When the board chair at a growing, midsize independent school asked Jane, a relatively new trustee to lead the committee that would negotiate a contract and compensation package with the school’s new head, she looked forward to bringing her expertise to bear on such an important board task. Jane, a C-suite executive at an international for-profit corporation, had extensive experience negotiating executive compensation from both sides of the table. She was enthusiastic about the board’s selection of the new head and looked forward to negotiating with her to finalize the compensation and other terms of employment.Jane very quickly realized, however, that executive compensation in the independent school world is negotiated very differently and is impacted not only by laws and regulations applicable to the nonprofit sector but also by the dynamics of negotiating with the school community’s leader—which requires special care and attention to the long-term relationship between the head and board. Jane convened her committee and sought out information from her school’s associations and legal counsel to ensure the committee complied with the law and followed best practices from across the independent school community.
This anecdote highlights just how critical the contract negotiation process is and how important it is to manage it carefully and thoughtfully. And schools have the opportunity to do this often. According to NAIS’s “2021 State of Independent School Leadership Survey,” more than half of sitting heads intend to transition from their current jobs within the next five years; heads continuing at their current schools tend to renegotiate their contracts every three to five years.
Negotiating the head of school’s compensation and other terms of employment is a necessary and regular part of the relationship between the governing body of the school—the board of trustees—and the senior executive at the school—the head of school. It’s an important relationship-building opportunity and, when managed in a careful, open, and considerate manner, the process can strengthen the school community and the independent school industry at large.
The Head-Board Relationship
The relationship between a board and a head of school is one of the most critical elements of a school’s success and ability to deliver on its mission. When there is transparency and trust between the head and the board, it is easier to build shared mission and direction and to safeguard those decisions together as a team. This creates consistency in school leadership and allows initiatives and decisions to take root in the school. There are many strategies and best practices for nurturing a strong and mutually supportive relationship—and although it might not seem like it on the surface, the negotiations between the head and the board around compensation and other terms of employment offer a key opportunity to nurture and build a trusting and collaborative relationship. The process can strengthen the board’s understanding of its role at the school and the head’s understanding of the board’s expectations. Equally important, it can establish or renew the board-head partnership for the next few years.This process is best facilitated by agreeing at the outset to some basics, such as the process for the negotiation, the thoughtful selection and engagement of the right legal counsel, and a target date for reaching an agreement. In selecting counsel, expertise and personality can impact the process. Boards and heads should select respective counsel who have the knowledge and expertise to navigate these complex issues, while also understanding the goals of collaboration, trust, and partnership.
Reciprocal accountability, a concept developed by the late Richard Elmore, a longtime professor at the Harvard Graduate School of Education, can be a useful guiding principle for the head and board as they engage in negotiations. This concept emphasizes the link between expectations and support. Elmore describes this concept in a paper, “Bridging the Gap between Standards and Achievement: The Imperative for Professional Development in Education” in this way: “For every increment of performance I demand from you, I have an equal responsibility to provide you with the capacity to meet that expectation.”
What might applying this reciprocity to the head-board relationship look like? Ensuring that each goal for the head is accompanied by an expectation that the board will discuss and approve the support needed to achieve that goal when in the purview of governance work, such as setting budgets and enacting policies. Expectations for reciprocity should be discussed in the head’s contract, in connection with setting goals for performance, establishing processes for evaluation, and discussing how and when compensation will be reviewed.
For example, Jane and her board committee were focused on transparency with the school’s incoming head, and as they began the process, they clearly communicated their intention that this negotiation would be the start of a strong and collaborative relationship. They provided the head of school with an overview of the stages of the process, describing when she could expect to see the board go into executive session, who would act as her primary contact, and similar key points. They also communicated their commitment to fair and equitable compensation and that this would be a key consideration for the board during their negotiation.
Incorporating expectations around goals and performance and the related commitments in terms of support and priorities into the employment contract and establishing a routine and mutual expectation of regular reflection and renewal is good practice. The board and head should set aside time (ideally this occurs at least on an annual basis) to review and reflect on their progress toward the established goals, the fidelity to the expectations of each role, and the effectiveness of their working relationship. Many boards use a combination of board self-assessment and head evaluation surveys to gather anonymous input about school leadership, as well as carving out time at a board retreat or meeting to discuss the findings and how to move forward. The chair of the board and the governance committee often lead this work, handling the communication and working with the head of school.
The Legal Landscape
Not surprisingly, there are a myriad of important laws and regulations that impact executive compensation. The board and head should be aware of the impacts and, where possible, take steps to protect the school and themselves from legal liability by working with a knowledgeable attorney to assist with compliance and to facilitate a positive and productive process. What follows is a high-level overview of some of these applicable laws.IRS Rebuttable Presumption
The Internal Revenue Service (IRS) applies a level of scrutiny to executive compensation at applicable tax-exempt organizations, which includes most independent schools. In one particular area, this scrutiny has the goal of preventing impermissible private benefits to be given to certain individuals who are in the positions of control at private schools. To avoid this, all school leaders and boards should take measures to research, justify, and document how they compensate what the IRS calls “disqualified persons”: those who influence an independent school’s major decisions, particularly financial decisions. In independent schools, disqualified persons include, but are not limited to, the head of school, the business manager/CFO, all trustees, and potentially other employees who also have influence over major decisions. It can be a tangled web, which is yet another reason why trusted counsel is necessary.
The prohibition is in the law at Section 4958 of the Internal Revenue Code. The IRS has granted what’s called a “rebuttable presumption” that the executive compensation paid to the disqualified persons (e.g., the head of school) is reasonable if certain criteria are met. Very generally speaking, these criteria include review of comparability data and creation of contemporaneous documentation. Each piece is important, including and perhaps especially the creation of adequate documentation that should be maintained in the event of an IRS review. The board can and should work with legal counsel to take the steps necessary to meet the rebuttable presumption threshold and to have a set of records that will pass review.
Possible Sanctions
If executive compensation is deemed excessive (i.e., “unearned”) by the IRS, an independent school could risk the loss of its tax-exempt status. More commonly, however, independent schools face the potential of the imposition of penalty taxes on the amount of compensation that is found to be excessive. It is important to note that such penalties can be substantial and may be charged to the disqualified persons themselves (e.g., the head of school and the trustees who authorized the compensation), as well as to the organization.
Antitrust Safety Zone
In the process of creating a rebuttable presumption that executive compensation is reasonable, a school will place reliance on salary comparison data. However, in relying on such data, it is important to stay clear of potential antitrust violations. In general, antitrust laws aim to promote free and fair competition in the commercial marketplace. In doing so, these laws impact independent schools’ ability to gather, review, and discuss certain terms and conditions of employment directly with other schools. For independent schools, any activity that could be seen as setting salaries or benefits among competitors can attract scrutiny.
Both the Department of Justice and the Federal Trade Commission (FTC) have the authority to enforce the Sherman Act to examine practices that they believe result in an agreement to keep salaries at certain agreed-upon levels, even if those practices are done in an effort to keep costs low. Many states have antitrust and other unfair business practice laws as well. These tend to follow the federal philosophies and enforcement paradigms and have the same objectives.
One of the easiest ways for a school to stay out of trouble is to avoid directly collecting competitor data. Agencies such as the FTC have outlined the parameters of how to safely collect data among competitors to avoid a challenge by them. Third parties such as NAIS and other organizations help facilitate this work by collecting and distributing information in a manner that helps keep all involved in the antitrust safety zone.
409A
An employment contract for a head of school often includes provisions addressing the termination of the head’s employment before the conclusion of the contract’s term. Heads usually expect severance pay if they are terminated without “cause” before the contract term has expired. However, the head and the board must carefully craft severance terms to comply with Internal Revenue Code section 409A. This code section can impose penalties if an employee receives compensation in a later year than the year in which the compensation was agreed to. This can apply to severance pay and also to reimbursements of expenses, bonuses, and other deferred compensation discussed in the employment contract. To avoid penalties under 409A, which can be significant, the head’s employment contract should allow the parties to conform payments with the various 409A exemptions. Boards and heads should work with legal counsel to ensure compliance with these highly technical provisions.
Equity in Compensation
In an October 2018 Independent Ideas blog post, NAIS President Donna Orem highlighted the inequities in compensation in independent schools, noting, “In the independent school world, the pay gap progression follows that of other industries. The gap is smaller for entry- and midlevel jobs and gets larger as one progresses to senior administrative roles and the head of school position.”Orem goes on to point out that “although some independent schools have achieved pay equity, we still have some work to do as an industry. As the market for faculty and administrators gets tighter, candidates will increasingly be considering pay equity when choosing a job,” and urges schools to become intentional about pay equity.
According to DASL data cited in the NAIS Trendbook 2021–2022, female heads earned 86 cents for every dollar their male counterparts earned in 2020-2021. Even when comparing compensation of heads in schools of similar size and grade levels, salaries for female heads tend to be lower than for male heads. The “Equity and Justice Outlook” chapter in the Trendbook includes other related data, including a review of race, which did not reveal the same gap.
Compensation disparity correlates with lower job satisfaction, according to the “2021 State of Independent School Leadership Survey.” When asked, “How satisfied or dissatisfied are you with the following aspects of your job?” with respect to “your financial compensation,” 76% of female heads of school indicated somewhat or completely satisfied, while 90% of male heads of school indicated the same.
Many independent schools unwittingly contribute to the historic gender wage gaps that have developed over the years, and heads and boards must be aware of these gaps to ensure they don’t perpetuate them in the decisions they make. Bringing this awareness and diligence to the compensation-setting process can help ensure equity in the relationship at hand and in the larger independent school community.
The Bigger Picture
When executed with the care and consideration that the employment contract negotiation and compensation-setting process is part of a larger whole and sets the tone for relationship-building, the benefits are widespread.When Jane stepped back to reflect on the process with her committee and head of school, they all agreed that the transparency at the beginning and the clarity that each party had about priorities and negotiable areas were critical to the success of their negotiation. The committee commented on the usefulness of understanding the process and legal requirements in broad strokes, even knowing that such elements were being managed by trusted counsel. The head said she felt welcomed by the respectful and open manner with which the committee conducted the process and that she looked forward to working with the board into the future. With the board’s documentation filed away for future reference and the goals and outcomes relayed to the governance committee for their annual reflection and evaluation of the board and head, Jane continued on with her board work and care of the school.
Attorneys at Commons & Commons, LLP have contributed to this article. The information provided in this article is intended for general information purposes only and does not constitute legal or other professional advice. Boards and heads should obtain advice from legal counsel when negotiating employment contracts and should not act on the basis of the information contained herein without first doing so.
On the Horizon
Coming in Winter 2022: Executive compensation data and resources from NAIS Data and Analysis for School Leadership, including a customized DASL benchmark report that includes the schools or criteria you choose for comparison, accompanied by guidance and resources around the head of school employment contract negotiation process and requirements.
Go Deeper
Access these relevant resources:- The October 2018 Independent Ideas blog post, “A Call to Action: Let’s Close the Pay Gap in Independent Schools,” by Donna Orem
- NAIS Legal Advisory on Antitrust Regulations
- NAIS Legal Advisory on Compensation Issues for School Heads
- NAIS Trustees’ Guide: Evaluate the Leader Against Concrete Goals Using a Fair, Transparent Process
- NAIS Head Search Handbook
- Negotiating Heads of School Employment Contracts webinar recording
- Head and Board Surveys
