heads’ contracts: compensation, negotiations, and terms debra wilson, nais
TRANSCRIPT
Heads’ Contracts: Compensation, Negotiations, and Terms
Debra Wilson, NAIS
Be sure to write . . .
202 973 9716
What do I do?
Who is your legal counsel?
About this presentation
Where are we going?
Brief overview
Lets talk about you – executive contracts.
How the law fits together
Federal
– Constitution
– Legislation
– Regulations
– Case Law – admin and federal courts
State
– Same
– May raise the floor on federal law
– Examples . . .
Uptick in Heads Being Let Go
Main Causes
– Poor Evaluation Systems and Communication
Lack of goals and objectives
Lack of clarity
Lack of systems
– Poor Succession Planning for Boards and Heads
– Major Donors
– Poor Training for Heads
– Lack of Engagement to Accomplish Goals (both heads and board members)
– Inappropriate matches
On the front-end
Contract – Needs to be your net Board succession planning – Often the problem
What does your succession planning look like?
Does it actually work?
Are you consistent?
How does the head fit into the process?
You are being offered your first headship. You and your spouse had a wonderful visit with the school, which is a lovely k-8 day school that is offering you $300,000 a year in a town about an hour from a major city in the Midwest. Your package include tuition remission for your three kids, a car, a country club membership, 6 weeks of vacation, and tuition for your spouse who wants to go back for her masters degree. Is there anything to worry about?
Who is interested in heads’ compensation?
IRS
State Attorney General
Potential Donors
Local Newspapers
National Papers
Other heads and trustees
Intermediate Sanctions
If an interested person receives more than the fair market value for the services, goods, or property provided, there is an excess benefit.
Interested person = disqualified person = individual with substantial influence over the (mostly monetary) operations of the school any time within the previous five years.
Compensation = very broad definition when it comes to your employees.
Always the heads, almost always your business officer. Always board members. Major donors and others also potentially on the list.
Rebuttable Presumption
IRS has created safety net:
Can create a rebuttable presumption of reasonableness of the compensation.
Similar schools, similar circumstances, what are they paying? Look at entire package.
Data, discuss, document. No conflict of interest within the voting group.
A word on the StatsOnline project
If there is an excess benefit: individual returns the money and pays a 25% tax, those knowingly and willfully signing off on the benefit pay 10% or $10,000 whichever is less. Each.
It is important to make the process of creating a rebuttable presumption a habit.
What is this process, really?
Inter Sanctions Cont’
Important issues regarding intermediate sanctions
Reasonable reliance upon third party’s professional opinion
Importance of documentation
IRS activities
– Executive comp segment study
– Loans have created own segment study
– 990 reporting – often done improperly in this area
– Interested in affiliated orgs and connections between trustees
– 990 – new form
What should happen?
Head’s compensation – who should know, who should be involved?
Documentation?
Minutes?
Third party?
Who is liable?
Compensation
What is compensation?
– Standard Components:
Salary
Bonus
Deferred compensation (403(b), 457(b), 457(f), Rabbi trusts)
Cost of health insurance, dental, life, disability, liability, flex benefits
Other Compensation
Foregone interest on loans
Forgiven loan principle
Education assistance plan
Tuition remission
Other tuition benefit
Spousal travel
Housing allowance / on-campus housing
Parking pass / transit passes
Auto allowance
Personal use of vehicle / cell phone
Club membership / dues
Cash out of sabbatical / vacation / other days off
Automatic Excess Benefits “If the benefit is treated as compensation under IRC 4958,
Agents should consider the benefit along with any other compensation the disqualified person may have received to determine whether the aggregate compensation was reasonable.”
Did org provide written substantiation?– Form 990, W-2, or Form 1099, or amended tax return
before examination of individual or org. – Contract laying it out, appropriate doc from authorized
body.
If not, “automatic excess benefit transaction.” – Doesn’t matter if reasonable, any other compensation is
reasonable, or if aggregate is reasonable.
What else is automatic excess benefit?
What else have we got in this guidance from the IRS?
You better be reimbursing through an accountable plan.
Receipts and reasons for reimbursements.
Otherwise, likely neither will report, won’t have documentation, won’t be reasonable cause for failing to report, and suddenly may have both the 25% excise tax and the 200% excise tax
Likely not willful violation . . .
So here is what they tell the agents to look at
Consider all
Agreements– Employment– Deferred Comp– Bonus Agreements– Retirement Agreements– Severance– Purchase and sale of any goods or services
Loans
Expense reimbursement or payments
Now we are crossing into 990 world
990 Compensation: all cash and noncash forms of compensation for each listed employee whether paid currently or deferred
– salary, fees, bonuses, and severance payments received by each listed employee
– all forms of deferred compensation and future severance payments (whether or not funded, whether or not vested, and whether or not the deferred compensation plan is a qualified plan.) Include in this column payments to welfare benefit plans ... Such plans provide benefits such as medical, dental, life insurance, severance pay, disability, etc. Reasonable estimates may be used.
– Taxable and nontaxable fringe benefits – except for de minimis under 132(e) . Includes: the value of the personal use of housing, automobiles, or other assets owned or leased by the organization (or provided for the organization's use without charge), as well as any other taxable and nontaxable fringe benefits
What about DASL?
Working with someone on the data?
When do you really need extra help?
Using the 990 – new developments in the 990
Other approaches
Hire a consultant to gather own data or use their own
School can gather
Can use the consultant NAIS has negotiated with to help
Can do a combination of these approaches.
It’s important to do something from a fiduciary standpoint to make sure the compensation is reasonable.
CAIS Heads: Salary Deferred Comp
CAIS Salary
NAIS Schools by Enrollment
NAIS Schools by Enrollment
NAIS Schools by Enrollment
NAIS Schools by Enrollment
NAIS Schools by Enrollment
NAIS Boarding / Day
You are in your first year as vice chair of the board. You are really not sure if you want to be chair, but at least for this year you are chairing the search committee for your new head. What do you do?
Process
Identify search committee (board member and beyond)
Decide on search firm or not
Figure out compensation range before going shopping.
Heads should inform themselves via 990s.
New heads generally going to be at lower end of the scale depending on experience.
Do have your must have, like to have, pros and cons lists.
Do hire an attorney to work with your contract.
First Contract…
You are negotiating your first head of school contract. You and your spouse have one three year old and another baby on the way. Your new school is a k-8 day school with 350 kids in a small urban area in the South. Your spouse would like to go back to school starting in January to work on his graduate degree. What are you looking for? What is standard? What might be special to you?
Considering the package
Negotiations between boards and heads.
Looking at previous list, consider where the family is in the life cycle
Idea of financial planning for heads.
Tuition remission, child care v. 457(f), building bigger retirement nest egg
NA IS Heads’ Tax Guide
How do you “figure this out?”
Salary, retirement, benefits
Childcare? Parental leave?
Does it matter if an item is taxable? Should you just throw it into salary?
Do you hire a lawyer?
Other Compensation
Foregone interest on loans
Forgiven loan principle
Education assistance plan
Tuition remission
Other tuition benefit
Spousal travel
Housing allowance / on-campus housing
Parking pass / transit passes
Auto allowance
Personal use of vehicle / cell phone
Club membership / dues
Cash out of sabbatical / vacation / other days off
Initial Contract Negotiations
Delicate balance: Getting off on the right foot while having a reasonable agreement
Attorneys are good if you actually use them and they know what they are doing
Play out the worst case scenarios – what does each side need?
Now is the time – negotiate for the worst of times in the best of times.
Termination Provisions
Must work with the renewal provision.
Cause and Not for Cause – Be particularly aware of a broad for cause section. There may be a “cure period” on some for cause areas.
Pay-out – Can be a year to two-years. May be an off-setting provision such that any subsequent employment may off-set the rest of the payout. What’s the important timing element here in terms of your future employment?
Transition of any relevant benefits – housing, tuition remission, etc.
Remaining Ambiguity – It happens
Other important provisions
Evaluation – make sure there is a goals and objectives system, with feedback, and make sure that it keeps working
Renewal – make sure it’s timely and operating
Clarity around any potential ambiguity in the contract or elsewhere in school policies
– Board protocols and head involvement therein
– Outside activities
– Perceived need for potentially disruptive changes within the school with which head is charged
– Discipline issues, arbitration, etc.
MidLife Transition
Your new head of school is 45 years old, heading into his first head position after 10 successful years at your old school. He is separated from his first wife separated and remarried. His oldest child is in college, the second is in boarding school. He and his wife are thinking of having a baby.
Your school is a boarding school. Enrollment is consistent, but there are concerns about the future of boarding schools like yours.
What is appealing to this head?
Other Compensation
Foregone interest on loans
Forgiven loan principle
Education assistance plan
Tuition remission
Other tuition benefit
Spousal travel
Housing allowance / on-campus housing
Parking pass / transit passes
Auto allowance
Personal use of vehicle / cell phone
Club membership / dues
Cash out of sabbatical / vacation / other days off
Final Headship?
You are signing your first agreement with a new school, the school that you hope will be your last. You are 55 and would like to retire in about ten years. The school is 25 years old, k-12, and has been thriving but it really needs fundraising and other efforts to move it to the next level. You still have a ten year old child at home with you.
What do you want now?
What about retirement?
Other Compensation
Foregone interest on loans
Forgiven loan principle
Education assistance plan
Tuition remission
Other tuition benefit
Spousal travel
Housing allowance / on-campus housing
Parking pass / transit passes
Auto allowance
Personal use of vehicle / cell phone
Club membership / dues
Cash out of sabbatical / vacation / other days off
Retirement / Severance packages
Trends that we see in retirement packages for heads:
– Health Insurance
– Payouts over time
– Forgiveness of loans
– Large (and likely taxable) gifts.
– Year’s salary
What Happens if You are Suddenly Gone?
You have been enjoying your headship and you are taking a group of 8th graders on an overnight camping trip. Unfortunately, you never learned not to use 15 passenger vans at your school and have been in a huge accident. Your valiant efforts saved the students and the other chaperone, but not you. What happens to your family?
Planning for the worst.
What has been built into agreements in the event of your death?
Are there any benefits left from earlier employment?
Life insurance? Salary payments? Tuition?
Is your head shopping around?
Your head of school has been with the school for 15 years. You think he’s great, so does the rest of the school. You suspect this is probably not the job he wants to die in, but don’t foresee any big moves any time soon. However, at CAIS you hear from another board chair that he met your head before. This board chair has a new head this year and this comment gets you wondering, has your head been shopping around? What does his contract require?
Head leaving the school (voluntarily)
What does his contract require?
Notice? Notice before leaving? Notice of looking?
– What does your school’s contract say?
What does your board do if you find out your head is looking?
– Unfortunate trend
Most contracts have a notice provision
Enforceability can be a question, although some schools tie to golden handcuffs through a 457(f).
Search cycle: Usually looking in the summer/fall for next fall.
Unless someone has hired your head, then you are looking in the winter / spring for the fall.
Can do an interim at that point, too.
Your board is generally displeased with your head of school. Enrollment is down, potentially because there is a perception that your head of school is shopping many afternoons instead of being at school. She is also leveraging one of the wealthier families against the board, in part because the trust fund mother is the head’s sorority sister. The head only fundraises from this family and will not let the development director or a board member talk with this family about their future contributions. The children of this family have been shown blatant favoritism.
The faculty is in revolt and has sent numerous letters to the board and there is a rumor that a parent letter is on the way. What can you do?
Ideally, what do you have in place?
– Consistent and thorough evaluation process that relies on clear goals and objectives that gets to these important topics
What about the faculty and parent uprising?
As board chair, you have spoken with most of the rest of the board about the head’s performance and issues. Virtually everyone you have spoken with agrees that she is a bad fit. You have not spoken with two of the board members, who are not current parents and do not attend many of the meetings, and they have not returned your calls.
You are feeling a need to put the head on notice that this is her last year with the school and you know you need to get a search started. You have already laid the groundwork with the dean of students to be interim in the event that the head does not finish the year.
You want to meet with the head to prepare her as things will unfold quickly. Can you? Should you?
What does this look like from the head’s perspective?
Do you have the authority to meet with her?
What other steps need to occur?
What else are you worried about?
Good Drafting
The following terms should have no confusion:
– Termination – for cause and not for cause
– Termination by head of school
– Pay out provisions
– Renewals (particularly when it’s a rolling renewal)
– Evaluation – goal and objective setting
– Authority to oversee and interact with the head (committee, entire board, etc.)
Getting Started…
You are the head of school in this conversation, which is coming as a complete surprise. What do you do?
Every step of the way: COPE
Rules of the road:
– Calm – Remain calm. You will get through this but you need to process.
– Over the net – don’t go “over the net”
– Plan – on the front-end and throughout the process you will need to work with your partner to come up with a good plan for you and your family
– Engage – an attorney to help advocate for you. They can keep you from getting pushed around and allow you to provide some sense of “business as usual” in the school. How you leave a school can be more important than how you arrived.
Where do you start?
Get your bearings
– What does your contract say?
– Who do you talk to?
– What’s your plan?
If they terminate…
If they don’t terminate…
Transition steps
What do you want to see happen? How are you feeling about what has taken place?
What do you know about the board dynamic?
The horses have galloped out of the barn. The rust fund mom is holding candlelight vigils on the school lawn. The three teachers who shop with the head are wrangling the STEM departments against the board. The two board members who were out of the loop have suddenly re-emerged in the op-ed pages of the local paper declaring their love of the school and how much you, the board chair, are gutting it to suit your commitment to the common core standards. What do you do? What could you have done?
Jumping the rails…
Even when you are doing the right thing, it can come out all wrong.
Good transition and mindfulness for community impact actions, particularly early on. Try to head things off at the pass.
If aggressive action is needed, then coordinate and never go it alone.
Board must be on the same page.
Help with communications and roll out is important.
Engaging key players is mandatory. At the very least, you need to know where they stand.
From the head’s perspective…
What is the best case scenario?
Should you move on?
What does it take a school to get “over” this?
What does the board / head relationship look like now?
Questions . . .