Focusing part of an organization’s energy on increasing capacity is always a smart move. In the face of transition, it is a necessity.
An essential part of building capacity is diversifying and expanding resources. Increasing revenue generation enhances the health of the organization making it more attractive to potential new leaders. Often there is an unexpected second step to attracting the best leader: exploring the CEO market compensation rate.
How can the CEO’s compensation rate vary significantly from market rate? After all most boards review their CEO annually and the organizations’ tax return (also referred to as the 990) state that the Board reviews the CEO’s salary annually.
There are many reasons CEO salary rates may vary from market rate. First, the market rate itself is not a set number but a range depending on a number of factors. The starting point is always the organization’s overall budget. An organization with a ten million dollar budget will normally compensate their CEO more than an organization with a million dollar budget. Part of this is the capacity of the organization. Organizations with smaller budgets often have less left over after paying program and administrative costs. Some would also argue that the higher salary is dictated by the organization’s increased complexity leading to the need for a more seasoned CEO.
Another factor to consider is the mix of revenue sources. Organizations that rely heavily on government funding may not have the flexibility of an organization depending on diverse resources. Many government grants do not cover all administrative costs associated with the program and reimburse organizations after expenses are incurred. Additionally in this age of high government deficits, many governments are paying invoices at a slower rate, forcing many organizations to open lines of credit. Private individual donations are often donated for general operations rather than for a specific program or expense. “Gen op” revenue provides flexibility and an increased capacity to afford a higher CEO salary.
Starting a new leader at market rate, does not guarantee their salary will continue at that rate. Many leaders prioritize other organization needs in front of their own. Often organizations forgo salary increases to launch new programs or bring on employees with essential new skills. Additionally, because the salary market rate varies, many CEO’s don’t fully realize their own value until they transition.
If the CEO salary is below market rate, then the salaries of other leaders may be as well. This may partially explain the constant turnaround in leadership staff. In these cases, the organization should develop a long term strategy to bring all salaries to market rate.
In upcoming posts, we will explore other issues board leaders should explore as they bring on a new leader.