Have you wondered whether your board should have an employment contract with the executive leader? As an executive director, have you envied your colleagues who have a contract? Whether you ultimately decide to operate with a contract or leave well enough alone without one, there are several aspects to consider. Some are positive, some negative — depending on how you look at it.
There are many reasons to consider a contract agreement with your executive director and only a few for maintaining status quo with the at-will arrangement. The list of pros and cons will vary depending on which attorney you consult and your organization’s particular situation.
This article gives an overview of the benefits and cautions when implementing a contractual agreement between the board and the chief executive. This is written from the board’s perspective; however, here are additional aspects of this important decision for executives to consider.
Jump on the Contract Bandwagon to Create Stability
While employment contracts for top executives are common in the business world, the nonprofit sector is just beginning to understand the benefits of such an arrangement. According to a 2001 survey by the Association of Fundraising Professionals, only 27 percent of executive directors surveyed have employment agreements.
As chief counsel to the American Society of Association Executives in Washington, Jerald Jacobs says he sees a new wave of interest by boards to use employment contracts to formalize the way they deal with their groups’ leaders.
“I maintain a contract is always as valuable to the organization as to the individual,” he says. “A contract promotes stability and continuity. It helps guide the staff and volunteers when the road gets rocky.”
Protect Your Charity’s Assets
Also, he notes, employment contracts can protect the assets of an organization, such as donor lists and other information stored on the group’s computers, by including a confidentiality clause. Employment contracts can clarify expectations by specifying compensation, health-care benefits, vacation days, even perks. And just as important, contracts can spell out the executive’s role in promoting the organization’s mission and vision as well as a system for overseeing the daily administration of the organization.
Another reason so few charities create employment contracts is that boards often wait for an executive director to make the initial request, says Melissa Flournoy, chairwoman of the National Council of Nonprofit Associations. However, she says, trustees who wait for the executive to make the first move may be missing out on a means of quelling leadership turnover.
“More and more nonprofits are taking the hint from the for-profit sector in using certain tools to retain their skilled employees,” she says. “A contract can do that.”
Reinforce Your Goals
Michael Bisesi, director of the Center for Nonprofit and Social Enterprise Management, an academic department at Seattle University, says he is surprised at how few nonprofit organizations take advantage of employment contracts. Bisesi says that without a letter of hire, job description, paper trail of evaluations and, especially, an employment contract for an executive director, no leader can be forced, not even by the board, to follow the group’s goals. Usually, Bisesi says, executive directors make the initial request for an employment contract, which he calls a sign of strong leadership.
Contracts Benefit Everyone
The Chronicle of Philanthropy points out that employment contracts can also provide nonmonetary rewards in an effort to inspire executive directors to improve their performances. If organizations cannot afford to pay leaders their market value in dollars, a contract can spell out such incentives as interest-free loans, free lodging, flextime and other perks. Suggestions for such nontraditional benefits can come from either side of the negotiation table. However, it is usually the executive who comes up with a creative solution.
One reason nonprofit boards and executive directors are jumping on the contract bandwagon previously reserved for the business world is a well-written contract can provide a solid foundation of understanding and agreement. Since most problems arising between boards and executives stem from a lack of mutual understanding, a contract has the power to proactively ensure that everyone understands and agrees to performance expectations — by the board as well as the executive.
One Board’s Experience
The board of a large nonprofit recently engaged my services to help them prepare a contract for their newly hired executive. They had never used a contract before, but they felt they needed one now because of recent misunderstandings. Their previous director failed to fulfill the board’s expectations in regard to community involvement and advocacy. The executive did an adequate job of administration but didn’t like getting out in the community to promote the organization’s mission and nurture support. Of course, those of us in the nonprofit sector know the importance of the leader advocating for the mission and being the public face of the organization.
When the board chair gave the director poor marks in this area on her performance appraisal, the executive felt blind-sided. No one ever told her this was an expectation of the job. She thought her main charge was keeping the business of the business running smoothly — which the board acknowledged she was doing. She said she did not enjoy attending community events. She was shy and just not a people person. Before long, the board and the director agreed to part ways.
The board soon realized that what seemed to be a catastrophe was actually a blessing in disguise. After working with the board executive committee, we created a clear outline of performance expectations as well as methods of measurement and rewards for outcomes. We also clarified issues such as steps for performance improvement, expected roles and support from the board, and incentives for success.
Once the contract was created, vetted by an attorney, and approved by the board, it provided a clear road map to success for the executive as well as the board. Everyone felt a strong sense of stability that comes from clear expectations.
Summary of Contract Benefits
» Provides a formal way of dealing with the group’s leader
» Promotes organizational stability and continuity
» Protects the assets of an organization
» Clarifies expectations and roles of the board and the executive
» Spells out rewards and incentives for the director
» Affords a solid foundation of understanding and agreement
» Can serve to attract high level employees
Disadvantages to Consider
While the benefits of operating with a contract abound, it’s also helpful to know the downside so you can weigh all aspects of this important decision. Without a contract in place, you are operating in an “at-will” agreement, meaning the chief executive works at the will of the board and can be fired without notice and for any legal cause. Many boards prefer the at-will arrangement because they feel it gives them more control.
Another downside to having a contract is it sets up obligations the employer (board) must meet. If the newly hired executive turns out to be a bad hire or the needs of the organization change, the board will have to renegotiate the employment contract. For example, if you hire an executive director under a two-year contract only to find out six months into the tenure that you hired the wrong person, you cannot simply fire him/her. Instead, you will only be able to terminate the employee under such terms as the contract allows, unless you and the employee reach a separate agreement for termination.
Avoid Breach of Contract
Another disadvantage of employment contracts is that, under the terms of the contract, you are required to act according to the “covenant of good faith and fair dealing.” FindLaw.com explains this means that you have to act in good faith and in accordance with the terms of the contract.
Summary of Contract Disadvantages
» Board potentially feels loss of control
» Board must meet contract terms
» May not be responsive to changing needs
» Board is required to act in good faith
Keep Your Brain Engaged
Employment contracts can be used to lure the best employees into your company and give the board more control over the executive’s work by clarifying expectations. However, contracts also have the potential to burden the board with undue requirements if things go awry with the executive.
As with any important decision, there are positives and negatives to consider when choosing whether to use a contract. The important thing is that those entering into a contract, or intentionally choosing not to do so, inform themselves of the potential ramifications to the organization. Critically weigh the upside and downside for your particular organization.
Terms Are a Key Factor
Nathan Rogers is a local attorney whose practice focuses on business transactions and litigation. Rogers emphasizes the importance of a carefully written contract.
“If a contract is going to be used, all of the contract terms should be carefully drafted," he says. "Often, a poorly written contract can be worse than no contract at all. Particular attention should be given to the contract terms related to the executive’s duties and compensation and the terms setting forth the circumstances under which the contract can be terminated, both with and without cause.”
In an upcoming article, we will outline some suggested components for a well-crafted contract.