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CEO remuneration

Issues of how much to pay a community group's CEO or executive director usually arises in one of two quite different settings: when hiring a new CEO, and when discussing whether to give the current CEO a raise.

There are no hard and fast rules to setting a salary package level, and there are certainly no simple tables for you to check. Some general principles, however, do apply at every point.

1. The salary should be enough to attract the right candidate.

When hiring a new CEO, boards typically choose a salary designed to attract strong candidates and then cut it by 20% to allow candidates to show how much they are committed to the organisation for its own sake. This has been known to work, but be ready to put back that 20% and add another 10% if you don't get any suitable applications.

Once the person has been hired, the same board often sets aside the question of whether the salary is enough to attract a good CEO and gives only minor percentage increases, if any. This isn't sensible. You should consider, in every year's performance review, whether the salary is sufficient to make your organisation competitive in the market for talent.

If your CEO was looking around, would any of your competitors be able to offer them the same satisfaction and more money? If they did leave, how much would you have to pay the new person? Look at the salaries of comparable groups in the area (bearing in mind that salaries at very similar groups can be different by factors of three or more.)

Look at the kinds of positions your CEO might take in the public service departments you deal with, and what salary and benefits are being offered there. From where are you most likely to recruit your next CEO? How much are they getting now? If there's a large gap, look out.

2. The salary should be able to be sold as fair in the context of other salaries in the organisation.

How much are other employees making? How distant or how close do you think is appropriate? There are circumstances where the CEO doesn't get top dollar - law firms, say, or hospitals, where specialist expertise is valued - but the general rule is that they do. Don't just set the CEO level at 5% above the next highest; think about rule #1.

3. The CEO's salary shouldn't stress the organisation's finances.

The board has a responsibility to keep the total costs of the organisation (including the CEO's salary) in an affordable range. On the other hand, it also has the responsibility to get the job done. The only way to bring these two together may be to up your fundraising.

4. The CEO's salary should send the appropriate signal to the person, to the staff, and to other stakeholders.

Salary is, among other things, a motivational tool. Words are important, but so is money. Praising the CEO in the board room while keeping their compensation flat ends up conveying a message that the board doesn't really value their work.

Note, too, that the CEO's salary for the coming year reflects the contribution we expect them to make this coming year. Last year's work gives us clues about how well they'll do next year, but this year's salary is not a reward for last year's work.

Whatever you pay your CEO, it's a good idea to have the salary reviewed and approved by the board annually, preferably in the context of performance evaluation and the budget for the upcoming year.

The simple step of assigning one person to look up the salaries of comparable organisations can set a helpful context for the board. It's not easy to make comparisons between the value of work at different organisations, though, and there are many things to take into account in your discussions - how many employees, what size budget, how much fundraising, how much financial management, how much responsibility, what sort of backup.

Some information on Australian not-for-profit sector salaries may be found at www.enterprisecare.com.au/human_resources; which does, however, charge for it.

 


 

 

 

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