August 19, 2024
While the focus is on those who are paid more than $1 million, a federal law could also trigger tax on many more executives.
Personnel costs at associations will likely rise, and employee duties are expected to change due to a new federal overtime rule issued by the Department of Labor effective July 1.
The new regulation under the Fair Labor Standards Act makes significantly more employees eligible for time and a half if they work more than 40 hours in a work week.
Prior to the new regulations taking effect, the minimum salary threshold above which executive, administrative and professional (EAP) employees were exempt from overtime pay was $35,568 annually ($684 per week). That threshold is now $43,888 per year ($844 per week) and will rise to $58,656 per year ($1,128 per week) on Jan. 1, 2025.
In addition, the minimum salary level to qualify for the highly compensated employee exemption from overtime rules also has increased to $132,964 from $107,432 and will rise to $151,164 on Jan. 1.
The thresholds will increase automatically every three years starting July 1, 2027, based on data about the average wages of salaried workers.
“There could be substantial changes to how associations operate,” said Julia Judish, special counsel at law firm Pillsbury Winthrop Shaw Pittman. “And that affects not just the employees who fall underneath this change in minimum salary levels but also their colleagues.”
Judish said that to avoid paying overtime to lower-paid employees, employers may ask those who are paid more than the thresholds to do more work.
Reducing services, laying off staff, lowering hourly pay and increasing the compensation of some workers so they are over the threshold are among other actions employers may take.
Many associations and nonprofits — including the American Society of Association Executives (ASAE) and the National Federation of Independent Business — unsuccessfully urged DOL to amend the rule before its final adoption on their behalf and that of their members.
In a November 2023 letter to the agency, ASAE said associations and other nonprofits would be harder hit than for-profit companies, partly because nonprofits typically pay their employees less.
In the letter, CEO Michelle Mason asked DOL to allow a biweekly calculation to determine if an employee has worked overtime. That is, if an employee works 50 hours one week but 30 the next, they would not be owed overtime, in ASAE’s example.
That’s an important consideration for associations that hold meetings that require staff travel and long hours. However, DOL did not allow a biweekly calculation.
One potential result is that some junior staff may no longer be asked to travel to meetings, Judish said. That could stunt professional development.
Time for legal review
Jim Wilson, a partner at law firm Webster, Chamberlain & Bean, said the implementation of DOL’s new overtime rule is a good opportunity for associations to review their practices. Wilson typically represents nonprofits as an outside general counsel.
In addition to complying with the increased pay thresholds, associations should make sure they are classifying employees correctly.
“Just because you call somebody an executive or a professional or an administrator, that does not mean they meet that exception,” he said. “This is an occasion to look at how you’ve been treating this issue overall and to make sure you’re compliant.”
Investments boosted the median association reserve ratio in 2020-2021
From cash in the bank to investments in stocks and bonds, how much should associations hold in reserve? And what mix of savings and investments should they hold?
Experts generally recommend that six to 12 months of expenses be held in reserve, meaning 50% to 100% of expenses in reserve. That’s the “short answer,” Nat Bartholomew, partner at accounting and consulting firm Clifton Larson Allen, told CEO Update. But a specific answer depends on factors like the stability of an association’s revenues and its ability to tap members for extra funds in a crisis.
The recent pandemic proved how critical it is for associations that are heavily dependent on in-person activities like meetings and education for their revenue to have a healthy reserve. Other organizations in recent years have found the need to mount expensive advocacy campaigns to respond to what they see as existential regulatory or legislative threats to their industries.
“Different organizations are going to require different reserves, based on where their risks and opportunities are,” Bartholomew said.
Short-term operating reserves are necessary to smooth out the ups and downs of yearly cash flow. Long-term operating reserves are in case of unexpected events like a sudden drop in membership, he said. Long-term strategic reserves are for different categories of risk and opportunity: advocacy needs, technology investments, building repairs and improvements, litigation risks and even things like celebrating of an association’s anniversary. If your C-suite executives are aging, you might set aside money for eventually replacing them. “That can be quite expensive these days,” Bartholomew said.
“If you’re not prepared, from a technology standpoint, a human capital standpoint, or for litigation or advocacy, these things can make or break an association. So, reserves are critical,” he said.
View new data: Reserves grew during COVID on strong markets
Groups adding to reserves
The pandemic may be one reason associations appear to be building up their reserves in recent years. According to ASAE’s 2022-23 Association Investment: Policies, Practices and Performance study, “just 13% of respondents reported holding reserves of 25% or less of their annual operating budget, whereas in 2020 this figure was 21%. Second, the number of associations that have to justify (to board members) the level of reserves held declined meaningfully.”
“The level of pushback that associations get for the amount that they’re holding in reserve is declining,” said Ahmed Farruk, principal and regional director at Fiducient Advisors and an author of the study. “And that’s probably because we’ve been through some tumultuous periods. Maybe more people are embracing the idea that keeping a healthy reserve isn’t about being a Scrooge McDuck sitting on a pile of money and counting it but understanding that there are going to be periods when these reserves are very valuable to the organization either from an emergency need perspective or an opportunistic perspective.”
CEO Update spoke with the CEOs of three associations to learn about their approaches to reserve policy: the National Association of Chain Drug Stores (NACDS), the Mortgage Bankers Association (MBA) and The ESOP Association (TEA).
Both NACDS and MBA have more than a year’s worth of expenses in reserve. Much leaner times are within recent memory for both groups and their volunteer leaders are happy for the associations to have plenty of cash and investments.
TEA, which represents companies that offer employee stock ownership plans and professionals who provide support services for those plans, runs with less than six months in reserve but feels secure in its regulatory environment and can tap members for contributions should the need arise.
From sickness to health
When Steve Anderson became CEO of NACDS in 2007, the group had just $345,000 in reserve, a tiny fraction of the nearly $35 million in expenses the group reported in 2006. Anderson had to focus the group narrowly on core priorities and lay off staff to restore the association to health. Today, its assets are about $70 million and NACDS expects revenue of about $37 million this year.
“We’ve got about two years of our operating expenses in reserves, and we’ve used them when we needed to,” such as when all three of NACDS’s meetings were canceled in 2021, he said. The association’s conservatively invested short-term reserves could fund operations for about a year. The rest, in long-term reserves, is invested aggressively with 70% in stocks, 25% in bonds and 5% in cash.
“I’m a firm believer in the more reserves, the better,” Andersons said. “We’ve got a lot of public policy priorities we’re working on.”
Currently, NACDS is tapping reserves to fund an advertising campaign in its battle against pharmacy benefit management companies, which Anderson said are driving some pharmacies out of business.
Mortgage default
MBA had recovered from disaster during the Great Recession of 2007-09 by the time Bob Broeksmit became CEO in 2018. But the memory of the ordeal keeps board support strong for a healthy — and conservatively invested — reserve.
MBA had purchased a new headquarters building in Washington, D.C., for $79 million shortly before the real estate bubble burst in 2008 and was forced to sell it for just $41.3 million in 2010 as its industry floundered and it was unable to attract enough tenants to the building. MBA defaulted on its mortgage and had virtually nothing in its reserves.
But now MBA has 27 months of operating expenses in cash and marketable securities — above the board’s target of 18 months, Broeksmit said. Dues and meetings revenue each make up about 40% of MBA’s overall revenue, which was $73 million in 2022.
“The scars are fairly deep from having such disastrous financial conditions,” Broeksmit said. “People are happy to err on the side of having too much in reserves for now.”
That could change at the end of this year when the organization expects its industry to be trending up because of lower mortgage rates and a consequent increase in home transactions. At that point, the board may seek to deploy its excess reserves, possibly by adding more services or making a strategic investment, he said.
MBA keeps a healthy short-term reserve of about six months of expenses in safe, cash-like instruments, and also recently has reduced risk in its long-term reserves, Broeksmit said. From a previous allocation of about 60% stocks and 40% bonds — a typical moderate-growth allocation — MBA has flipped to 40% stocks and 60% bonds, a conservative posture.
“That protects us on the downside at a time when that seems appropriate since our reserves are a good deal higher than our target,” he said. “It also results in throwing off interest and dividend income that the board can choose to use to supplement regular revenue.”
Reserves of goodwill
Jim Bonham, CEO of TEA, said his association’s reserves are “plenty,” although it might not seem that way if you only looked at their IRS Form 990. Based on that public disclosure, TEA’s reserve was just 5% of their operating budget in 2022.
It’s a good example of the limitations of using 990 data to draw firm conclusions about an association’s reserve ratio. Bonham said the group, which reported $8.8 million in total expenses in 2022, currently has about $2 million in long-term invested reserves. TEA typically carries a cash balance between $800,000 and $1.3 million. It has a line of credit that it isn’t currently using and no debt.
Bonham also said the group has some cushion in its Employee Ownership Foundation, of which he is president. The foundation reported nearly $1.7 million in net assets without donor restrictions in 2022 and less $1 million in total expenses. It reported nearly $1.2 million in revenue.
“There are activities that can be undertaken by the foundation that the association typically does. In a pinch, the foundation could take over some of those responsibilities,” he said.
Bonham said TEA has great bipartisan relationships with policymakers and he doesn’t expect any need to fund a major advocacy campaign. If there were such an event, TEA members — some of which are major corporations, such as Walmart — could step up to fund an appropriate response.
In any case, Bonham says money is not TEA’s most important asset.
“I don’t just look at the reserve we have in terms of cash in the bank, I look at the reserves that we have with policymakers and our reputation,” he said. “We have a tremendous depth of goodwill that we have built up over many years. If there is some catastrophic event, we can draw upon those relationships.”
“We’re a nonprofit. I take that seriously. Accumulating big cash balances in the bank, I don’t see that as an advancement of that mission,” he said.
Anderson, Broeksmit and Bonham are members of CEO Update’s CEO Roundtable.
Advice to CEOs negotiating employment agreements: Don’t let your drive for a few more dollars lead board members to question your commitment to the association’s mission.
That’s especially true for first-time CEOs, who should think long-term, build relationships and focus on proving themselves so their second and third contracts might be more generous.
These were the words of wisdom shared by panelists during the CEO Update LIVE: Compensation forum held on April 3 in downtown Washington, D.C.
Simon Quint, a principal at compensation consulting firm Quatt Associates, advised CEOs to be objective when considering how much compensation to seek. Those looking at the tax disclosures of other associations need to gauge their expectations on CEO pay at organizations of similar sizes, with similar activities, locations and missions.
“If you’re not being objective about what your market is, and you have these unrealistic expectations about what compensation should be, you run the risk of your board feeling like, ‘Maybe this person isn’t as committed to the mission as we thought they were.’
“These are still nonprofits,” he said. “Even if you’re representing a trade association, representing businesses, you’re still working toward the mission and your board members still want to see that.”
The other panelists were Leslie Hortum, association practice leader at executive recruiting firm Spencer Stuart; Art Herold, a partner specializing in employment law at Webster, Chamberlain & Bean; and former longtime National Association of Professional Employer Organizations CEO Pat Cleary. CEO Update’s own CEO, Brittany Carter, moderated the hybrid event.
First-time CEOs need to realize how valuable it is to get into the “CEOs club,” said Cleary. Once in the club, other leadership opportunities will come along if you are successful, he said.
Quint made a similar point.
“It’s really that second and third contract where we see the biggest jumps in compensation because you’ve proven yourself,” Quint said. “Most of the boards we work with are very receptive to moving compensation quickly once you prove yourself.”
And Cleary advised all CEOs to think less about how much they can get, and more about how much is enough.
The professional employer organization sector — which consists of companies that provide outsourced HR and other services — grew tremendously during Cleary’s tenure, but he didn’t seek to renegotiate for more money during his final five-year contract.
“Our industry outran my contract, but it was a good contract,” Cleary said. “My personal view is to focus on what is enough.”
More bonus money
Hortum said she’s noticed a trend toward more at-risk pay. (She is a recruiter member of CEO Update’s CEO Roundtable.)
“I remember years ago when association CEOs didn’t even have performance bonuses, but now they not only have an increasing percentage of their total package in that performance bonus, but the trend (is) to have more clearly defined metrics” for determining the bonus, she said.
Severance terms also are a major topic today, Hortum said.
“The trend that I see is typically six to 12 months of severance if you’re asked to leave for reasons other than cause,” she said.
Hortum said when board members represent for-profit companies, they need to be reminded that association CEOs get no equity in the companies when they leave.
“There’s no golden (parachute) that they’re going to get. So, having a decent severance package that allows the CEO to transition to that next chapter is super important,” Hortum said.
Herold agreed. He noted that two situations trigger severance pay: when the association terminates the CEO without cause (that is, in the absence of improper or illegal conduct) and when the CEO terminates the contract for what is defined as good reason. An example of such a reason is if the association moves more than 50 miles away from its current location.
But there are “gray areas,” he said. For instance, does severance begin when the CEO is notified of termination, or only when the CEO departs? And if the association declines to renew a CEO’s contract without due cause, should the CEO get severance?
“We’re trying to write more and more provisions in employment agreements for executives that would say, if the association fails to renew without cause, that that would also trigger severance,” Herold said. “But that’s still an issue that we’re seeing going both ways.”
Quint said that when comparing your compensation expectations with what CEOs at similar organizations are paid, focus on the median of the pay range, not the top. (The median is the point where half of the CEOs in the dataset make more and half make less.)
“The median philosophy has the benefit of competitive pay, but it’s also one that you can very comfortably sell to your membership and other stakeholders. Membership organizations don’t love the idea that their dues are going to pay for compensation at the very top of the market,” Quint said.
“It never goes especially well when somebody cites a single (nonprofit tax disclosure) and says, ‘That’s how I should be paid,’” he said. “It needs to be a much broader conversation about what is in the best interest of the organization while also considering what is the market value for the position.”
There’s no need to wait until the last year of your deal to seek an extension; candidates who get offers can take cues from recruiters.
Note: The positions of CEOs and other executives interviewed for this story may have changed since the initial reporting of this story.
Managing your board and its committees is both art and science, and the "science" part is particularly important with investment committees.
A mission-critical task like investing your association's reserves for growth and stability—especially given the volatility and uncertainty of the markets in recent years—should be done with established parameters, training and empirical data.
Best practices include bringing together on the committee people with a diversity of backgrounds and viewpoints, and at least some volunteers with knowledge of investing.
"Having individuals with knowledge of investing, generally speaking, who can bring their own expertise or knowledge into that role, can be very helpful to the rest of the committee members as well as to the company you're using for your investment advising," said Natasha Rankin, CEO of the Irrigation Association. The association's investment advisors are from Morgan Stanley.
But a volunteer's experience with IRA or 401(k) retirement plans is not enough. Rankin, previously chief operating officer at the American Counseling Association, said she seeks volunteers with organizational experience for an investment panel.
"I am thinking of people who—maybe for their company or in a specific profession, (or) maybe as part of their role where they work—have that organizational investing perspective," she said.
Committee members shouldn't rely too much on personal experience, but it happens sometimes.
"(Individual investors are) looking at their own needs; they're looking at the needs of their children or their family," Rankin said. "But it's a really different perspective that you're bringing to an association, because what you're investing for—when you say long-term investing and sustainability—you're talking about, ideally, infinity."
Personal versus fiduciary
Ahmed Farruk, regional director and senior consultant with Fiducient Advisors, agreed.
"Many (committee members) are going to understand most broad investment principles, likely due to their own personal experience. But that is different than investing for a nonprofit in a fiduciary capacity," he said in an email.
Fiducient produced a podcast in 2021 called 10 Habits of Effective Investment Committees, and among the recommendations was that panel members should resist personal investment bias.
"They should understand what's generally happening in the markets but should be careful about what they read and/or what they take away from that. Much of what's out there is designed for the masses (and) leaves out much of the important detail that investment professionals dig into when building and managing portfolios," Farruk said.
Farruk also said the size of a committee is important; five to seven members is sufficient to get a broad array of perspectives and experience. He cited an ASAE study released last year showing most associations of all sizes have between four and six members on the panel, while a substantial number have seven to 10. But 21% of associations with revenue below $1 million have just one to three investment committee members.
Regular training
Among Farruk's clients is the Construction Specifications Institute. COO Velma Hart is CSI's longtime liaison to the seven-member investment committee.
"Those that are educated on a regular basis about the breadth and scope of their responsibilities, and where that breadth and scope end, function at the highest level," Hart said.
There are certain variations to committee roles, depending on factors such as whether an outside investment advisor is used. Some committees have the responsibility of making and executing investment decisions. In CSI's case, the panel is charged with strategic oversight consistent with the association's investment policy statement (IPS). CSI's IPS has not been changed in a long time.
"(The committee's role is) clearly stated in the IPS," Hart said. "They don't decide on investments, but they do oversee the board-approved investment strategy. Their responsibility is to ensure compliance with that investment strategy."
CSI's strategy, since before the pandemic, has been to draw on its ample investment reserves to fund operations and growth opportunities. That makes it essential to get the investment strategy and execution right, in good markets and in bad.
CSI puts resources into training the board, including the investment committee, "so they don't cross that line and get us into danger," Hart said, adding that it "has been money well spent."
"You wouldn't think that people need to be reminded, especially volunteers, of the scope and range of responsibilities, but they do.
"It's been very meaningful and useful to have regularly scheduled training for our volunteers on their responsibilities not only on the investment side but from a governance standpoint," she said.
CSI's board members appreciate the training.
"They look forward to it. They can take that knowledge and use it in their business, in their day-to-day activities. They see it as personal and professional growth, simultaneously," Hart said.
INVESTMENT PANEL TIPS
Diversity: Differences of opinion and perspective are important.
"It's always a good idea to have different views—even if those views don't always result in action," said Ahmed Farruk, of Fiducient Advisors. "They're at least discussed, and there's a record of that discussion."
Institutional memory: Stagger terms on the committee so not all volunteers roll off at once; but fresh perspectives should be brought in regularly.
Strong chair: To avoid a "halo effect," the member with the most power or influence should be the last to provide their opinion, so that others feel free to speak.
"A strong chair is critical to channel the opinions of those who are comfortable with investments and welcome the opinions of those who may not be," said Farruk.
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