Nonprofit CEO Employment Contracts – Jack Horak

Nonprofit CEO Employment Contracts is legal scholar Jack Horak’s insights on how to protect everyone’s interest whey performing a professional hire. Here’s what Jack Horak of The Alliance for Nonprofit Growth and Opportunity has to share:

Nonprofits often think of employment contracts as an unnecessary expense, as an impediment to trust and confidence, and as a mere statement of “for how long and for how much.”

To the contrary, at the chief executive officer level a well drafted employment agreement is an intangible asset that can pay a significant return in at least two different ways.  First, it brings clarity and structure to that place at the top of the chain of command where corporate decisions are made. Second, it provides a road map for the termination of the CEO (lessening the risk of rancor and litigation) if the relationship is no longer working.

In a sense, these agreements are akin to pre-nuptial agreements —  in which each party discloses what it brings to and expects from the relationship, and which makes “breaking up” less messy if it becomes necessary.

Hypothetical Case study

Assume Human Services Corporation of America (HSC) is a provider of social services with 300 employees.  Its performance slipped badly under its former chief executive James Doe, who was recently terminated after a protracted and expensive legal struggle about who was responsible for the problems. There was nothing in writing.

Doe’s lawyer claimed that the operating problems arose because the board was not attentive,  that there was an implied contract of continued employment, and that Doe was being discriminated against because of his age (56).  Upon advice of its counsel, and given the absence of anything “in writing,” after weeks of rancorous negotiations, HSC agreed to pay twelve months of severance to Doe to avoid litigation.

HSC board members simultaneously conducted a search for a replacement CEO  and decided to hire Mary Smith.  The board is enthusiastic about Mary but having learned a hard lesson in Doe’s case,  asked its lawyer to prepare an employment agreement and to negotiate its terms with Mary’s lawyer.  The two lawyers agree on acceptable terms and the four relevant sections of Mary’s contract are: (1) performances expectations, (2) annual board evaluation, (3) the term of employment, and (4) termination of employment by HSC before the end of the term.

Nonprofit CEO Employment Contracts

First:  Performance Expectations.

This is what the proposed contract has to say about the board’s expectations of Mary.

“HSC engages Mary to serve as its Chief Executive Officer.  In that capacity, she shall have the duties and responsibilities of that position as set forth in the By-laws and the following:  presiding at all fund raising events such as the annual gala, golf tournament, and auction; working closely with the chief financial officer to prepare annual operating and capital budgets;  attending meetings of the audit, investment, and executive committees;  reporting to the board any candidates for merger with HSC; registering as a lobbyist and/or working closely with HSC’s lobbyist to protect HSC’s interests at the legislature; and preparing an annual confidential report to the board in which she assesses the strengths, weaknesses, opportunities, and threats of or to HSC”.

If you parse the terms of this language two things stand out.  First, it begins with a generic reference to the types of duties customarily understood as those of a chief executive officer (the By-laws) while segueing into some specifics expected by the board (fundraisers, committee assignments, lobbying, etc.) which were the source of disagreement with Doe.

Second:  Board Evaluation of Performance

The contract with Mary creates a mechanism for the board to evaluate her performance against the duties discussed above, as follows:

“No later than thirty (30) days before the end of any fiscal year, Mary shall meet with the Board of Directors to conduct an annual evaluation of her performance during the year then ending measured against the duties and expectations established under this Agreement. The results of the annual performance evaluation shall be memorialized in writing,  and placed in Mary’s personnel file,  and shall be a factor in making any adjustments in Mary’s annual compensation”.

This language puts some teeth into the description of the duties by requiring Mary and the board to take the time each year to look at what they said they would do and what they did do, and to make adjustments as necessary.

Third:  Length or Term of Employment

A question which always arises with executive employment agreements is how long?

Mary’s agreement says:  “HSC agrees to employ Mary, and Mary agrees to accept employment with HSC, for a term of five (5) years commencing on January 1, 2020 and continuing until December 31, 2024, unless sooner terminated as provided in the next section of this Agreement”.

This section establishes a basic five-year term which is the minimum– and is the type of language one could rely upon to state in conversation that “Mary has a five-year contract.”  However, the clause “unless sooner terminated as provided in the next section of this Agreement” is important because it creates a track that HSC can follow to terminate Mary before the end of five years — but on balanced terms agreed upon in advance as discussed next.

Fourth:  Termination before the end of the five year term.

Mary’s contract is designed to prevent a repeat of the James Doe situation, and it does so with two parallel termination provisions that  give HSC a way out of the contract – a termination for “cause” section (which would provide an “objective   legal basis” for immediate termination);  and a termination “without cause” section (which would allow HSC to terminate Mary without getting into a “he said she said” argument about who is at fault).

“Termination for cause. Mary’s employment may be terminated by HSC for ‘cause’ at any time upon written notice to Mary, which notice shall set forth the facts on which the termination is based and the effective date of termination.  As used in this Agreement “ cause” shall be limited to (i) Mary’s having been indicted or arrested for any act of fraud, embezzlement, theft, dishonesty or moral turpitude or for any other act constituting a felony; and/or (ii) any internally documented substantial and repeated failure or refusal to perform, or breach of, her duties to HSC as described in this Agreement and/or under applicable law.”

“Termination without cause. HSC may terminate Mary’s employment at any time without cause after December 31, 2022 upon sixty  (60) days written notice; provided, however, in the event of termination without cause under this Section HSC shall, as severance, continue to pay Mary the salary and benefits provided under this Agreement for the shorter of (i) six (6) months or (ii) the time remaining in the employment period ending on December 31, 2024”.

This language in the termination “for cause” section is designed to address Doe’s lawyer’s argument that Doe had not done anything wrong and that the problems were the fault of an inattentive board.  It does so by defining a set of occurrences that will, in fact, give HSC a reasonably objective basis for immediate termination of Mary.   Readers should not focus on our definition of “cause” (which can be negotiated),  but on the fact that HSC and Mary have agreed upon the definition of occurrences that would give HSC the power to terminate Mary immediately.

The language in the termination “without cause” section gives Mary two full years of employment during which she can be terminated only “for cause” (calendar 2020 and 2021), after which, she would be at risk of being fired without cause — but only if she is given 60 days’ notice and six months of severance pay (a total of eight months).

Again, readers should not focus on the number of years before this “termination without cause” right arises, or on the number of months of severance, which are variables that can be negotiated.   However, readers should understand the trade-off underlying this approach: HSC is confident enough in Mary to rely only on the termination “for cause” section for the first two years, after which, if things deteriorate (which might simply mean that Mary is doing a mediocre job) it can dismiss Mary by giving her notice and severance (as pre-negotiated).  Similarly, Mary feels comfortable enough with HSC, and has enough confidence in her abilities, to accept the fact that after two years she can be dismissed for no reason – but with enough guaranteed severance to hold her over until she can find another job.

Conclusion

There was nothing in writing in Doe’s case and  the result was a free for all.   In Mary’s case the carefully written document provided clarity to both sides – the type of clarity that allows nonprofits to avoid bad situations in the first place.

Nonprofit CEO Employment Contracts was first posted at INSIDE CHARITY

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