Board Governance: Best Practices for Not-for-Profit CEO Evaluation
Being a member of a not-for-profit organization’s board of directors allows members to be directly involved in the decision-making that ultimately decides the mission and direction of the organization
However, with the transitory nature of many boards, with members often serving one or two terms, it can sometimes be difficult to set specific, consistent guidelines for Chief Executive Officer reviews.
Changes among board leadership is often a given within a not-for-profit organization, so it is beneficial to establish a process for evaluating your CEO and determining appropriate rewards that can be consistently followed, even through transitional phases within the board. Increasing scrutiny regarding CEO compensation by legislators, donors, and the general public has also made it more important that the organization has an evaluation process that is documented and aligns with its mission and goals.
There are many steps that can be taken to ensure that a board’s CEO evaluation process is sound and reduces any undue risks to the organization.
Define Performance Criteria
This may seem like an obvious step, but the criteria for CEO performance is often poorly defined, or too task focused. Consider examining and evaluating performance using the following categories: day-to-day results, behavioral competencies and/or objectives.
Day-to-day results include major accountabilities that must be accomplished in the CEO role, not a list of tasks and duties.
Behavioral competencies show how a CEO does his or her job, giving the board an opportunity to ensure that the executive’s behaviors reflect the mission and values of the organization. These are determined and defined by the board and can include such important areas such as leadership, ethics, and relationships.
Objectives can involve goals that are developmental or strategic. An example of a developmental objective would be acquiring new skills or abilities that help in job performance, while a strategic objective involves improving or maintaining the performance of the organization (and is usually linked to the organization’s strategic plan).
Alignment with reward systems
As critical as it is to define the CEO’s performance criteria, it is just as important to determine what reward system to utilize and how the selected criteria tie in to it. If your organization offers incentives or bonus opportunities for performance, you will want to be clear about what results trigger such rewards, and how that differs from the results expected in exchange for base pay. Being transparent up front will reduce potential confusion later and diminish the possibilityof “double dipping” (paying for the same results through two different reward systems).
Review process
The CEO review process consists of three key steps: the performance review, salary review and the determination of an incentive or bonus award (if applicable). The size of your board often determines members’ roles in the review process.
Performance review
A 360-degree evaluation will provide a broad view of the CEO’s performance, gathering input from direct reports as well as indirect reports in some cases. The information collected should be reflective of the performance criteria that the board determined was important to the organization’s goals and mission. Many Web-based tools are now available to help in assigning key metrics and measuring your CEO’s (or other employees’) effectiveness related to them. After the review is complete, many organizations use an outside consultant to compile and analyze results to ensure that confidentiality is maintained in the process.
Salary review
Regardless of whether the CEO’s performance review results in a salary increase, you will want to ensure that your organization offers a competitive level of compensation. A study of compensation practices of comparable organizations, and possibly for-profit companies, should take place on a regular basis. Be sure to look at industries where qualified replacement candidates could be found, as well as industries that may be looking to recruit your current CEO.
Incentive or bonus awards
Many not-for-profit organizations do not offer bonuses or incentives because they believe it is contrary to the mission of the organization. If your organization does choose to offer such awards for organizational success, it is imperative that the results that must be achieved to earn this additional compensation are clearly communicated and understood. Your organization should develop a written plan document to communicate differences between base and “extra” pay expectations, and address administrative issues such as termination and/or retirement.
Every step in your review should be documented along with target dates and responsibilities to provide a common framework that benefits both the board and CEO.
McGladrey has recently published a white paper entitled Not-for-Profit Board Governance: Best Practices for CEO Review to provide more in-depth insight and strategies for successful CEO evaluation.
For more information, please contact McGladrey Managing Director Maureen Driscoll at 612.376.9322, or at maureen.driscoll@mcgladrey.com.
