January 29, 2009

Setting up an employment contract for a nonprofit executive

Q. How do I set up an employment contract for an executive director? What sorts of things should be covered in such an agreement?

A. Doug Herbert, an employment lawyer in Washington who works with nonprofit clients, suggests that you talk to a lawyer - or several.

"This is an area where it would be a real mistake to do this without an attorney unless you just can't afford one," he says.

An employment lawyer will help you navigate such issues as bonuses, leave, sabbaticals, insurance, perks (such as housing or parking), relocation costs, causes for dismissal, and severance, Mr. Herbert says.

A tax lawyer will help you ensure that the compensation you offer, including perks and deferred compensation, such as pension, is not more than the law allows for nonprofit executives, says Diara Holmes, a Washington tax lawyer who works with charities.

"The key is to see that the organization is paying no more than fair market value," she says. To do that, you'll have to "benchmark" what organizations of similar size, budget, and mission to yours pay their chief executives.

You can look for chief executives' compensation in the informational tax returns that nonprofit organizations file with the Internal Revenue Service, which are available publicly, or you can hire a compensation consultant to do the research and analysis for you, Ms. Holmes says.

Your tax lawyer will make sure you collect and analyze the information correctly and that you properly document your justification for the compensation you offer.

Mr. Herbert recommends that the president of your charity's board, rather than a lawyer, negotiate directly with the candidate, concluding the negotiations by writing a brief "term sheet" that lays out the terms that have been agreed to. Then the employment lawyer should prepare a detailed written agreement, if you request one.

Although drawing up a contract is common, "it's probably in the organization's interest not to have a written agreement at all," Mr. Herbert says. "If it turns out the executive was not a good fit, you can get rid of them for free," rather than having to pay out a severance that would likely be included in an employment contract.

Possibly for that reason, most new executives will ask for a contract, Mr. Herbert says. The higher the compensation, the more likely a nonprofit executive is to have a written agreement: Those who make $75,000 or less are unlikely to have a contract, and those who make $200,000 or more usually do, he says.