Surprising Facts And Figures About The Head Compensation Process

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Surprising Facts And Figures About The Head Compensation Process

Since 1982, in facilitating over 5,000 head/director compensation reviews worldwide on behalf of boards, this consultant has seen the following core messages consistently emerge and stand out over time.

Contrary to what one might think, most of these key themes for US schools do not relate to the Intermediate Sanctions Rule (Section 4958 of the Internal Revenue Code), although compliance with the Rule remains of paramount importance for independent schools and all 501(c)(3) entities. These themes also are not mainly about reporting on the IRS Form 990 for US schools, even though many schools are acutely aware of how they present the compensation package of the head (and key administrators) in the public domain.

Nearly all of the trends and patterns of behavior below are true worldwide and they affect the level of head/director pay more than surveys and regulations do.

I. Data and Trends

  1. While base salary increases for heads have been lower in the past two or three years due to the recession and the “optics” of higher pay for senior executives, head/director compensation has gone up substantially in other areas. Boards thinking about creative ways to retain and provide incentives for their heads of school are offering: bonuses linked to performance, signing bonuses, retention bonuses, sabbaticals and similar paid “leaves”, housing improvements and deferred compensation (despite the changes in US tax law). We are now seeing that head compensation is rising again despite economic worries.
  2. The highest paid heads continue to be males who leave every seven years, not long-term heads or founding heads. The highest paid women are those regarded as being in the top 10% of the most highly regarded cohort of female leadership (but rarely in the international market). After this group, there is a sharp drop off in the compensation of all other female heads.
  3. For profit schools, especially those in the international arena, pay substantially less. The exceptions are the one or two new international school chains that are offering up to $700,000 US in base salary and benefits plus stock options up to the seven figure range.
  4. Enrollment and endowment size continue to have only a modest impact on compensation. There is little correlation between overall pay and school location except overseas where schools in the Far East continue to pay the most.
  5. The occupational background of the compensation committee members which in turn affects their mindset about how to attract, retain and reward a head/CEO, continues to be the most powerful determinant of the actual level of head/director pay.
  6. The use of surveys and 990 data (in the US) as benchmarking tools is better than using none at all, but they are flawed. Surveys often underreport actual compensation by as much as 40% because the accuracy of the data is highly dependent upon the person completing the questionnaire and the sophistication of the survey. In the past, the IRS Form 990 filings (in the US) underreported actual total compensation by up to 25% due to the absence of compensation information that was not required. While the 990 has been “tightened up” and is far more accurate than “association data” or online surveys, it will always be at least eighteen months to two years out of date. It will also still exclude approximately 25% of US independent schools that are Church affiliated, some very remotely.

II. The Process

  1. Most heads are embarrassed to talk about, or even reluctant to raise the question of their cash salary and benefit package. When heads do suggest benchmarking their compensation using any number of sources of data as backup, they fear they appear self serving, and unfortunately, that is a real risk.
  2. The deadlines for many heads’ contracts go by without the leadership of the board remembering to address the issue. This may be because either a busy board chair forgot, or there is a change of chairs or there may be a more ominous message lurking in the background: the head’s support is waning.
  3. A meeting between a compensation committee of the board and the head in a formal but comfortable setting, in timely manner (and with enough advance notice to allow both parties to look elsewhere if the discussions do not play out to their mutual satisfaction) actually occurs less than 50% of the time for “sitting” heads.
  4. The input of a head’s spouse or partner is almost never sought or valued when considering his/her current compensation package and the long-term needs and goals of the family. That is clearly a serious omission but not many chairs or boards seem to acknowledge it.

    What are the consequences of these scenarios? The head does not advocate for him or herself and the board is not advocating sufficiently for the head. The head does not feel especially appreciated.

  5. Seldom do search committees commit to a formal benchmarking of head compensation in the final stages of the search (although they should). Rather they will start with a number and react, especially to a head with multiple offers. Or the marriage may end “at the altar” when the Board lacks sufficient knowledge about the current head compensation marketplace to land its preferred candidate and loses that candidate in the final stages of negotiation.

III. Summary

The majority of US based and international schools are realizing the importance of a written evaluation of the head of school’s performance conducted by the full board. This consultant, however, still encounters heads who have not been evaluated in two or more years let alone experienced a formal review of their compensation. Many are still evaluated only by a chair or by a small committee.

A formal benchmarking session between the head and a committee of the board is the most powerful, successful and effective way for both the head and the board to feel knowledgeable and grounded in appropriate data. It also reflects an understanding that the head contract renewal process really should be a “marriage renewal”, cementing a healthy board/head relationship.

One of the most important areas for compensation planning is development of retirement assets. Too few schools with mid and long term heads have focused sufficiently on assisting heads to build adequate retirement assets using deferred compensation and other tax sheltering tools. This consultant continues to meet large numbers of moderate to very experienced heads whose total retirement assets are far below those of their often younger peer group. If a head still has three or more years left on his/her contract, it is wise to review the retirement planning options.

John Littleford of Littleford & Associates can be retained only by the board chair or a compensation committee of the board and does not work for or advise heads or directors of schools. We remain one of the very few compensation benchmarking firms that does not cross that ethical line of working for both sides, even though most chairs will become aware of our work through the school head.

Our database continues to be one of the most accurate in the world for the compensation of independent and international schools and many other non profits. More and more US based Boards are requesting “safe harbors” documentation and the Rebuttable Presumption of Reasonableness Checklist (required by the IRS) for individual administrators who are making a cash salary over $150,000 a year. Our Firm is providing this service as well with increasing frequency.

John Littleford
Senior Partner