Transcript
Dan Daly: Welcome to Executive Insights, I am Dan Daly. Today I am joined by Jim Hudner. Jim is a partner here in the Boston office for Pearl Meyer Executive Compensation Specialists. Jim has a broad range of clients, he has a specific focus on nonprofit executives, and that's what we're going to be discussing here today. Jim, welcome to Executive Insights and thanks for taking the time to join us.
Jim Hudner: Thanks so much Dan.
Dan: Let me start of by saying with the individuals I'm involved with, we talked about corporate governance over the last ten years. Most of those people feel that the two most important responsibilities from a fiduciary standpoint for nonprofit board members are ensuring the success of the organization's mission, one. Two, managing the CEO or the Executive Director. Based on your experience, what's your reaction to those two things? Valid?
Jim: Valid Dan, I would agree with that, although I think that they basically, both of them go hand in hand. Effectively, the ability to pursue a successful mission is going to be hugely dependent upon making sure that you've got a talented and competent executive. If you're going to get a talented and a competent executive, they're going to expect compensation that's commensurate with the skills that they bring to the party.
Dan: Good point, but I've seen situations where someone just says, "Well, Bob was a senior executive with IBM, he'll do this thing for, you know, paying his car expenses or his travel or something like that. We want to save money." Is that a good idea? I know it happens, you see probably more of these than I do and clean up more of these problems.
Jim: You do see it, and I think in certain cases it can work. If the not-for-profit organization is rather small in size, has a really clearly defined mission, operations are pretty straight forward, it can work. It could even be such that the executives working almost in a part-time schedule. If the not-for-profit starts to become of a size, starts to be bit more, to be a little bit more complex on the mission, possibly even a turnaround ...
Dan: I think those are good points. If it's a turnaround, you've got to pay the person, because God knows how much time it's going to take to turn this around. If the mission is complex, fine. Let's just take a cut at revenue. I would say if the revenue of the organization is a million plus, you've got to have a professional Executive Director or CEO, you really can't run that part-time. Let's say it's in the educational area or it's in the social services area, billion dollars, you're rendering some service, you've got to have the person compensated. Is that a fair statement?
Jim: That's fair.
Dan: The part time, the friend of the friends is okay if it's small, but we're talking a couple of hundred thousand dollars’ worth of revenue at the most and a very simple mission statement and an organization that's running relatively smoothly, not a turnaround as you said.
Jim: Exactly.
Dan: You've convinced me. I'm on the board, how do we go about as a member of the board or the governance committee or the compensation, how do we go about validating either the existing pay of the CEO or how do we go about determining the pay of the next CEO. Putting on your Pearl Meyer hat, what's the procedure that you're going to advise the board to follow regarding validating the current pay or hiring new person. Talk to me a little bit about that.
Jim: I'd say there's really two essential things. The first of which is the board needs to be really clear about the competencies that they're looking for out of the CEO. CEO's all generally have a comparable set of responsibilities…
Dan: CEO, Executive Director, same?
Jim: Same thing.
Dan: Okay.
Jim: Competencies for example, you mentioned a turnaround situation or maybe there's a huge capital campaign that's upcoming, then the nature of the person that they're looking for can be different than somebody who is focused on operational excellence. Be very clear about the nature of the skillset, the organizational priorities so that that's going to help to define the type of leader that you're looking for which I guess going to have an impact on the pay. Beyond that, you need to identify comparables.
Dan: Let me just go back and review that first thing because it's important. You've got to define the requirements of the job at the board level, in a very honest, realistic way. It isn't just a requirement of the job today, it's the requirements of the job over the next two or three years, because you mentioned the capital campaign. Capital campaigns are anywhere from two to five years, so I've got to think out there. You also mentioned turnaround. If you're going to bring somebody on the board you better do a turnaround, you better have some feel for what has to be turned around and what it's going to look like at the end of it. Defining almost in a job description of what are the requirements are critically important before you have the discussion of what's you're going to pay the person.
Jim: Absolutely.
Dan: We know what the requirements are. Jim, you might have been in this discussion ... If the organization might send you in, and you might be asking some of these questions we're talking about, what do you want this person to do over the next five years? You would contribute to that conversation, then you can come back and give me some feedback. I've defined that job and the responsibilities, now I want to say, "Okay, what are we going to pay this person? What do I do? Jim, give me a number, what should we pay Harry?" It's not quite that simple?
Jim: No.
Dan: Walk me through the process. I interrupted you, you started with comparables of peers of something there. Talk a little bit about that.
Jim: Essentially, trying to identify organizations for which you would think there's some sort of commonality that exists between your organization and others.
Dan: That could be revenue or it could be the mission and the product rendered.
Jim: Right.
Dan: Let's say social service, education, medical, etc. I try to get similarity if it's around in mission, and then in size by revenue.
Jim: Size absolutely matters. Also the nature of which their funding occur. For example, if you're a not-for-profit and you're having to generate 90% of your own funds and only 10% is actually funded from say the government, that's different than an organization that's 80% funded.
Dan: Excellent point. It changes the role of the CEO/Executive Director and their institutional advancement or development person.
Jim: Right.
Dan: Completely? Okay. Jim, what about where there are maybe more than one or two in the city you're at, what do you do there?
Jim: It's always a tough case. It's trying to find organizations that at least are in a comparable setting. They may not be exactly like your own organization, but their broader mission is comparable, their size is comparable. Also, for example, we talked about maybe their financials in terms of fee-based revenue that needs to be generated, so there's some commonality around that, maybe the complexity of operations. You can work your way through. They're not going to be organizations you would look and say that they are exactly like you, but they're comparable enough that you would expect that the skillset of the executives in those organizations are going to be somewhat like the one in yours.
Dan: Let's say in New England, I've identified one or two in Boston, one Rhode Island, maybe one in Connecticut, so I've got these targets. I'm chairman of the compensation. What do I do? Call up and say, "Hey, what are you paying Harry down there? What's the next step? I haven't been down this road Jim. You've taken me down, I've got peers, I've got comps, now I want numbers.”
Jim: Numbers for many not-for-profits or most not-for-profits are all going to have to file a form 990.
Dan: Which is?
Jim: It's a tax file, it's a federal government tax file and that's required to be filed annually.
Dan: Public record?
Jim: It is public record. Not all necessarily executives are reported there but the CEO is always going to be on there, and other executives are often reported in that. That becomes a form to be able to be able to gather information and be able to assess competitiveness.
Dan: I've identified four or five targets by name, and then I have someone or a Pearl Meyer's somebody goes in and pulls out the relevant information from the 990. Now I have my methodology is what is this comparable organization doing in terms of the service, their revenue base and this is what they're paying the CEOs. I have some four or five things that are comparables that we can discuss and get some idea of what we're going to pay or what we should be paying the current person, or what we're going to be paying them in the future. That methodology, Jim, we've got to formalize that because it's going to be defendable, correct?
Jim: Yes.
Dan: It isn't, "Hey, we talked to Jim and Jim said ... Here's the number."
Jim: Yes, it certainly needs to be documented and formalized. One thing I want to mention is...you gave four or five as an example. Ideally, you're going to get more than that, because ideally you'd like to try to be at least in the eight to ten area. The result of which is, it might mean even though in our example we're looking at New England institutions, we might have to broaden the reach to be out, northeast, mid-Atlantic states, so forth, to be able to find other organizations that might be a little more remote geographically, but they are certainly more...
Dan: If I'm looking for somebody in Boston or New York or something like that, and one of my comps is [inaudible 00:10:42], I've got to find a way to interpolate that, and that would be perhaps cost a living or a firm like yours would do it, because it's not going to be valid.
Jim: If there's grave differences like you've just described, then there is a process that you could use to be able to adjust that to reflect local wage basis.
Dan: Just in summary here, that the compensation is an important fiduciary responsibility of the board because that determines how motivated most cases the CEO, the Executive Director is. That responsibility, if you're over a million dollars in revenue say, has to be carried out in a relatively formal way namely: developing comps which are what are your peers doing and what are they paying, and take eight to ten of those comps, and then you've got some relevance where you can make a decision based on it, and that's defendable.
Jim: Yes.
Dan: Pearl Meyer is one of those firms that you would want to bring in if you were that size or whether there was a complex situation that we talked about earlier, major capital campaign over four years, turnaround situation or some other problem. The more insight you get, the better your decision will be and the more defendable that decision will be.
Jim: Exactly.
Dan: Let's come back in a minute or two and I want to go a little bit further down this line. Thank you so much, we'll be back in just a moment and continue our discussion with Jim Hudner from Pearl Meyer.
