Financial pitfalls go hand-in-hand with leadership transitions. Although succession planning can prevent a whole range of problems before they happen, the single most dangerous element posed by a transition is the litany of financial risks that often come with a change in leadership.
Executive and Staff Pay
The great thing about nonprofit leaders is that they’re passionate and committed — so much so that they often feel guilty taking a salary that reflects the hard work and long hours they put into their efforts. Plus, they often donate their time and refuse raises.
This is especially true for founders, legacy CEOs and EDs who run smaller organizations.
This is all very noble. After all, selflessness is what nonprofits are all about. The problem, however, is that incoming CEOs are much more likely to possess the more pragmatic point of view that no one can run on just passion alone. The salary that the organization had gotten used to paying their CEO is likely to jump way up — often by tens of thousands of dollars.
But it doesn’t stop there.
Most organizations have a pay scale that operates on a top-down structure. If you have money to bump the salary for the new top dog, you’d better believe the staff — who are very likely to already be working hard for below the industry average — is going to be interested in a raise as well. Thus, you may very likely be carrying a hidden liability on your balance sheet that represents the difference between current salaries and market salaries.
Your balance sheet pitfalls don’t stop with salary. A lack of diligent planning can lead a board to miss other budget gaps.
- If the outgoing ED accrued sick time or vacation pay, he or she may require a final payout. Organizations who have not reviewed their personnel policies in years are especially vulnerable.
- Fundraising often suffers during transitions. Donors are often loyal to individuals, not organizations, and when an ED leaves, their financial relationships may leave with them. Additionally, institutional funders often step back from organizations during a transition to see how things pan out over a 6-12 month period, which can significantly impact revenue projections for some organizations.
- Legacy CEOs and founders are often jacks of many trades and reluctant to delegate, thus performing multiple roles across the organization. Upon leaving, those supplementary roles often have to be filled by additional staff with new salaries.
Proactively Plan For The Inevitable
A Guide To Leadership Transition & Succession
Boards have to start leadership transition planning early — long before your leader announces his or her intentions to move on. This planning has to be consistent and it has to be documented every step of the way. A major part of transition planning has to include an assessment of current financial obligations, a clear look at financial risks during transition (gap assessment) and the development of a strategy to build fiscal resiliency and deal with the economic shortfalls that can result from transitions without appropriate planning.