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Evaluating the performance of nonprofit employees Executive Compensation Procedures Evaluating the performance of the executive director Reducing your nonprofit's risk during employee layoffs An organization's personnel policies define what the agency can expect from its employees, and the employees can expect from the agency. The policies should be written within the first year of hiring staff, and will help the organization maintain positive employee relations because they can prevent conflicts arising from misunderstandings. The board of directors, often through its personnel committee, is responsible for developing written personnel policies. The executive director and staff members can contribute to the development of satisfactory policies. The board of directors should formally accept the personnel policies, and review them on a regular basis to incorporate new legal requirements and organizational needs. Every employee should receive a copy of the policies. Personnel policies often address the following topics:
A sample personnel policy is available on this web site by clicking here. Evaluating the Performance of Nonprofit Employees Employee evaluations help organizations accomplish four main goals:
The general timing of performance evaluations should be spelled out in the personnel policies (within one month of the end of the calendar year, at the time of the annual meeting, semi-annually, etc.), although actual timing can be decided as needed. While supervisors are generally not enthusiastic about delivering performance evaluations, they are important both because inadequate communication can result in negative consequences, and because they represent a valuable opportunity to exchange feedback. There is no set of rules that determines what should or should not be included in an evaluation. The evaluation process can be formal or informal, it can reflect input from only the supervisor, or include information from staff members' peers or external (to the organization) colleagues. It can be based on staff job descriptions, annual workplans, or the organization's strategic plan. The executive director, possibly with the assistance of the personnel committee, should establish a format that will allow for an exchange of information and strengthen staff effectiveness. In general, employees sign the evaluation to indicate acknowledgment of review, but not agreement with the evaluation. A staff evaluation process may include an opportunity for the person being reviewed to respond in writing to any points of disagreement. Staff evaluations should address the following questions:
A sample employee evaluation is available on this web site by clicking here. EXECUTIVE COMPENSATION PROCEDURES Introduction MCN’s Principles and Practices for Nonprofit Excellence [link] are based on the fundamental values of quality, responsibility and accountability and provides guidance on how to approach compensation. The Principles and Practices suggest that a nonprofit board of directors or its designees “set compensation for the organization’s executive director and stay informed of compensation levels for other key personnel.” Board leadership and involvement in this process allows nonprofits to better fulfill their duty of care in management of financial resources and additionally help safeguard against excessive compensation and financial mismanagement. Legal
Authority While no individual or group of individuals may profit from net organizational earning, a charity may nonetheless pay “reasonable compensation for services rendered.” Treas. Reg. § 53.4958-6. The IRS and the state of Minnesota do not require organizations to follow a particular process to determine reasonable compensation. In Minnesota, nonprofit Boards are given authority to fix compensation, usually via articles or bylaws. M.S.A. § 317A.211. While the IRS does not require organizations to follow a particular process, the 990 disclosure requirement appears to be modeled on the “rebuttable presumption test” established in Internal Revenue Code and Treasury Regulations. As the IRS explained, Under this test,
compensation payments are presumed to be reasonable
if the compensation arrangement is approved in advance
by an authorized body composed entirely of individuals who
do not have a conflict of interest with respect to the
arrangement, the authorized body obtained and relied upon appropriate
data as to comparability prior to making its determination,
and the authorized body adequately documented the bases
for its determination concurrently with making the determination. 990
Disclosure The 990 inquires in Part VI, Section B,
Additionally, Part VII and Schedule J solicits compensation information for certain officers, directors, trustees, key employees and highest compensated employees. Organizations would be prudent to adopt compensation procedures and provide a narrative of those procedures in Schedule O, based on each part of the question 15 inquiry as emphasized above. Procedure
Insight Advance approval by authorized independent body
Once an organization fulfills the outlined steps, the IRS may rebut the presumption that an amount of compensation is reasonable only if it puts forth sufficient contrary evidence to rebut the probative value of the comparability data relied upon. Sample Policy
Additional Resources
Evaluating the Performance of the Executive Director One responsibility of the Board of Directors is appraising the work of the organization's Executive Director (ED). An evaluation can help to improve the confidence, support, growth and working relationship between the Board and the ED. While this review is sometimes avoided or done poorly, it represents an opportunity to identify challenges in program or performance, reward the ED, and strengthen the organization's overall administration. Because at least once a year the ED should expect to receive a coherent view of the Board's opinion of his or her work, the evaluation process will be more effective with advance planning. At a minimum, the appraisal can take the form of a pre-arranged discussion between the ED and the Board Chair, although the evaluation should have a written component. The ED's performance should be measured in relation to his or her job description, and the evaluation may cover the following activity areas: staff relations; administration; planning; leadership; fiscal management; external public relations; effectiveness in working with the board to fulfill the annual plan; and effectiveness in helping the board achieve its own accountability and level of responsibility. The specifics of the evaluation process should be determined by the Personnel Committee or a task force of the Board, and the ED should be informed of the process in advance. An Executive Committee or the Board Chair can report the conclusions of the evaluation to the ED. The type of evaluation the organization uses can include any of several elements:
One system that seems to work well for many nonprofit organizations is for the Board Chair to circulate a questionnaire to all of the board members asking specific questions about the ED's performance during the past year. The questionnaire can use a ranking system (i.e.1=outstanding, 2=expected, 3=below expectations, 4= not satisfactory) and include space for narrative comments. The Chair can then summarize these responses and communicate them to the ED, seeking his or her reaction. At that point, the Chair and the ED can set performance objectives for the coming year, and then a report can be made to the full board for review. After that, changes in compensation can also be discussed. A sample executive director evaluation is available on this web site by clicking here. Reducing Your Nonprofit's Risk During Employee Layoffs Layoffs
that are motivated by economic or administrative reasons — such
as loss of funding or staff reorganization — are common in the nonprofit
sector. The result is that employees, through no fault of their
own, may find themselves unexpectedly without a job. When downsizing
is necessary, the nonprofit can take steps to reduce its liability
in the process of laying off one employee or several paid staff. Q:
We can no longer support the current number of staff on our budget.
What is the chance that laid-off employees will sue us if we let
them go? A:
When economics dictate that a staff position be cut, it’s critical
that the nonprofit have a well-supported business reason to select
which employees are to be terminated. The risk is that you’ll be
vulnerable to claims that discrimination played a part in deciding
who was to be let go. Whenever a nonprofit is considering layoffs,
alternatives should be also considered. Can the objectives of the
reduction-in-force (RIF) be accomplished through a hiring freeze,
a salary freeze, an hours reduction, or a status change from full-time
to part-time? Document that you’ve considered alternatives to the
RIF. Take the time to spell out in a written memorandum to the board,
the business reasons for the necessary layoffs, as well as your
justification for those employees selected for termination. Q:
Even if we have a legitimate business reason documented and we’ve
considered alternatives to a RIF, are there other aspects of a RIF
that could come back to haunt us?
A:
Before implementing any lay-offs, consider how the workforce will
be impacted. Is the downsizing going to affect one particular group
of employees more than others? Is the reorganization going to eliminate
the only minority in the agency? If your answer to either question
is yes, even if there are solid business reasons for the selection
of that particular employee, there are clear liability risks involved
in the RIF. Q:
What’s the best way to select the employees/positions to be eliminated?
A:
In selecting which employees/positions will be eliminated, it’s
imperative to use an objective method. Possibilities include basing
retention on:
Whatever
the method, consider:
Salary
shouldn’t be a consideration in who goes and who stays, since typically
older workers are those with longer tenure who are at the higher
end of the salary scale. Q:
What can our nonprofit do to reduce the risk of a lawsuit?
A:
Your nonprofit can reduce the risks of facing a lawsuit in a number
of ways. First, consider asking for voluntary resignations from
employees. Also, take some time to identify ways you can support
employees who will be let go. If your policies prohibit use of the
nonprofit’s equipment for personal reasons, consider relaxing these
rules and allowing employees who will be laid off the opportunity
to use your equipment to prepare resumes or search job notice Web
sites. Review your reference giving policy. If you don’t give references,
consider changing your policy and using a reference form. A reference
form is a document that serves as a written reference. You’ll be
doing departing employees a great service by ensuring that they
will be able to provide a reference to prospective employers. Even
if you think you can’t afford a severance package, it might be worthwhile
to negotiate a severance package in exchange for a signed release
and waiver of claims against your organization. Although a release
will cost you something, you’ll probably sleep better knowing you’ve
taking an important step to reduce the possibility of a suit. Q:
Whom should we tell and what should we tell about the reasons for
the downsizing?
A:
It’s critical to communicate to the staff the reason for the downsizing.
Management or the board should share the economic realities of the
situation with the staff, and explain the business justification
for the reorganization or downsizing. They might explain that the
downsizing is being carried out reluctantly and only after efforts
have been taken to avoid such as result. If possible, make an effort
to network with other nonprofits in the community to identify alternative
new positions for those being let go. Q:
Are there federal or state laws that affect downsizing?
A:
In severe downsizing situations, such as a nonprofit closing its
doors, the federal WARN Act (Worker Adjustment and Retraining Notification
Act) or a similar state law may apply. WARN
only applies to those nonprofits with 100 or more full- or part-time
employees, who, in aggregate, work at least 4,000 hours per week.
WARN requires employers to give employees 60 days’ advance notice
when 50 or more employees will be terminated, if that constitutes
1/3 of the workforce (or when 500 or more employees will be laid
off). Beware of state laws:
Q:
How can we soften the blow of a lay-off for employees being let
go without jeopardizing the nonprofit?
A:
Because lay-offs are often unexpected and not the employee’s fault,
many nonprofit employers offer separation pay when termination is
a result of economic necessity. There is a risk in having such a
policy as a standard procedure because in cases where a severe shortfall
necessitates layoffs, there may not be sufficient funding to cover
all of the separation payments. While
softening the blow of a lay-off is a terrific idea, rather than
codifying separation pay in personnel policies, it’s better to offer
separation pay as funding allows. An alternative is to clearly state
in policy language that separation pay will be offered, “at the
discretion of the board, as funding permits.” Q:
Fortunately, we don’t have to worry about layoffs now, but are there
things we should know or could do now that would help us if this
ever became necessary? A:
Begin by reading your nonprofit’s handbook, noting any policies
that might lessen your right to conduct a reduction-in-workforce
or specify how RIFs are to occur. Also review all written policies
given to employees. Instruct
management not to make promises that they can’t keep, such as there
won’t be any layoffs or that everyone’s job is safe. Employees who
feel that they’ve been misled or lied to are more likely to sue.
If
you are considering hiring younger workers who have needed skills
to replace older employees who don’t posses these skills, stop.
First offer to retrain the to-be-fired older workers in new skills
and document that offer. Never use a lay-off process as a way around terminating poor performers. RIFs are not an alternative to terminating someone for poor performance or gross misconduct. A lay-off process should never be used for this purpose. ________________________________________________ This
article was adapted from Taking
the High Road: A Guide to Effective and Legal Employment Practices
for Nonprofits, published by the Nonprofit Risk Management Center.
For more information about this article or other risk management
topics, contact the Nonprofit Risk Management Center at (202) 785-3891
or www.nonprofitrisk.org. The
Minnesota Council of Nonprofits is a part of the Nonprofit
Risk Management Center's Satellite Office Program.
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