Not every exiting nonprofit leader may need or require an exit agreement. However, not-for-profit boards should understand four common types of CEO exit plans to negotiate an exit agreement if needed — ideally far ahead of the leader’s actual exit to support nonprofit operations.
The use of exit agreements occurs most often in four ways. Most are drafted by an attorney working with an executive, a few board leaders, and perhaps an accountant who specializes in nonprofit compensation. Boards and executives can explore these four exit agreements if the situation calls for it.
Catch-up Agreement
This agreement is a monetary package acknowledging that the executive’s salary has been significantly below market for a long period and/or the organization’s retirement contributions have been low or nonexistent. Obviously, the more years that are available prior to the executive’s exit, the more options are available to address past inequities.
In such agreements, the not-for-profit organization must be aware of private inurement risks that disallow payment beyond reasonable compensation to the CEO of a nonprofit. This exposes the executive to possible IRS fines and penalties. The organization’s tax-exempt status can also face risks if compensation is deemed excessive.
Incentive (to stay longer) Agreement
This agreement creates an incentive to encourage the departing executive to remain as an executive for a defined time, for purposes important to nonprofit operations. It may clarify the commitments of how much longer the executive will serve the organization and in what capacities.
Keep in mind that this exit agreement may be more optimistic than realistic if the departing executive is unable to continue fulfilling promised duties or if the organization suffers a loss in unrestricted revenue to cover promised compensation.
Post-Retirement Services Agreement
In this agreement, a contract for services is negotiated that defines the leader’s role after he or she moves out of an executive role. It is sometimes used as a bridge to support the executive until official retirement, or to allow the leader to continue consulting on a vital project. It also may be used to create an overlap period between the outgoing executive and an internal successor to support nonprofit operations.
In some cases, the board and executive want to clearly define the terms of post-retirement services, whether it includes continued involvement in certain activities or availability “as needed.”
Honorific Agreement
This agreement is a type of public acknowledgement or thank you, in writing, along with a one-time, board-approved monetary gift recognizing or honoring a departing founder. The board wants to acknowledge the long tenure and/or efforts above and beyond the call of duty. There are many ways to say thank you to a departing CEO or executive beyond a monetary gift, but money is often customary.
Regardless of the exit plan selected, board members and staff are advised to consult legal advisors and the executive on the appropriateness of gifts, parties or other plans. Everyone involved should understand the executive’s personal preferences for success, the court of public opinion and the financial appropriateness of monetary gifts according to tax or legal authorities.
Organization board members and other leaders will need to view exit agreements in light of their financial capacity as well as terms governing their mission and tax-exempt status. They should also consider how the agreement will impact the expectations of future executives. If you have any questions about executive compensation for not-for-profits as well as transition planning, talk to the not-for-profit team at LvHJ.
Source: Nonprofit Quarterly
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