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Head Compensation: The Lay of the Land

Most independent and international boards do not engage in timely head of school benchmarking and compensation analysis even though all nonprofits are bound by the Intermediate Sanctions Act that requires boards to benchmark formally their CEO’s compensation annually. Many nonprofit boards forget that they really need to do this work 18 months in advance of the end of the head’s contract to ensure there is time enough for both parties to conduct a search if terms cannot be agreed upon. 

In Littleford & Associates’ experience of providing head and executive compensation services since 1983 for several thousand schools worldwide, these nonprofit boards fall into one or more of these behaviors:

1. The board and chair simply overlook the entire issue and process until the renewal date is past or until the head reminds him/her. This is not intentional but often occurs when chairs get busy. In these cases, the head may feel hurt, undervalued, disappointed and worried.

2. Boards and chairs that are on top of the process, including the importance of annual evaluation, may see the head as “captured” and the school’s resources as limited.   They may or may not be aware of the shifting marketing place but simply do not have the motivation to try to bring the head more in line with competing schools. 

3. Sometimes a head does his or her own benchmarking homework by asking peers and perusing 990 forms, NAIS or regional association data, and then presents that research to the board chair or compensation committee chair.  These sources of the information are legitimate, but the data may not be terribly accurate or interpreted correctly. Usually, in this situation the head feels secure and in a strong position and may not feel the need for outside assistance for the board to assess the marketplace or meet “safe harbors” documentation called for under the Intermediate Sanctions Act. Quite often, in this case, the head is also much beloved by the board.  

However, there is a risk here for both the head and the board.  In a well-intentioned effort to please and retain the head, the board may agree to pay a total package that it is at or near the top of what local, regional, and national peer schools pay. It is a board’s fiduciary responsibility to do its own compensation research or hire an outside expert so that it can defend the head’s package in the event of an audit. 

4. In another scenario, the board values the head and may know that the head is below market.  However due to the profile of the board, or the personalities of key board members, or worries about the school’s budget/enrollment/fund raising etc., it may underpay the head thus wounding the head’s pride and leaving him or her open to a search contact.

5. Sometimes the head is paid so far below market that the board cannot fathom how to make the total package more competitive. This may be because the head was an internal hire, a female, or a very long-term head. In many of these circumstances, heads are often paid less than the competitive marketplace. Heads do not make more necessarily because they are long term. Sometimes the opposite is true.

6. Sometimes the board members on the compensation committee cannot agree or have very different views of the kind of package the head should have. One board member may advocate for a performance-oriented component of the package; another may feel that the head will prefer a larger salary; or another board member may want a nonqualified deferred compensation plan as a form of golden handcuffs for the head.  In this circumstance, the chair and the head may have a strong bond, and the chair may know what he or she wants to accomplish on behalf of the head but cannot bring the entire committee to a consensus. 

7. The ideal situation is when the chair listens, has the respect of the rest of the board and can lead and facilitate the contract discussion supported by appropriate benchmarks, with or without the outside help of an outside consultant.  The result is a timely, amicable, and fair resolution.

Boards have only three major roles: Mission integrity; fiscal oversight; and hiring, guiding, evaluating and when necessary, changing the head. Finding and keeping a head is a huge responsibility because search and transition potentially represent a loss of momentum, reputation stress and possible financial challenges. 

Knowing the head compensation marketplace, the laws that affect executive compensation, best practices and how to engage in a contract renewal that is professional and not adversarial all require a wise chair, a wise board, and a smart head of school. 

Our Firm constructs a process around accurate benchmarks that makes heads feel valued and paid fairly and give boards assurance that they have followed the laws governing head/CEO compensation. The outcome is more like a marriage renewal process. 

While only boards can retain our Firm for this service, heads often bring our services to the attention of their boards.