I have been stunned by the number of chief executives with whom I’ve consulted who have told me that it has been years since the board has made any adjustment to their compensation. In one case, it had been more than 5 years since she had a raise! While I place some level of blame on those chief executives for failing to address this with their boards (as in “you get what you ask for”), this really is a matter that the board chair needs to ensure is addressed appropriately and annually.
There are several factors that drive compensation decisions within any organization—market forces, performance, years on the job, experience, cost of living, and more. Determining appropriate compensation (pay and benefits) is a complex business, but making sure that the board annually considers the chief executive’s compensation, and makes decisions, is not.
Failing to engage in some annual process to consider and, as necessary, adjust the chief executive’s compensation poses several risks. Compensation issues can lead to the loss of capable leaders and create challenges in seeking their replacements. Adjustments that are made less than annually can have a jarring impact on the budget. And rather than sending an annual message that, “we value you,” delayed action on compensation can send a negative message and lead to contention.
It should not be surprising, then, that some boards avoid all of this by simply letting the chief executive budget his or her own pay raise, in-line with what he or she is recommending for the rest of the staff. While this might be a reasonable “place-holder” during the budget process, it is unacceptable for the chief executive to set his or her own compensation. Boards who relinquish this responsibility put themselves and their organizations at risk.
In anticipation of hiring a chief executive, and then on a periodic basis thereafter (every 3 years is a reasonable standard), the board should engage in an objective assessment of compensation. Hiring a consultant to conduct this evaluation helps to ensure some level of objectivity, but whatever path you choose needs to consider similar organizations and positions both inside and outside of your market. Then, wherever you choose to position your organization within the market, you should be able to justify your decisions. If the board is ever put to the test, you want to be able to say, “We’ve done our homework, and here’s why we have settled upon this level of compensation.”
If the organization engages in a thorough review of compensation every three years or so, odds are that you’ll be able to ensure that salaries and benefits stay competitive, and arriving at an annual salary adjustment for the chief executive will be that much easier. However, it is up to you as board chair to ensure that these things happen. I think it is unfair to expect the chief executive to take the lead in this work.
I don’t want to pretend to be an expert when it comes to compensation issues, and that’s why I suggest that you take advantage of your organization’s accountant, attorney, and any human resource expertise that resides among your board members. You need to be aware of the tax and legal restrictions that pertain to organizations like yours and get objective advice.
Most importantly, make sure the full board has an opportunity to talk about compensation and affirm whatever decision is made. While it is almost certain that you will have to take the lead in order to ensure that a compensation decision is made, you never want it to be your decision alone.
For additional information, please contact Jeff Wahlstrom at (207) 992-4407 or send him an e-mail message at [email protected].