Head of School Contracts: The Role of an Independent Compensation Consultant

Author:
Cliff Kling, J.D., Mission & Data’s Senior Executive Compensation and Leadership Strategist

The head of school contract process should feel more like a collaboration and less like a negotiation. When Mission & Data is retained by schools to serve as an independent compensation consultant, our unique approach promotes collaboration over negotiation, offers the benefits of a neutral third party, shares benchmark data with both the board and head, utilizes a multi-benchmark approach, and educates the board and the head.

Summary: This article highlights the benefits of utilizing an independent compensation consultant as boards of trustees perform the critical task of selecting and compensating the head of school. Such consultants 1) mitigate risks inherent in the process, 2) make meaning of benchmark data, 3) advise about compensation structure, and 4) ensure compliance with IRS requirements. The article also outlines Mission & Data’s unique approach when retained as a compensation consultant, which includes: 1) promoting collaboration over negotiation, 2) serving as a neutral third party, 3) sharing data with both the board and the head, 4) utilizing a multi-benchmark approach, and 5) providing an educational session for the board or compensation committee. By engaging an independent compensation consultant, schools can navigate the complexities of head compensation packages effectively, leading to a stronger board-head partnership and greater mission fulfillment.

One of the chief responsibilities of the board of trustees is to select, support, nurture, evaluate, and compensate the head of school, the board’s sole employee. While these tasks fall squarely within the board’s fiduciary duties, doing them well has significant positive impact upon the board’s strategic and generative work and by extension upon the total success of the school and its mission. From a governance perspective, the board has only a few direct tasks which it must perform largely or completely on its own. Overseeing its sole employee is certainly one of them.

When tasked with developing a first contract for a newly selected head or renewing the contract for a sitting head, the board can choose to largely go it alone, perhaps with the input and help of either the search firm or the school’s CFO, or retain the services of an independent compensation consultant. This article will explain the role and benefits of using a compensation consultant, as well as setting forth Mission & Data’s unique approach when we are retained as an independent compensation consultant.

Why You Shouldn’t Hire an Independent Compensation Consultant

This may seem like an unusual place to start, but it is an important point to make. A school shouldn’t hire a compensation consultant if all the board wants or needs from the consultant is benchmark data. This data is readily available and can be compiled from any number of sources: NAIS DASL, INDEX, Form 990’s, and regional and national head compensation surveys. Utilizing appropriate benchmark data is essential and absolutely required when developing or renewing a head’s contract; however, a school does not need to hire an independent compensation consultant to access good benchmark data.

Benefits of Using an Independent Compensation Consultant

Why then should a school hire an independent compensation consultant? The following outlines the benefits of retaining a compensation consultant.

1. Derisking the process — First contract offers at the end of a long and frequently grueling search process and contract renewals for sitting heads are important inflection points in the life of a school and tenure of a head. The very fact that a contract is first being offered or is up for renewal means that there hasn’t yet been a meeting of the minds for the upcoming contract. How the process is handled by both the board and the incoming or sitting head has a lasting effect on the board-head partnership that extends far beyond the signatures on the newly inked contract. This consultant has seen examples where an independent compensation consultant was not involved and damage was done to the partnership in various ways: a newly selected head’s enthusiasm for their new school dampened by the first contract offer and ensuing contentious negotiations, a board becoming frustrated with its preferred candidate’s contract demands, and a sitting head who is not a strong advocate or negotiator accepting a less than satisfactory contract leading them to explore other headship opportunities. This list is not exhaustive by any means. While there are always risks in the contract offer and renewal process, a compensation consultant significantly mitigates these risks by providing the benefits and services outlined below.
2. Making meaning of the benchmark data — In the current era of big data, making meaning of the data is where expertise is most needed and valued. At what percentile should the head be paid? How should the head’s tenure at the school and overall experience as a head impact the appropriate percentile? How should the school’s profile impact the appropriate percentile? A compensation consultant will help answer these questions and others to translate the benchmark data into the head’s contract.
3. Advising about the structure of total compensation — Head compensation packages generally are very complex. Annual base salary, while the largest, is but one component of a head’s contract. In addition to the annual salary, other components of a head’s contract can include an annual cash bonus, standard benefits, supplemental benefits, deferred compensation, and perquisites. In these last three areas, there are myriad options schools can consider when developing a head’s contract. Is the school about to launch a capital campaign or nearing completion of one? Is the head mid-career or nearing retirement? A compensation consultant will advise about the best structure of the total compensation given where the school is and where the head is. Deferred compensation, in particular, is a tool that is often overlooked or avoided due to its complexity; however, it can be an important part of the head’s total compensation structure.
4. Ensuring compliance with IRS requirements — “Section 4958 of the Internal Revenue Code imposes an excise tax on excess benefit transactions between a disqualified person and an applicable tax-exempt organization. The disqualified person who benefits from an excess benefit transaction is liable for the excise tax. An organization manager may also be liable for an excise tax on the excess benefit transaction.”source The excise tax is 25% of the excess benefit and is owed by the disqualified person, the head of school. An excise tax of 10% of the excess benefit may also be imposed upon an organization manager, the trustees. Should the IRS assert that the head’s compensation is an excess benefit transaction, the burden of proof would be on the school to prove it is reasonable compensation and not an excess benefit. However, the IRS has outlined a process for schools to establish a rebuttable presumption of reasonableness, in which case the burden of proof would shift to the IRS to prove that the compensation is not reasonable. A compensation consultant will ensure the school follows the steps to establish the rebuttable presumption of reasonableness and document this for the school by providing a “safe-harbor” letter. The IRS has deemed the use of an independent compensation consultant important enough to include a checkbox on Schedule J of Form 990 to indicate whether or not the school used one in determining the head’s compensation. As head salaries are increasingly scrutinized — even published annually by media in some markets — using a compensation consultant and indicating it publicly on the Form 990 demonstrate to the school’s stakeholders that the board is taking the utmost care in fulfilling its important responsibility of determining the compensation of the head.

These benefits result in a data-informed process with a thorough and tailored compensation package, achieving both the school’s and head’s goals. This in turn leads to a stronger board-head partnership, a longer tenure for the head, and greater mission fulfillment for the school.

Mission & Data’s Unique Approach as an Independent Compensation Consultant

When we are retained by schools to serve as an independent compensation consultant, Mission & Data’s unique approach serves to greatly enhance the general benefits outlined above. The following explains our approach.

1. Promoting collaboration versus negotiation — Our primary goal is to make the process feel more like a collaboration and less like a negotiation. After the contract process is concluded, the board and the head will be in partnership in serving and fulfilling the mission of the school, hopefully for many years to come. It is far better for this partnership to not bear the scars of a difficult negotiation process for a first contract or contract renewal. Often a board and a head have made clear in advance of any process that each is very happy with one another and that the contract renewal should be relatively straightforward and easy. This is not a reason to forgo retaining a compensation consultant. Instead, retaining the right compensation consultant is even more important, and our approach fostering collaboration is a great fit for boards and heads who approach the contract renewal process from this perspective.
2. Serving as a neutral third party — We serve as a neutral third party advising both the board and the head. We are not an agent nor a fiduciary for the board or the head; rather, we serve as a true independent compensation consultant and broker of the transaction. While the school pays our fee, much like a CPA must do when engaged by a client to perform an audit, we maintain our independence to fairly advise both the board and the head about the recommended financial terms for the head’s contract, informed by the school’s goals, the head’s goals, and the benchmark data. Taking on this role best positions us to derisk the process and also to help it feel more like a collaboration. We are able to serve as an impartial intermediary hearing, filtering, and presenting comments and requests from the board and head alike. While we advise both the board and the head to each utilize their own legal counsel to prepare and review the head’s full contract at the conclusion of our process, we do not believe that developing the financial terms requires each party to have their own compensation consultant. We highlight this as a uniqueness of our approach as we have sometimes seen compensation consultants working as agent for boards. This dynamic begs the question: in the spirit of fairness, if the board has a compensation consultant working exclusively for it, should not the head likewise have a compensation consultant working exclusively for them? Again, we do not take this approach nor think it is advisable.
3. Sharing benchmark data with both the board and head — Consistent with our approach outlined above, we share all benchmark data with the board and the head. We believe that the board and the head having a shared understanding about the data and the implications it has for the head’s compensation is the best approach for a collaborative, data-informed process. If the data were to only be shared with the board, the head will seek out their own data, which again is readily available. Now, the two parties have competing data sets with no shared understanding and little opportunity for collaboration. In our view, not sharing the benchmark data with both the board and the head adds considerable risk to the process.
4. Utilizing a multi-benchmark approach — We utilize a multi-benchmark approach to inform decisions about the head’s compensation. We work with our client schools to determine the appropriate benchmark groups which vary from school to school. Benchmark groups typically include select local independent schools; identified peer schools; schools in the region, state or association; and schools with similar enrollment and operating budgets.
5. Educating the board and the head — We provide a session for the full board or the compensation committee of the board, if preferred, providing an overview of head compensation and the various components boards consider, including various types of deferred compensation. This general overview sets the stage for specific recommendations made about the structure for the head’s total compensation.

As boards carry out the crucial responsibility of determining the compensation for their head of school, they would be well served to engage an independent compensation consultant to help them carry out this task. Performing this key fiduciary duty well has far-reaching implications for the success of the school.

Cliff Kling, J.D. is Mission & Data’s Senior Executive Compensation and Leadership Strategist. Cliff brings a unique background and skill set to his work having practiced public accounting with KPMG as a CPA, practiced
law with a large law firm, served 13 years as Chief Financial Officer and General Counsel of an independent school, and served 11 years as President of two independent schools, including the fifth largest NAIS school, Gulliver Prep in Miami, FL with an enrollment of 2,230 students. Cliff has also served on numerous boards, including the search and compensation committees of those boards. Given his broad experience, he understands faculty compensation from many perspectives: legal, accounting and tax, school budget constraints, and from knowing well the demands and challenges of recruiting, retaining, and supporting faculty. Cliff graduated magna cum laude from Georgetown University where he majored in accounting, and he finished second in his law school class, graduating summa cum laude from the University of Mississippi School of Law.

Mission & Data is a firm dedicated to the effectiveness, health, and vitality of educational institutions and other organizations that make the world a better place. We are committed to enhancing mission-driven, data-informed leadership and governance by:

• Consulting to promote financial sustainability, improve organizational effectiveness, and facilitate organizational transformation.
• Developing custom data products, visualizations, and dashboards to highlight progress, identify trends, and leverage actionable insights.
• Auditing current practices and analyzing organizational data to recommend process efficiencies and strategic improvements.
• Coaching leaders and boards of trustees to enact institutional vision and build a culture of inquiry-based decision making practices.

If you would like to know more about how Mission & Data can help your organization, please contact us at contact@missionanddata.com.