by Alan Davis and Jolene Knapp
Did you know that negotiating your first contract extension as a nonprofit CEO is one of the most impactful conversations you will have with your board?
It is customary for newly appointed nonprofit CEOs to receive a three-year employment contract. From the board of directors’ perspective, this makes sense. The board may be hesitant to make a long-term commitment on behalf of the organization. Although appropriate vetting will have occurred during the hiring process, there is no guarantee the appointed CEO will be a long-term success.
Two years into the contract is not too soon to begin consideration of a contract extension. The CEO is in an advantageous position at that point. The board is pleased with his or her performance and does not want to disturb the progress being made by the CEO and the organization. The board wants to avoid having to engage in another search—it is expensive and the hiring process timetable can set the organization back by a year or more. So, the timing is ideal for the CEO to request favorable contract considerations.
“Having just completed my first major contract extension,
Alan and Jolene’s recommendations to leverage a CEO’s first contract extension for the mutual benefit of the CEO and organization are on target. A huge win can be had for both parties if the tenets articulated by them are heeded.”
How to proceed? We suggest that you operate under several assumptions:
- Be reasonable in your requests. Do not ask for unrealistic considerations.
- Do your homework. Review your current contract, understand best practice, and consult your own legal counsel. Refer to trusted resources, such as this Professional Practice Statement from the Association Forum, to refresh your knowledge.
- Control your hubris. You may be feeling good about the board’s desire to extend and perhaps reward you. But also realize the organization can function without you (no one is indispensable) if necessary, and the board has ultimate fiduciary responsibility. At the end of the day, both sides must be comfortable with what is negotiated, so do not demonstrate arrogance throughout the process.
- Board members, as volunteers, are often unfamiliar with the process of contract negotiation and extension. For many it is the first time (and probably last time) they will be involved in such a process. As a professional CEO it is your responsibility to familiarize them with the process, by connecting them with resources that can guide them. This will ultimately be helpful to you—it will facilitate the process. In “Employment Agreements: Five Things Every Nonprofit Board Should Know”, BoardSource president Anne Wallestad succinctly describes the unique aspects of a nonprofit CEO reporting to a board.
- When you are initially appointed it is helpful to acknowledge that a different board will be in place when you re-negotiate. The board that hired you is invested in your success; you are “their selection” and are in a “honeymoon” period. However, use foresight—realize that it is likely a different group of people will be in leadership when you prepare to negotiate an extension. Be sensitive to the different dynamics that exist between your first board and the board you negotiate with for an extension.
Assuming you used a not for profit contract attorney to arrange your initial contract, we suggest once again engaging professional legal assistance. There will be additional or different specifications an attorney may suggest. An experienced attorney will be sensitive to your status vis a vis the organization and can suggest additional benefits for you. And remember—the organization’s attorney is representing the organization, not you. As CEO, you need your own counsel—do not depend upon the organization’s attorney to represent your best interests.
What term of service should you request? We believe a five- year contract is recommended for the second contract term. Five years allows you the time to effect the long-term change that may be necessary and to adequately address major problems or issues. It allows the CEO to engage in staff changes or major organizational changes that you may have been hesitant to implement during the initial term. The second term is when you can effect truly meaningful change that either provides for the sustainability of the organization or substantially enhances the organization. Five years is not too short, and not too long. A board may not want to commit to a contract period that is too lengthy; five years should be a comfortable period.
Some CEOs prefer an evergreen arrangement. An additional year is automatically added to the contract at the conclusion of each year of the contract. Basically, it is a rolling contract, until one party decides not to add a year. Do your homework regarding evergreen arrangements—there are advantages and disadvantages for both parties. Various factors, e.g., the mission and culture of the organization, the board structure, the strategic plan, etc. will impact your decision.
We believe the first extension may be the most important contract you will sign as a CEO. It solidifies your position with the organization and can establish meaningful employment benefits during your tenure with the organization. Benefits are rarely deleted in future contracts—so if your tenure is a lengthy one (10-12 years) the benefits you gained in this first extension will be of long-term value to you. And the benefits you include can also be used to your negotiating advantage if and when you negotiate an opportunity with a different organization.
The authors: Alan Davis and Jolene Knapp are senior partners at Ideas for Action, LLC—a consulting practice that is driven by a passion to empower the potential of people and organizations. Their experience includes association, non-profit, and higher education leadership, strategic planning and thinking, governance, and coaching. Alan or Jolene would welcome an introductory conversation with you: email email@example.com.