Heads’ Contracts: Compensation, Negotiations, and Terms

1. Heads’ Contracts: Compensation, Negotiations, and Terms Debra Wilson, NAIS

2. Be sure to write . . . • Wilson@nais.org • 202 973 9716 • What do I do? • Who is your legal counsel? • About this presentation

3. Where are we going? • Brief overview • Lets talk about you – executive contracts.

4. 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 . . .

8. 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

9. 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?

10. 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?

11. Who is interested in heads’ compensation? • IRS • State Attorney General • Potential Donors • Local Newspapers • National Papers • Other heads and trustees

12. 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.

13. 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

14. 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?

15. 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

16. What should happen? • Head’s compensation – who should know, who should be involved? • Documentation? • Minutes? • Third party? • Who is liable?

17. 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

18. 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

19. 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.

20. 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 . . .

21. 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

22. 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

23. What about DASL? • Working with someone on the data? • When do you really need extra help? • Using the 990 – new developments in the 990

26. 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.

27. CAIS Heads: Salary Deferred Comp

28. CAIS Salary

29. NAIS Schools by Enrollment

30. NAIS Schools by Enrollment

31. NAIS Schools by Enrollment

32. NAIS Schools by Enrollment

33. NAIS Schools by Enrollment

34. NAIS Boarding / Day

35. 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?

36. 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.

37. 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?

38. 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 • NAIS Heads’ Tax Guide

39. 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?

40. 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

41. 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.

42. 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

43. 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.

44. 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?

45. 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

46. 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?

47. 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

48. 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

49. 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?

50. 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?