Keeping it Ethical is our weekly blog series highlighting the 33 Principles for Good Governance and Ethical Practice. Throughout the series, we hope to highlight the importance of each Principle, the helpful resources associated with it, and learn more from you about how you’ve incorporated these Principles into your charitable organization.
‘Tis the season! Finally, we are in full winter glow – wreaths are hanging, white lights are glittering, and crisp cool days are turning quickly from the holiday season and into the new year.
Just kidding! Real talk: ‘Tis the season of annual reviews, reports, and evaluations. *Collective group sighs*
The new year is well timed for a quick breakdown of Principle 13 which urges us to evaluate and compensate the CEO with an official annual performance review process.
This is one of the many reasons the board of directors should be independent and ready to supervise activities such as CEO evaluation and compensation. Your CEO is charged with the effective management of your organization’s daily operations, that’s a lot of work which deserves a thorough review.
Principle 13 provides relatively simple guidance on the importance of CEO evaluation and compensation process: the board should 1) hire a qualified CEO 2) annually evaluate the performance of said CEO and 3) the evaluation the CEO should happen before any change in their compensation.
It’s common sense to adjust compensation based on performance thus the complexity lies in the specifics of having a proper and transparent process in place. So, here’s a high-level breakdown of what an evaluation and compensation process should prioritize:
- The full board should understand the evaluation and approve compensation decisions. Of course, there may be a committee in place to oversee the evaluation process, but their recommendations must be approved by the entire board.
- Usually, there’s a conversation that takes place to deliver and discuss the evaluation between the board (or an executive/personnel committee) and the CEO. This provides an opportunity to engage in clarifying goals and expectations.
- However your board goes about the delivery of their evaluation process, findings, decisions, and final conclusion must be documented in writing to guarantee accountability.
- Compensation changes should not be made until the annual evaluation process concludes. Exceptions to this rule may include routine adjustments for inflation/cost of living or multi-year contracts.
- Any individual involved in making a compensation recommendation should not have a conflict of interest to avoid any ethical quandaries.
- The board should be objective in their process of setting compensation rules and practices. They may utilize tools such as benchmarking against what comparable organizations pay, compensation surveys (readily available), or even compensation consultants.
- The board should ensure that the CEO is compensating other officers and staff in line with guidelines and policies approved by the board. The IRS is acutely interested in the compensation of nonprofit organizations and most are required to report key employee compensation on their annual information returns. In fact, many boards designate a compensation committee that reviews personnel policies. They may even take it a step further by instituting equitable pay mechanisms which allow them to stay aligned with their organizational values.
This might sound like an overwhelming endeavor but it’s a routine process. No worries, there are endless resources and templates available to support you along the way. Check out this sample evaluation form to get started, and some more advice from our partners at BoardEffect.
Annual reports, reviews, evaluations, promotions, and compensations (!!!) – these fun buzzwords can feel like a heavy load. But lighten up! Now you can look forward to a new year ready to tackle these scary concepts with your new ethical lens.
Learn more about Principle 13 and associated resources.
Are we missing a great resource associated with this Principle? We want to hear that, too. Leave your thoughts in the comments and let us know what you think. You can also use #npethics on social media.
Global Topics: Ethics and Accountability
Focus Areas: Principles for Good Governance and Ethical Practice