CEO Update LIVE panelists say demand for talent continues to drive up salaries

High inflation, the increasing demand for dynamic leaders, and the need for greater pay equity and transparency are all driving intense conversations on executive compensation among association boards. It's keeping executive recruiters, compensation experts and employment attorneys busy, panelists at the CEO Update LIVE: Executive Compensation webinar said April 19.

In their zeal to retain effective leaders, associations are extending employment contracts. Instead of the typical three-year terms, more executives are being offered five-year contract renewals. And while market data is more important than ever, boards recognize that it might reflect historical inequities.

"There's a greater focus on compensation now than probably at any point in the past 20 years," said Simon Quint, principal at consulting firm Quatt Associates, which specializes in nonprofit compensation. Incentive programs are becoming more common, he said.

"Everybody is really focused on compensation from board members down to employees," he said. "As a result, more and more organizations are looking for strong, contemporary market information and insisting that they pay competitively."

The other panelists were Lorraine Lavet, head of the association practice at executive recruitment firm Korn Ferry, nonprofit employment attorney Art Herold of Webster, Chamberlain & Bean, and James Wynn, also a principal at Quatt Associates.

"We're doing a lot of work with our clients on reexamining their compensation strategies and compensation philosophies," Wynn said. "As compensation continues to escalate, there's been a lot more board scrutiny on the cost of human capital. And there have been a lot more questions from board members wondering, ‘Do you need this many executives? Is it common to be paying at these high levels?'"     

Educating boards

Lavet said boards want transformational leadership, but often are surprised at what that costs today. Many have "champagne tastes and a beer budget," she said.

"More than ever, we're spending time educating search committees and boards about the state of compensation," Lavet said. "This is extremely important. And it's even more important where we're seeing longtime leaders retiring and new entrants coming in. There's a lot to be discussed. It's been a long time since those organizations even had executive compensation conversations about new talent."

Just because an outgoing CEO had long tenure doesn't mean they were paid at or above market rates, she said.

"We're very candid and manage expectations and give them a sense of what their expectations cost in the market," Lavet said.

Wynn agreed, saying the old notion of bringing in new executives at the low end of the range is changing.

"We're seeing much more of a focus on bringing in and hiring executives and staff closer to the target value in the compensation range rather than the bottom, for a number of reasons" including retention and pay equity in relation to the former CEO, he said.

Lavet and Quint said that boards want to pay the market rate but are willing to be flexible when they become aware that current comparative compensation data may be based on unequal pay for women or minorities.

"It's absolutely a conversation that's going on and it's requiring some organizations to sometimes deviate from the data because they recognize that the data has inherent biases associated with it," Quint said.

More at-risk pay

The use of incentive pay is on the rise, and with it comes scrutiny on the metrics on which bonuses are based.

"The prevalence of incentive plans is increasing," Quint said.

"We're seeing a real heightened attention to different compensation models, and there's a lot of conversation about at-risk income," Lavet said. "There are more metrics, very specific concrete metrics, in order to earn those incentives."

"Obviously, the financial condition of the association seems to be paramount for most performance bonus determinations," Herold said. "However, we've always encouraged associations that they should not look just at revenue. There are other aspects that may not be monetary that are important to measure the association executive by, such as accomplishments in providing services to members, success—if you can measure it—with respect to legislative or regulatory activities.

"While money and revenue and perhaps new membership are important elements in determining a performance bonus, it should not, in my view, be restricted to one particular element," Herold said.

Herold also said he is seeing an increase in signing bonuses for new executives.

"We're seeing signing bonuses when a new executive joins an association, particularly if they're leaving another association or giving up some benefits like deferred compensation," he said.

Longer-term contracts

Quint said board members are getting more involved to ensure pay is commensurate with market rates.

"An interesting development that I've seen in the last 12 months probably is related to board engagement in the compensation process, being a bit more proactive in ensuring that they are paying and competitively," he said.

"I've been hearing from many, many organizations that are no longer waiting until their CEOs contract is coming up. They're reaching out to me because they want to ensure that they're doing the right thing or paying competitively even if the CEO isn't asking for money. They want to demonstrate to that executive that this is important to them.

"I'd also say it's become a more transparent and collaborative process, where boards want to ensure that whatever they are providing to the CEO, that it truly meets the needs and objectives of the CEO and they're not just throwing something at the CEO because it sounds like it's a good term to throw into a contract," Quint said.

Wynn said contract terms are being extended as a retention tool.

"If a person is working out well (boards) want to lock them up, we're really seeing a push to four or five and I've seen a few six-year contracts," he said.

"Once an individual is on board and they're performing well, before the end of that initial term, and even if there's an automatic extension (where the contract is renewed if neither side takes any action), at least among our clients, the boards are acting early to open up talks for an extension."

Important elements

Herold, who represents both boards and individual CEOs in contract negotiations, highlighted key aspects of contracts.

"Probably the most important provision of an employment agreement is the termination provision," he said, noting that association board chairs can change annually.

"We're seeing some times when there are changes that new officers or directors, the first thing they want to do is terminate the executive if they're unhappy or there's a personal animosity. So, the termination rights you have are very important.

"If you are terminated without cause, and we see a number of terminations without cause, that's when severance should be available and should kick in.

"We see severance provisions ranging from three months to even a year in some cases," Herold said.

Beyond compensation and severance, another important contract element is the definition of the CEO's role and responsibilities.

"The duties of the CEO (should be) described and we find it important to be sure that the responsibility of the CEO is to hire, supervise and discharge all personnel. It's important that the CEO have that responsibility and that none of the staff, to the extent it's feasible, will have a contract that will permit them to bypass the CEO with respect to their employment. We want to see the CEO being completely in charge of hiring and firing and compensation."

Negotiate wisely

Wynn and Herold said CEOs should choose their timing and focus when negotiating or renegotiating contracts.

"If you can negotiate with a friendly chair, that person can be an advocate for you with the remainder of the board and that's the right time to seek an extension," Herold said.

Consider providing personal justification for what you are seeking, Wynn said.

"It's important in negotiations, especially if you're working with a favorable chair, to really frame your request," he said. "If you're asking you know, for remote work when you're joining a new association, (you could say), ‘My daughter's a sophomore in high school, and I don't want her to relocate.'"

While boards are increasingly aware of the need to pay for talent, Quint said executives should take care to remember what the organization is all about.

"Executives forget that they are still working for an association, a nonprofit organization, and that doesn't mean they should not be well paid," he said. "They should be very competitively paid if they're doing a good job.

"Where we've seen it go south at times is when one loses sight of the mission. Boards want to pay well for people who are going to push their mission forward. When the focus of the conversation loses all sight of that and only becomes about the dollars, (that can leave a) sour taste in boards' mouths and sometimes derail the conversation," Quint said.