Executive Transition Planning Series Part 3: Pros and Cons of Executive Director Contracts : Successful Nonprofits

Executive Transition Planning Series Part 3: Pros and Cons of Executive Director Contracts

by GoldenburgGroup

Executive Transition Planning Series Part 3: Pros and Cons of Executive Director Contracts

by GoldenburgGroup

by GoldenburgGroup

Almost every executive director I know wants an employment contract, but the vast majority of boards are reluctant to give their executive directors a contract.

You may ask “How does Dolph know this?” The answer is simple: Board Source’s 2017 Leading With Intent report indicates that only 31% of executive directors actually have one.

Let me be clear that I have a strong opinion about this – – – I believe any organization that cares about stability and continuity should have an employment contract with their chief executive. If you are an executive director reading this, I am preaching to the choir. If you serve on a board that is reluctant to give the chief executive a contract, however, this post is for you.

Let’s start by exploring some of the pros and cons of offering your executive director an employment contract. Before I present these, however, let me remind readers that I am not a lawyer or accountant and am not providing legal, tax or accounting advice. If your organization is going to consider a contract for your executive director, it should definitely secure legal counsel.

The table below outlines the five advantages and three disadvantages of an executive director contract:

I believe there are five (and one more) potential advantages of an executive director contract:

  • Establishes relationship ground rules

The contract will outline how often the executive director will be evaluated, the manner in which their compensation will be reviewed, and the general expectations for the relationship. This helps hold the board accountable to its fiduciary responsibility and gives the executive director a gentle way to remind the board if it lags behind on this responsibility.

  • Empowers the executive director to act within authority

The contract details the general authority of the executive director. Typically, it will delegate all staffing decisions to the executive and some level of budget control to the CEO as well. It will also clearly indicate who the executive director reports to: the full board, the executive committee, or the board chairs. You would be surprised how many board members are uncertain who their executive director reports to.

  • Ensures sufficient notice for a smooth transition

I think this section of most employment agreements makes boards uncomfortable because the contract outlines the amount of notice the board must give to terminate the employment relationship. While most contracts that I have seen include clauses that allow immediate termination for gross negligence or malfeasance, the chief executive must be paid for a certain period of time if terminated for any other reason.

In exchange for this, however, boards often get a commitment of an equal amount of notice from the executive director should they want to leave.

Boards will often ask me, “but what stops the executive director from giving us just a month’s notice instead of three months’ notice as outlined in a potential agreement?” Several things do:
(a) the chief executive cares about their professional reputation and
(b) the CEO may lose vacation payouts or other incentives if they don’t give sufficient notice
(c) contracts are enforceable in court; no executive director wants a possible legal battle hanging over their heads while starting another job.

  • Assures funders of stability

Foundations, government funders, and major donors all want a smooth executive director transition. Knowing that a contract exists between the executive director and the board assures them that reasonable steps are being taken. And, by the way, having a transition plan also gives your funders this assurance.

  • Creates framework for preventing and resolving differences

Since the employment contract outlines general roles and responsibilities, it can prevent arguments between the board and executive director. But when disagreements arise, the contract creates a framework for resolving them – often through the board chair or a specific committee.

  • Creates a guide for the relationship when everyone likes each other

Typically, an organization negotiates a contract before the new executive director starts or after an executive director has been with them for a period of time. At this stage, both parties like each other and are willing to be generous with each other. And this is the perfect time to discuss the tough questions: (a) What will the board/executive director relationship look like? (b) How will the board review and compensate the chief executive? (c) How will we end this relationship in a way that is fair to everyone? These are much more difficult conversations to have when the relationship is strained and people are angry with each other.

I primarily hear three board arguments against offering a contract. Since I’ve disclosed a bias toward chief executive agreements, I will share the most common board arguments and offer a counterpoint.

  • The contract may end at-will employment status

Boards fear that a contract will prevent them from terminating an under-performing executive director without costly payouts. I offer three counterpoints to this concern:

  1. This is why both parties should have a lawyer; lawyers can help structure an agreement you’re comfortable with.
  2. The board hired the executive director, right? Do you doubt your choice? If you do, then why did you offer the person the position?
  3. At-will employment also means that your executive director can email a resignation without any notice and never show up at the office again. Is that really the relationship you want with your chief executive?
  • The contract may enable the executive director to get paid for a few months even if the board has relived them of all duties.

This depends how you structure the agreement, but an abrupt and publicly hostile transition is much costlier to an organization than a few months’ salary. Even if the board has sent the executive director home with pay for their final month or two, chief executive must still be available to answer questions, provide information, and even help ensure smooth transition. Because you’re paying them, they are far more likely to be cooperative.

  • Some people just don’t like contracts

This is one I just can’t argue with. Some people don’t like contracts. I once worked with an executive director who didn’t want a contract. More than once I heard her ask this rhetorical question, “Why would I want to be here if the board doesn’t want me to continue?” After twenty successful years in the role, however, an abrupt change in board leadership led to her very abrupt termination. This took an extreme emotional toll on her and the organization, and both required several years to recover.

As you can see, I am not agnostic when it comes to contracts. I believe they are important to a healthy relationship between the executive director and board, and they dramatically reduce the likelihood of needing to utilize your abrupt transition strategies.

Back when I was a permanent executive director, I found my employment contract to be an incredibly helpful tool. In my last chief executive role, I never felt like the job was a great fit – even though we grew the budget by 25% during the great recession and expanded the organization’s footprint from 28 counties to 42 counties. I gently brought my concern up to the board chair, suggesting that I might not be the right person to lead the organization. While the board didn’t want me to leave, I timed my departure with the end of my contract. I left the organization feeling good about the work I had done and knowing that I fulfilled my obligations to the organization. They had the benefit of ten months’ notice. It was definitely a win-win.

Now that we’ve covered the importance of contracts – and I’ve got that off my chest – our next blog post in this series will be a deep dive on developing your interim plan. It will help you create a plan for how you will actually run the organization without a permanent executive director at the helm.

Feel free to share your thoughts!

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