Level Up Your Nonprofit Governance With Executive Contracts
Are you unsure about the role of executive contracts in your nonprofit? Melissa Sampson McMorrow, a legal expert from Nutter Law Firm, provides clarity on this important topic.
Attracting and retaining top executive talent is an essential component of a nonprofit organization’s success. Yet, some nonprofits choose not to enter into employment contracts with their executives. This article will address whether a nonprofit organization should have a contract and why it matters.
Should you have a contract with your executives?
Some nonprofit organizations may be wary of entering contracts with their executive talent, in part because the organizations fear it could limit their options for terminating an executive if the employment relationship does not work out. The opposite is true, however, and the benefits of such a contract far outweigh the downsides.
Relationship with Talent: Contracts are a demonstration of trust between the executive and the organization’s Board of Directors. Contracts also may make an executive feel more comfortable entering nonprofit work from the for-profit world, as it will more closely resemble the type of employment agreement they are used to.
Complying with Nonprofit Laws: Nonprofit organizations are more restricted on how they can compensate their employees as compared to their for-profit counterparts. Having a contract with an executive can help ensure that the nonprofit is complying with federal and local law when it comes to demonstrating, for example, that the executive’s compensation is reasonable in light of the scope of services provided.
Clarity in Compensation and Expectations: In the same vein, a contract will make clear to that executive what their exact salary and benefits will be and what the Board of Directors expects of them. A contract may even provide for an annual performance review to make sure that the executive is meeting those expectations, enabling a nonprofit to make sure that an executive’s compensation tracks with their contributions to the organization’s success.
Stability: Having a contract lends itself to continuity and stability in a nonprofit’s leadership. Having continuity in leadership can allow nonprofits to pursue long-term goals and plan ahead for when there is a transition in leadership to make sure it goes as smoothly as possible.
Clear Exit Pathway: A contract does not change the nature of the at-will employment relationship, but merely makes various exit pathways explicit by setting out the procedures in various scenarios so there is no debate or confusion should the relationship with the executive end.
Risk Management: There is always the possibility that the relationship between the executive and the Board of Directors may sour, and a nonprofit should plan for what to do in this situation. With a contract, there can be mechanisms and provisions in place for terminating the executive. Through erasing ambiguities, a contract also reduces the likelihood of disagreements and litigation, even in an amicable exit situation.
What should be the basic elements of a contract?
Once your organization has decided that it wants to move forward with a contract for its executives, the contract should contain the following information.
Term: The contract should specify how long it will remain in force unless it is terminated sooner. This could be for a specific number of years, or ongoing.
Compensation: The contract should inform the executive of their salary and benefits, as well as the possibility of increasing these elements of compensation based on good performance that are aligned with advancing the organization’s mission.
Conditions of Employment: The contract should also include information for the executive regarding conditions of employment, such relocation expenses, any constraints on outside activities, liability insurance, and other benefits.
Scope of Responsibilities: The contract should make clear exactly what the Board of Directors expects the executive to be responsible for and achieve within the nonprofit organization.
Termination Provision: The contract should provide the conditions under which the executive may be terminated, including a definition of “cause” for termination, notice periods, and, if applicable, severance provisions including the requirement of executing a release of claims against the company. The contract may also require transition assistance in certain exit situations to ensure continuity and stability of the organization.
Restrictive Covenants: The contract should include any restrictive covenants the nonprofit wants with its executives, such as employee non-solicit, non-compete, non-disparagement, and particularly confidentiality agreements—both in-term and after the employment relationship ends.
Overall, nonprofit organizations should have contracts with their executives for a variety of reasons. The contents of the contract may be basic, but it will save the nonprofit from ambiguity and instability down the road.