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CEO Update LIVE: Time is money when considering severance terms

Event crowd
A panel of experts addressed about 75 association executives and jobseekers at the CEO Update LIVE Behind the Paycheck event June 16.

Cash only part of picture when terminated; adequate warning also softens blow

June 25, 2015
By William Ehart

New CEOs negotiating contracts should not think just about how much money to seek in the event of termination, but about the length of notice the board is required to provide, experts told a room full of association executives and jobseekers at the CEO Update LIVE: Behind the Paycheck event June 16.

Panelist David Goch, partner in the nonprofit practice at law firm Webster, Chamberlain & Bean, said beginning and end are the two most important parts of the employment agreement. Some executives pay too much attention to the in-between provisions, he said.

Goch and Furneaux
Electronic Transactions Association COO Pam Furneaux with contract attorney David Goch.
Friel Lavine
Executive recruiter Pat Friel of Lochlin Partners, left, speaks with Jeff Lavine of the Intelligence and National Security Alliance.

“Focus on the out clause,” he said. “It’s for the benefit of both the organization and the individual so they understand fully and completely what they are getting into. If the worst were to occur, here are the steps, here’s how we are going to unwind it. It’s not just about money, but time.”

Giving CEOs notice of termination while they are still drawing a paycheck can be comparable to giving them severance, the experts said.

The other panelists were executive recruiter Pat Friel, managing partner with Lochlin Partners, Brian Vogel, senior principal at compensation consulting firm Quatt Associates and Jeff Tenenbaum, head of the nonprofit practice at Venable. The event was held at the SunTrust Bank building on New York Avenue in downtown Washington, D.C., and moderated by CEO Update Managing Director Mark Graham.

Insights from the panel included:

  • The typical contract includes 12 months severance and sometimes more (at least among Vogel’s clients).
  • Incentive pay is becoming more common and the size of bonuses is rising, to as much as 20 percent of base salary at 501(c)(3) organizations and 50 percent at trade groups, Vogel said.
  • A signing bonus is one way to bridge the gap between a CEO’s salary demands and the board’s expectations. The use of such bonuses is increasing as executive compensation becomes “frothier,” Friel said.
  • Perks are declining, in part because of greater disclosure requirements since 2008 in the IRS Form 990, said Tenenbaum. Organizations don’t want to raise “red flags” in the eyes of regulators with benefits that look excessive. “The things that benefit you personally are supposed to have a business purpose,” he said.

Pounding the pavement

Goch said the notice provision for termination without cause is critical, because it allows the executive time to seek other employment. “It’s easier to find a job when you have a job,” he said.

Six months’ notice is reasonable, he said. “A lot of times you build in a step down … (you get) the recruiter up and running and in four months ideally (the search committee has) identified someone they’re excited about. So four months into that, the existing CEO is down to a low level, at least obligation-wise, to be in the office, if at all.

“They’re still wearing the hat, but also out there pounding the street for their next job,” Goch said.
Vogel agreed that entry and exit are most important, but said there can be issues during the life of the contract, too.

“Where we often see conflict during a relationship is when the contract is not spelling out how the base salary will be adjusted, when it doesn’t talk about how you’re going to set objectives, how performance is judged,” he said.

“The purpose of the contract is to spell out expectations and make that clear ahead of time.”

Boards may correctly perceive that a written agreement—particularly for a new CEO—favors the executive, but there are factors that can persuade boards to grant one.

“In most cases the contract benefits the executive more than it benefits the organization,” said panelist Tenenbaum.

First-time CEOs have little leverage he said. “But if you’re in your third or fourth job and you’re a hot commodity, there’s no question the association is going to have to provide a contract.”

Friel said boards should not be surprised when a candidate asks for a contract.

“By the time we get to the contract, we have been involved in a 90- to 120-day (executive search) process,” he said. “We introduce the topic of a contract very early on. It shouldn’t be a surprise, but sometimes (boards) are
still reluctant.”

The veteran recruiter said he tries to persuade clients to enter a written agreement with the new CEO.

“It’s an excellent opportunity for both sides to set expectations, and the client’s opportunity to weigh in on what they want to happen for the next three years,” he said. “If they still push back, my feedback is, ‘You’re probably not going to get a great candidate if you don’t (offer a contract).’”

Beyind the Paycheck panel
Panelists at the Behind the Paycheck event were, from left, compensation expert Brian Vogel, nonprofit attorneys Jeff Tenenbaum and David Goch, and executive recruiter Pat Friel.