We have all read sensational headlines about compensation packages paid to big company CEOs and wondered aloud (or shouted) “WHY?” Sometimes we even have that response regarding nonprofit CEO compensation. In either case, boards typically struggle to justify the link between the executive’s performance and their compensation.
The new IRS Form 990 includes questions for nonprofits about their compensation practices and procedures and encourages boards to take what I call a “3-D” approach to determining CEO compensation:
- Data-driven……(use compensation survey data or retain a qualified consultant)
- Disciplined……(establish procedures to review data; directors are not conflicted)
- Documented…..(memorialize and retain compensation deliberations)
The Council’s Compensation standard follows the principles outlined in the new IRS Form 990 and encourages nonprofit boards to adopt a similar “3-D” approach.
In addition, the Council’s Chief Executive Assessment standard supports nonprofit boards establishing performance goals and expectations for the CEO and annually assessing the CEO’s performance against those goals and expectations. Such an assessment identifies areas of strength and opportunities for improvement, as well as provides data that supports the board’s compensation decision. (For more information on this, Boardsource has a great topic paper on things to know about chief executive assessment.)
Does your organization conduct a performance review of the CEO? Can your organization affirmatively answer the new IRS Form 990 compensation questions?
Coming up: Monitoring Mission & Strategy