QUESTION 7: How Can Our Board Get CEO Compensation Right?

Don’t Tempt Management to Do Dumb Things!

You know this scenario. You stepped out of the board meeting to take an urgent phone call. Upon your return, the board chair announces: “Congratulations! You’ve just been elected chair of the CEO Compensation Committee.” 

Ram Charan explains the angst. “Of all the topics in the boardroom, CEO compensation has the most potential to create tension in the board-management relationship.” 

QUESTION 7 of 14: How Can Our Board Get CEO Compensation Right? Owning Up: The 14 Questions Every Board Member Needs to Ask, by Ram Charan (Order from Amazon)

Note! While this book—and especially Question 7—addresses for-profit governance issues, the savvy nonprofit board member will appreciate reading between the lines to capture a multitude of compensation wisdom that is highly relevant. True—nonprofit ministry board members are not eyeing volatile stock prices when setting CEO compensation. But they must still have a thoughtful rationale—a philosophy—for the compensation discussions and decisions. So…here are three lifelong learning options:

[  ] Option 1: Skip Question 7 in Owning Up and, instead, read Lesson 25 in More Lessons From the Nonprofit Boardroom, “Compensating the CEO—It’s About More Than Money.” Click here to read Lesson 25.

[  ] Option 2: Ask your CEO Compensation Committee to read Question 7 in Owning Up (and this blog).

[  ] Option 3: Inspire your full board to read both Lesson 25 and Question 7. (Congrats on being a lifelong learning board!)

Hopefully, your board is blessed with two or more board members who have an appropriate level of experience and expertise in setting CEO compensation in nonprofit ministries. But beware—there is no formula. One size doesn’t fit all. It’s complicated. It’s fraught with obstacles—both internal bungling and external unanticipated conditions (think COVID-19’s impact). As Ram Charan notes, “Business cycles change, and macro events like hurricanes or political turmoil happen.” (Note: he wrote this in 2009!)

Often, strongly-opinionated board members, with limited experience, make compensation judgments in a vacuum, or worse, based on their own company’s compensation practices—totally unrelated to appropriate comparability data. Charan again: “…boards need to start with a blank slate and fresh thinking.”

There are numerous compensation-setting factors to consider:

Did you bring in this CEO to tackle a turnaround? Business author Michael Watkins uses an acronym, “STARS,” to describe the four types of environments your CEO might be leading: Start-up, Turn-Around, Realignment, or Sustaining Success. Compensation approaches will vary widely—based on what your CEO inherited. (Read more.)

What’s your compensation philosophy? “Some of the objectives might also be nonfinancial in nature.” Does compensation include measurements for strategy, leadership development, leadership succession, and core values? When Dennis Bakke, author of Joy at Work, was CEO of the AES Corporation, the board evaluated him—partly—on how effectively their 40,000 employees were living their four shared values: to act with integrity, to be fair, to have fun, and to be socially responsible. (Read more in my chapter on the Culture Bucket.)

Will the right compensation, with incentives and bonuses, motivate your CEO in a nonprofit setting? Not so fast, says Clayton Christensen. In his bestseller, How Will You Measure Your Life, Christensen notes the Harvard Business Review article by Frederick Herzberg that discusses the “two-factor theory, or motivation theory—that turns the incentive theory on its head.” The two factors: hygiene and motivation. Compensation relates to the first factor. Christensen writes: “The opposite of job dissatisfaction isn’t job satisfaction, but rather an absence of job dissatisfaction.” (Read more.)

Are annual CEO goals clear—and achievable? Ram Charan recommends that boards “stress-test the goals against volatile external factors…” In the absence of S.M.A.R.T. goals, the annual performance review and compensation discussion tilts too much toward subjective factors—which is unfair to the CEO. And heed this warning from the author:

“Targets that are unrealistic or too far outside of management’s control
won’t convince the executive team to work harder;
they’ll convince management to do dumb things.”

Did I mention—this is another must-read chapter? 

BOARDROOM DISCUSSION: Ram Charan writes, “The purpose of a [compensation] philosophy is to clearly describe the board’s overall intent by stating in clear terms what the board will and will not do. The philosophy should be flexible enough to adapt to changes in the external environment and yet meet the test of consistency over time.” Are there any volunteers to write (or review) our board’s compensation philosophy—or should we wait until you step out of the room? 

CHECK OUT THESE HELPFUL ECFA RESOURCES

• SURVEY: A recent ECFA survey measured the difference between how much help board members, board chairs, and CEOs needed on 27 different governance topics. “The difference was the greatest—not dramatic, but noticeable—on the question of annual CEO performance review with CEOs wishing for more help than their board chairs or members voiced.” Download the 60-page report, Unleashing Your Board’s Potential: Comprehensive Report from ECFA’s Nonprofit Governance Survey, by Warren Bird, Ph.D.

• CHAPTER: Click here to read Lesson 25, “Compensating the CEO—It’s About More Than Money,” in More Lessons From the Nonprofit Boardroom: Effectiveness, Excellence, Elephants! by Dan Busby and John Pearson.

7 Ways to Address Absentee Board Member Syndrome

Which statement below best characterizes your board’s response to absentee board members?

• HO HUM. Certain board members frequently miss board meetings, but there is no board policy addressing absenteeism, so nothing is said.

• HINT. When board members miss a meeting, the board chair (or CEO) gently “hints” that their participation was missed, but nothing further is said. Expectations on board meeting attendance are not clear and are not in writing.

• HARASS. If there is a written policy, one willing soul on the board agrees to remind the absentee board member of the policy (usually with a strongly-worded email), but there is no follow-through or personal meeting with the person. 

Maybe your board responds more appropriately. If not, here’s my list of seven ways to address Absentee Board Member Syndrome:

1) Reference Checks. Recruit board members who have a track record of excellent board meeting attendance. Just as you expect your CEO to check references when hiring staff, so the board must check references of board nominees. How faithful was this person when serving on other boards?

2) Board Member Annual Affirmation Statement. Leverage a re-commitment time each year with an annual affirmation statement (download the template from the ECFA Governance Toolbox Series No. 1 and/or No. 2). That form should list board meeting dates and locations for the next 12 to 18 months—and annually give board members the option of exiting off the board if their schedules don’t align with the board’s schedule. (Or, change the board meeting schedule to accommodate all board members.)

3) Engage the Board With an Engaging Agenda. Sometimes (let’s be honest!), board members skip meetings because they are not needed. The CEO and staff do all the talking. Next steps are all buttoned down. There’s no room for generative thinking by the board. No heavy lifting. What’s the point of participating? This is easy to fix by engaging the board.

4) Establish a Written Policy on Board Meeting Attendance Requirements. If you have a Board Policies Manual, include board member attendance policies—and review them at least annually. Some boards have an automatic exit plan for board members who miss X meetings in any rolling 12-month period. 

5) Emphasize Calling Over Rule-Keeping. Al Newell, founder of High Impact Volunteer Ministry Development, writes: “Sustaining motivation is better understood as a by-product as opposed to a goal of itself. It is my experience that if you pursue discipleship with volunteers [and board members], motivation will follow. If volunteers see the fulfillment of their role as ‘obeying and serving God’ rather than serving you or your organization, it will cause motivation to swell.”

6) Affirm. Affirm. Affirm. Take time to creatively affirm board members for their participation and their contribution as stewards of your ministry. Board discipline (news flash!) is the board’s responsibility—not the CEO’s responsibility. Ditto affirmation. When board colleagues affirm each other, then engagement will heighten and board service satisfaction will soar.

7) Address Issues Early. Don’t wait for the fifth missed meeting. Create the expectation that your board chair (and perhaps one other board member) will meet personally (if at all possible) with policy offenders. No one should be surprised that absenteeism will be addressed frequently and in a God-honoring way. Pray for a discerning spirit to know when you must show grace—and when you must show someone the door.*

*Note: Watch for the new book next month, Lessons From the Nonprofit Boardroom, by Dan Busby and John Pearson, and read “Lesson 31: Cut the Cord! Invite Board Members to Exit When They Don’t Live Your Values.”

BOARDROOM DISCUSSION: What person, or committee, is responsible for addressing absentee board members? What’s our current approach to missed meetings: Ho Hum, Hint, or Harass?