For small or medium-sized boards, executive compensation may be handled by the entire board. For larger boards of directors, though, it may be useful to delegate executive compensation matters to a special compensation committee in order to ensure adequate time and consideration is dedicated to this detail-oriented task. Alternatively, some organizations assign executive compensation to the board’s executive committee. Regardless of which committee members are involved in the process, the full board should have an understanding of the compensation as it relates to the chief executive officer and any other officer’s compensation that will become public knowledge as a result of being reported on the Form 990.
All board members should be able to communicate the rationale behind executive compensation, as well as understand the process used to arrive at those decisions. The board must decide if using the two-step process of committee work followed by full-board discussion would streamline the process or simply add an additional step.
Another important consideration is to take an inventory of each board member’s skills and experience. Do board members currently have the expertise to adequately address executive compensation issues? What additional resources should be part of the process—legal counsel, compensation consultant, tax advisor or others?
The Compensation-Setting Process
Once the board has determined the internal structure, it needs to establish the overall executive compensation process. Steps can include:
- Review the organization’s mission, goals and strategy as it relates to its compensation plans. Review (or develop) the organization’s compensation philosophy. (Further information will be provided in the next post in this series.)
- Assess job responsibilities, job description(s) and job title, if necessary. Conduct annual performance review(s), including a review of effectiveness and the achievement of any individual goals set in the prior year. Set annual and long-term goals for the future.
- Gain an understanding of the marketplace and gather data on compensation at comparable organizations.
- Approve the compensation package. Any individual with a conflict of interest should not be involved in the discussion or voting.
- Record contemporaneous documentation that will satisfy the rebuttable presumption of reasonableness.
Schneider Downs Business Advisory Group provides compensation studies to aid organizations in understanding the market and documenting their reasonable compensation processes. Please contact us to discuss how we can assist you with your advisory needs
This post is part of a series to provide best practices for nonprofit boards to determine executive compensation.
