Hiring a new CEO is one of the most significant undertakings in the life cycle of an association, and the employment contract between them is a critical document. In principle, the contract should be clear, fair, and balanced between the parties. Of course, in negotiations, both the association and the executive may employ strategies to create advantages that serve their interests.

Parties on both sides of the negotiating table should be aware of four key elements of association CEO employment contracts—term, termination and severance, compensation and benefits, and authority and responsibility—and should understand the most important issues that need to be considered on the way to an agreement.

Term

Often, the initial term of a CEO contract is between two and five years. A key factor to consider is the variety of ways in which the term can end before the contract expires. The term and termination provisions are intimately intertwined and need to be coordinated.

The agreement should specify clearly what happens at the end of the initial term. It could simply expire with no obligation on either party to continue employment. The parties are always free to negotiate extensions if both desire to continue the relationship. Sometimes, it is advantageous for one party or the other to tee up a renegotiation of the entire contract.

Another approach is to provide that the contract will renew automatically unless there is some affirmative notice to the contrary. For example, if one party does not provide written notice at least 180 days before the initial term expires, the agreement might renew automatically for one or more years.

Termination and Severance

There are typically three ways in which the agreement can be terminated by one side or the other, each with its own implications for severance pay.

Notice by the CEO, with no cause or reason. Although by no means required, many agreements have provisions that allow the executive to terminate early, without giving a reason or cause, by providing certain advance written notice to the employer. Typically, a CEO will want such a provision. The notice period should take into consideration the hiring cycle and lead time required, and the agreement should specify that no severance will be paid to the executive in this circumstance.

Notice by the association, with no cause or reason. A CEO contract should include a provision that allows the association to end the agreement early without cause, as establishing cause sufficient for termination can be difficult. The agreement should provide for the CEO to receive severance pay in this situation. Moreover, the notice period effectively functions as additional severance pay, as often the board will relieve the CEO of executive responsibilities during the notice period.

Severance pay amounts vary, but they often start with a three- or six-month minimum, have a 12-month maximum (sometimes longer for long-serving executives), and otherwise are tied to the length of service. The organization often will pay for the executive’s employee benefits, such as health insurance premiums through COBRA elections, during the severance period. The severance pay should be conditioned on a release of all claims by the executive.

Additionally, CEOs often ask for a contractual right to severance, not only in the event of a midterm termination by the employer, but also in cases when the association does not renew the contract upon expiration. Associations may resist these requests, especially if the agreement calls for notification of intent not to renew many months before it expires. From the association perspective, it will have honored its promised period of employment to the CEO and provided the CEO sufficient opportunity to begin a search for a new position. From the CEO’s perspective, a nonrenewal decision may be made without fault by the CEO, so some severance pay may be appropriate, especially if the notice period is shorter than a without-cause severance period.

Termination for cause. The agreement should contain a provision for termination for cause. Cause should be defined carefully and precisely, striking an appropriate balance between the parties. Employers should be wary of definitions that require criminal convictions; no association wants to await the outcome of a criminal proceeding. CEOs should avoid cause definitions that are too vague, subjective, or otherwise ill-defined. A new best practice is to include in cause definitions material issues that “occur or come to light” during the executive’s tenure that bring the executive “into public contempt or ridicule.”

Generally, with a termination for cause, no severance is paid, which is why the definition is so critical. The agreement typically provides that the executive receives nothing beyond what was due before termination, along with any vested benefits.

Compensation

Obviously, initial base salary should be clearly set out in an employment agreement. Generally, the contract also makes provisions for future upward adjustments, sometimes with a minimum annual increase. CEOs typically try (sometimes unsuccessfully) to ensure that there can be no decrease in base salary.

Many agreements also provide a discretionary bonus opportunity, often tied to the attainment of to-be-specified goals and often with either a target or maximum percentage of base salary. The agreement should lay out the process for how the goals will be set, stating that this must be done at the beginning of the fiscal year or other performance period, and naming who will be involved in the process. Generally, it is not advisable for the full board to be involved in annual CEO performance evaluation and resulting base salary and bonus determinations; most often, the executive committee serves this function.

Employment contracts typically spell out any other employee benefits that the CEO will receive above and beyond the benefits provided to the rest of the staff. While this has become less common in recent years—in part, due to the required disclosure of some of these benefits on the annual IRS Form 990 return—it is still not unusual to see organizations provide them. Common examples include additional paid time off and additional ability to roll over unused PTO and be paid out for accrued but unused leave upon departure, a geographic relocation allowance, and reimbursement of legal fees in connection with the employment contract negotiation.

Bear in mind that total compensation paid to an executive of a tax-exempt organization, regardless of its tax-exempt category, must be “reasonable” (at or below fair market value) under the tax code proscription against private inurement. Serious violations in this area can put an organization’s tax-exempt status at risk.

Finally, be aware that compensation paid to association executives from most affiliated organizations—such as taxable subsidiaries or related foundations—needs to be reported on the Form 990 return.

Authority and Responsibility

It is a best practice for the employment agreement—and often the organization’s bylaws—to provide that the CEO shall have sole and exclusive authority for the hiring, firing, supervision, promotion, and compensation of all other staff, subject to budgetary parameters set by the board. This appropriately separates the operational and managerial authority of the CEO from the strategic oversight responsibility of the board.

Association CEO employment contracts typically include many other provisions, such as those regarding indemnification and limitation of liability; conflicts of interest and ethics; confidentiality; non-competition; non-solicitation of employees, contractors, members, sponsors, donors, and others; and alternative dispute resolution procedures.

Both the executive candidate and the association need a clear understanding of their respective rights and obligations before the candidate accepts employment and before the association announces that a new CEO has been hired. Careful, detailed, good-faith negotiation between the parties and a comprehensive, balanced, well-drafted contract that accurately reflects the agreement between them will pave the way for a long-term, successful association-CEO partnership.