What’s new in association CEO employment agreements?
Surveys show that for many types of associations, especially larger ones, there is a predominance of written CEO agreements. The agreements can take many forms, from an extensive legalistic document to an exchange of letters between the most senior volunteer and the CEO. But they all tend to address the main issues in the relationship between the organization and the CEO – title and role, evaluation, compensation, benefits, and the all-important provisions on termination and severance.
Here are some trends in association CEO employment agreements that have developed since the Great Recession cast a shadow on the US economy in late 2008:
Compensation increases. Many, if not most, association CEOs experienced no increase or a decrease in compensation during the 2009-10 period, whether voluntarily or involuntarily and whether provided for in their agreements or not. Cost-cutting, flat economic conditions, and creative revenue generation have put many associations on a firmer financial footing. Philanthropic organizations might be the exception. With improved conditions, many association CEOs are finally back on track with at least modest year-to-year increases in compensation.
Performance-based compensation. It has become the rule, not the exception, for some portion of the CEO’s compensation to be based on the association’s and the CEO’s performance. Nearly all CEO employment agreements now reflect some bonus opportunity. Usually the bonus is a discretionary amount determined by the senior volunteer leadership at the time of the CEO’s annual performance review, with the potential range of the bonus described in the agreement as a percentage of base salary. But more elaborate criteria-related arrangements also are used.
Retirement/savings benefits. It is the rare association CEO today, especially one with more than minimal experience, that does not have some form of enhanced end-of-career benefit set out in the agreement beyond the association’s regular tax-qualified employee retirement/savings programs. Section 457(b) plans, with a maximum amount of contribution but no risk of forfeiture, are common, as are the more complex Section 457(f) plans, which have no contribution limit but, to achieve tax deferral, must be at risk of forfeiture by the CEO. Other kinds of “golden handcuffs/golden parachute‚" are also used to help associations achieve stability and predictability in the CEO position.
Postemployment healthcare benefits. While this appears in only a minority of agreements, for very experienced and long-serving CEOs it is increasingly common to see some form of postretirement healthcare benefits. Often the association will keep the retiree enrolled in its employee healthcare insurance program following retirement if the program permits that; otherwise the association might pay the equivalent monthly amount to, or on behalf of, the retired CEO. At times the benefit is extended to the retiree’s spouse; sometimes it is limited only to the period before the retiree qualifies for Medicare (or, if not, applies at that point to a Medicare supplemental program). Healthcare reform may affect the viability of these arrangements.
Other benefits. Country clubs? Lunch clubs? Business-use auto allowances? Spouse travel to association meetings? These and similar “fringe benefits,” are on the way out. The federal income tax ramifications for the CEO are increasingly harsh (and there’s usually a tax withholding issue for the association itself). These other benefits can be lightning rods for constituent questions or even IRS audits; and often disclosure is required on the Form 990. Most organizations are moving toward foregoing these kinds of other benefits and just reflecting the equivalent value in the CEO’s base salary.
Severance and termination. Severance benefits are now nearly ubiquitous for the CEO who is terminated without cause, or even whose contract is allowed to expire on the association’s initiative. The “standard” that was once perhaps three months or six months of severance pay has crept up, at least in business and professional associations, toward one year to reflect the time and difficulty, especially in a recessionary economy, that is required to successfully change CEO positions (a common formula is one month for each year of service, with a minimum and maximum). Sometimes the severance benefit ceases when the CEO finds a comparable new position; but that is by no means typical. And provisions for termination for “cause” where no severance applies, have tended to expand to include performance failings and violation of organizational policies but with “notice and cure” opportunities.
Postemployment obligations. CEO agreements now routinely include restrictive covenants prohibiting such postemployment activities as soliciting association employees and members, or restrictions on competitive activity. The latter must be tailored carefully to comply with laws in the applicable jurisdiction.
Arbitration clauses. Many associations include binding arbitration provisions that nonetheless allow the associations to seek injunctive relief in court to enforce the CEOs’ postemployment obligations. Arbitration may favor the CEO, who is less likely to be able to afford litigation; but it helps protect the association from unwanted publicity as well.
For a sample association CEO agreement, see Documents Supplement No. 12 in Association Law Handbook, 4th ed., published by ASAE.
Jacobs heads Pillsbury law firms Nonprofit Organizations Practice. He is also general counsel to ASAE and the ASAE Foundation. He is the author of the best-selling Association Law Handbook.
