved in the development of the annual Form 990 report. But what does this involvement mean—a brisk overview when the report is finished, a serious discussion of the answers to the questions related to corporate governance, a record in the board minutes covering questions raised and changes suggested, etc.? A nonprofit boards needs to make a determination on which course is appropriate.

Boards implementing government-sponsored contracts can get into grey areas. Example: Some contracts require the nonprofits to follow government guidelines for travel expenses. I wonder how many nonprofit audit committees are aware of their responsibilities to make certain these guidelines are followed?

According to Fastow, a for-profit director can ask the wrong question—“Is this allowed?” A nonprofit director can make the same mistake. Instead, in my opinion, the better question for a nonprofit should be “Will this decision help the organization to prosper long after my director’s term limit?”

As Fastow did, human service boards can invite trouble if they falsely rationalize an action as being taken for client welfare, and then conclude they are following the rules.

• Mr. Fastow said one way to start changing an entrenched culture is to have either a director on the board, or a hired adviser to the board, whose role is to question and challenge decisions.

Nonprofit directors are often recruited from friends, family members and business colleagues, etc. This process creates an entrenched board.

When elected to the board, a process begins to acculturate the new person to the status quo of the board, instead making best use of the person’s talents. Example: An accountant with financial planning experience will be asked to work with the CFO on routine accounting issues, far below her/h professional level. One answer is to accept Fastow’s suggestion and to appoint a modified lead director or adviser to a nonprofit board. (For details: see: http://bit.ly/13Dsd3v)

An old Chinese proverb states, “A wise man learns by his own experiences, the wiser man learns from the experiences of others. Nonprofit can learn a something from Andrew Fastow’s post conviction recollections to hopefully help avoid significant debacles.