Performance Bonuses for Heads or Not?

Thousands of boards worldwide have retained Littleford & Associates to benchmark head/director compensation since 1983. We help to assess the market replacement costs for sitting heads, the likely package to attract new heads, and the retention and retirement options for long-serving and valued heads.

Many board chairs and search chairs who contact us ask about including performance related elements in either a contract for a new head or a renewal. Some of the factors to consider are the following:

  1. Has the head experienced a performance related bonus in the past and is the head comfortable with it?
  2. Is the performance bonus intended to be a reward or as incentive or both?
  3. Can the board agree upon a specific and reasonable number of bonus criteria that the head will find fair?
  4. Will the head feel that he/she must earn 100% of the bonus every year or he or she will not feel valued? What kind of expectations is the board creating?
  5. Does the head feel that he or she already works 100%+ and wonders how it will be possible to meet a specific set of goals and earn performance money?
  6. How large should the bonus be in order to be meaningful?
  7. Will the bonus be paid as part of a 457(f) deferred compensation plan, in cash or possibly divided between the two?
  8. Does the head believe that the board members entrusted with this decision are supportive?

Nevertheless, more than 50% of all of our client schools worldwide offer some sort of bonus option. In some cases, it is regular and expected and is just called a “bonus”, and in other cases, it is really tied to specific goals. More international than US schools also give resigning or retention bonuses, the latter serving as a “golden handcuffs” tool.

We assisted a Board compensation committee in creating a bonus plan that gives the Head a guaranteed deferred compensation payment plus she is eligible for an additional payment to the 457(f) plan contingent upon meeting certain goals. This concept potentially grows the Head’s retirement asset. This was one of the Committee’s main objectives.

Structuring bonus incentives has become more common practice. Boards and compensation committees should consider carefully how to structure such plans and take into account their tax implications.

Section 4958 – “Intermediate Sanctions”

Access to Form 990

These regulations are intended to target “disqualified persons”, also called “insiders”, who in the opinion of the IRS, receive “excessive benefits” from 501 (c) (3) organizations, such as independent schools.

The definitions of “disqualified persons” “excess benefits”, “rebuttable presumption of reasonableness” are key to understanding, and complying with the “Intermediate Sanctions” Act.

“Disqualified Person”

A “disqualified person” is a person who, with respect to any transaction, at any time during a five-year period beginning after September 15, 1995 and ending on the date of the transaction, was in a position to exercise substantial influence over the affairs of the organization. With respect to an independent school, an “insider” (disqualified person) could be (but not limited to) any of the following persons:

A president, head of school, business manager or chief financial officer;

a voting member of the board of trustees;

a family member of a “disqualified person” such as a spouse, children, grandchildren, siblings, ancestors, great grandchildren and spouses of children.

a person who has an interest of 35% or more in controlled entities (partnerships or trusts and estates) and/or a corporation in which the “disqualified person” owns more than 35% of the combined voting power.
“Excess Benefit”

The regulations are designed to tax any and ALL arrangements that are considered an “excess benefit”, defined as any benefit that an organization provides, that exceeds the fair market value of the goods and services that the organization receives in return. In simplest terms, if a head of school receives a salary of $175,000, and the fair market value of her services in a comparable market is $140,000, then the excess benefit is $30,000.

It is important to emphasize that excess benefit does not apply to salary and fringe benefits alone. The IRS definition includes the following, whether or not these are considered income for tax purposes: purchases, sales, and leases, or other transfers of value between the independent school and the insider; severance payments paid; plans providing medical, dental, life insurance and disability benefits; expense allowances; and foregone interest on loans.

Since deferred compensation has increasingly become a more important component of the total compensation package, the organization must further demonstrate that all forms of deferred compensation provided are of an amount that would have been paid by comparable tax-exempt entities for comparable services.

The penalty or tax imposed is equal to 25 percent of the excess benefit. If the transaction is not reversed, an additional penalty of 200 percent may be levied. Anyone who knowingly and willingly is a party to such a transaction can be subject to a 10 percent tax, not to exceed $10,000 per “excess benefit transaction”.

“Rebuttable Presumption of Reasonableness”

With respect to the compensation package, “rebuttable presumption of reasonableness” refers to the following: the presumption that the “consideration”, i.e., the compensation, property, transfer of property, or any other benefit or privilege (see above) that the tax exempt organization provides to the “disqualified person” (Head) in exchange for his/her performance of services, is NOT an “excess benefit” and is REASONABLE.

The key question is, when is the tax-exempt organization, entitled to a “rebuttable presumption”? It is entitled when the organization follows the following procedures both in determining and in approving the compensation:

Establishes the Head of School or CEO of a 501 (c) (3) as a “disqualified person”

States the members of the decision-making body participating in the transaction discussion (the compensation committee); how they voted; and any action of a voting member having a conflict of interest (See below)

Cites the source of the comparability data that the committee used in making its decision; how that data was obtained; and examples of comparable data on all relevant components of the TOTAL package; (See below)

States the terms of the approved transaction or package and the date of decision and ratification by the compensation committee (See below)
Other Key Issues

In order to have no conflict of interest, a member of the compensation committee must have no ties to the “disqualified” individual of a personal, relational or financial (including a vendor relationship) nature.

Comparabilty data is defined as industry surveys conducted by independent firms, documented compensation of persons holding similar positions in similar organizations, or expert compensation studies. It may be obtained by any means, including telephone calls.

If the compensation committee members are entirely independent, as stipulated by IRS regulations, and have been authorized by Board vote or by-laws to establish the Head or CEO’s compensation and benefits, there is no need for Board ratification of the compensation package in order to obtain rebuttable presumption.

The Right To Access Form 990

Effective June 8, 1999, all 501 (c) (3) corporations will be required to send copies of their three most recent Form 990 on Head/CEO compensation to anyone who requests them. This includes their tax-exempt applications, their IRS tax-exemption letters, and “Schedule A” that reports deferred compensation programs.

If the request is made in person, non-profits must provide copies of the form immediately. If the request is made in writing, by fax, or e mail, non-profits have 30 days to mail out copies.

For every day that non-profit employees fall behind in delivering the forms, they are subject to fines of $25 per day, up to a maximum of $10,000 per return. In addition, an individual will be penalized $5000 for willfully failing to deliver the forms.

With public access to the 990 permitted, it is crucial that non-profits ensure compliance with “safe harbor” regulations both in setting the level of head/CEO compensation and in designing the total package of salary and benefits.

John Littleford
Senior Partner

The Head’s Contract: Getting it Done

Since 1983, thousands of boards worldwide have retained Littleford & Associates to help them benchmark the compensation and benefit package for their head of school. Many undertake this process annually in order to ensure that the package is competitive relative to the marketplace. Schools also need to be attentive to the head’s personal and professional needs and goals while keeping in mind the school’s budget. Finally, for US based schools, this benchmarking process establishes compliance with the Intermediate Sanctions Act governing executive nonprofit compensation. If our US based clients have not heard of “The Rebuttable Presumption of Reasonableness Checklist”, (an IRS required document), please give us a call.

I. The Head’s Contract is Often the Last One to be Reviewed and Finalized

One of the most disappointing trends of the head compensation process worldwide is that boards often overlook the head’s contract right up to, and even past the actual contract deadline or neglect it completely. We have always been amazed that boards and board chairs assume that a head of school will demonstrate the “care and feeding” of the faculty by ensuring that their contracts and compensation agreements and packages are in place on a timely basis. At the same time, however, these board leaders forget that the head of school’s contract is up in six months or less or is already past due.

There is the expectation that the head should “not sweat it”. But the reality is that in delaying closure on the head’s contract the Board takes a risk that the head, feeling overlooked and unimportant, will walk away from the school to accept another offer. This delay also puts the head in danger of not securing another job should the board/head relationship fail.

Many boards value and respect their heads highly and have no intention of dismissing them. And yet, by early spring many heads still do not have their compensation decisions and contracts formalized for July 1 of the same year. It is embarrassing for a head to have to ask the board chair, “By the way, my contract ends in twelve months (or in eight, six or in the next three months), and when does the board plan to address it?” Can you imagine how the head’s spouse, family, friends or professional colleagues, who may know about this lapse, feel? Many self-effacing heads simply worry silently, and even the most extroverted types find the entire compensation review and contract renewal process awkward and even demeaning.

This is unprofessional board behavior that hurts the board/head relationship; damages the board chair/ head partnership; and can seep down into the ranks of senior administrators if they get wind of it. Senior administrators may lose confidence in the board and wonder about the security of this profession and of their own jobs.

That is how Littleford & Associates started its head compensation services in 1983 and why our Firm is still among the leaders worldwide in this business. We have come to understand these patterns and the integral relationship of the head’s contract and the head’s tenure to the school’s health and stability and the satisfaction of the constituent groups.

II. Consequences of the Board’s Failure to Address the Head’s Contract in a Timely Manner

A sudden head of school departure with less than twelve months’ notice always sends negative messages: the board fired the head or the head resigned with very little warning and took another position due to feeling overlooked and unappreciated; or in many cases, it points to a poor relationship between the head and chair or between the head and the board. Such a departure signals a lack of professionalism, trouble in the school house and results in a weakened ability to launch a healthy search on a timely basis and to sign a strong candidate. Increasingly today the expectation is that both parties should give the other eighteen months or more of notice. This Consultant, however, believes that more than eighteen months results in an unnecessarily protracted search.

Why would very attractive candidates be available on very short notice? Most sitting heads have a strong moral compass and would not leave their current school high and dry with limited prospects for finding a capable successor. What message does it send to viable sitting heads of schools or to rising second tier leaders that a school is launching a last minute search? Most of the schools that find themselves in this position should go with interim heads, but few do so.

Boards of independent and international nonprofit schools have one employee and that is the head of school. Hiring the head, evaluating and supporting that person and ultimately, if necessary changing the head represent one of the key strategic roles of a board. To forget or overlook this role is more than unfortunate or unprofessional. It is dangerous.

It takes many years for a school to build an enviable local, regional and even global reputation but a board’s failure to nurture and affirm a valued head can damage that good name in a very short time. There is a flip side to this, of course. Heads who look around for a new job every year while still expecting to hold on to their current post and thinking they will not rub raw the feelings of the board, are skirting close to the edge of being dismissed.

John C. Littleford
Senior Partner

What Is “Deferred Compensation?” And Why Do So Many Heads Have It Or Want It?

Deferred Compensation is a method that allows heads to save more for retirement or other needs than they can save through 403 (b) or 401 (k) retirement programs. Contributions may be made by both employer and employee.

    1. The Usual Suspects: Traditional Retirement Programs

Normal retirement programs have a “cap” on how much an individual can shelter for tax purposes and how much the employer may put into that same retirement plan. If a school or individual passes that “cap”, it is quite possible that certain anti discrimination provisions within the tax law will have been violated. The anti-discrimination provisions require that an employer not pay more for the retirement of higher paid employees than for lower paid employees.

    1. The “Other” Approach

The advantage to non-qualified deferred compensation plans is that they are NOT subject to these limitations. A head of school earning $250,000 may shelter $100,000, for example, and the School may contribute as well. Such sheltered funds belong to the SCHOOL, not the head, but only UNTIL the head leaves the employ of the school by retiring, quitting, being fired, becoming disabled or dying.

During these years, the funds grow in an investment plan, the strategy of which has been decided upon in advance by the head and the school. The funds may be invested as part of the school’s endowment portfolio, or they may be invested by another outside party who has a keen interest in the head’s well being. In either case, the money belongs to the SCHOOL, until the head departs.

    1. Why Is This Allowed?

Funds in a non-qualified deferred compensation plan are SUBJECT TO SUBSTANTIAL RISK OF FORFEITURE. That is the condition under which the IRS allows such plans to exist. For independent schools, there are several risks, but in most cases these are minimal:

      1. Bankruptcy or serious financial stress. If the School is at risk of closure or in serious financial straits, a plan of this sort is not a wise choice. The head becomes simply one of many creditors in line seeking access to the school’s financial resources in order to obtain his “deferred” piece. Our firm has yet to see one of these bankruptcy events occur.
      2. Dismissal due to moral turpitude, gross misconduct or illegal behavior. This is NOT defined as dismissal due to disagreement over job performance. Most tax attorneys indicate that if a board attempts to deny deferred compensation as a result of a “falling out” between the parties, the head might sue, and would probably win the resources in the deferred compensation plan AND the earnings on those funds.
      3. Breach of contract. This might mean jumping to a neighboring competing school or simply not giving the board adequate and/or stated notice of departure, as required by the contract.

Denying the deferred compensation funds for reasons stated in numbers 2 and 3 above would be the decision of the board at the time. Some, all or none of the money might be denied.

The funds added by the head, as well as earnings from those funds, as part of a voluntary salary reduction plan, normally would NOT be subject to substantial risk of forfeiture except for the first reason: bankruptcy.

    1. Who Has These Plans?

Some ninety percent of the heads of well known established independent schools nationwide today have deferred compensation plans one kind or another. These are almost always under section 457 (f) of the tax law and include: Split dollar life insurance policies, rabbi trusts and the most common, “unfunded” funds (really almost always funded). Split dollar policies are under scrutiny today because they are viewed as a poor investment for the school and head, and also questionable in terms of their intended purpose. Many nonprofits with such split dollar policies have been audited recently.

The amount of money contributed by heads to these deferred plans varies with the ability of the head to do with less cash today in order to have more available for the future. However, many heads are sheltering $10,000 to $100,000 a year over and above their 403 (b) TIAA/CREF plan tax shelters and IRA shelters.

The amount of the schools’ contributions may vary from as little as $3,000 annually to over $150,000 annually. Littleford & Associates keeps accurate, confidential records of these amounts, as part of our overall compensation review work for boards. The firm can be retained ONLY by the board (through its chair) and does not work for individuals nor does the firm provide counsel and advice to individuals.

When the money is withdrawn upon a head’s departure, the risk of forfeiture provision ends, and the money is subject to taxation (at regular income tax rates) at that time. However, there are several ways to spread out the tax impact over time as well as some creative ways to assist with a housing purchase, thus further reducing tax liability.

The boards of over 1250 schools, foundations and nonprofit educational agencies have retained Littleford & Associates to assist with the review of the compensation and/or evaluation of the head/director.

John Littleford
Senior Partner

The Safe Harbors Act: The Necessity Of Demonstrating Annual Compliance

Littleford & Associates provides, for US based schools, crucial information to avoid problems emanating from misinterpreting, or inadvertently overlooking “Safe Harbors” limits.

    1. What Constitutes Compliance?

The “Taxpayers’ Rights Act”, of which the “Safe Harbors Act” or the “Intermediate Sanctions Act” is a part, provides that every 501 C3 institution in the United States must annually review the CEO’s compensation to ensure that it falls within a normal range for similar positions in similar institutions or meet criteria for “replacement costs.” The institution must have a written record of compensation decisions, including: the details of the actual decision; the names of those participating in the decision-making process; and the date of ratification. Those participating must have no personal, financial or relational interest in the outcome of the compensation arrangment.

    1. How Does A School Obtain “Safe Harbors” Documentation and Protection?

With the most complete and accurate “Safe Harbors” documentation available to independent schools, and other educational organizations, Littleford & Associates offers guidance to avoid or limit investigation or litigation. The source of our information is direct dialogues with almost 2,000 heads of school and board chairs, with whom we have established personal relationships based on our respect for confidentiality.

These educational leaders entrust us with information about all components of a head’s compensation package, which are usually under-reported, or not reported at all to regional and national associations where it may be possible to trace data to a single source. A unique and current database is a tool to work with boards to accomplish two key objectives: provide an equitable package to retain effective heads; and document fully where the proposed compensation falls relative to similar organizations and the cost of replacement of the current leadership. It is critical that outside consultants work with boards, not heads, to avoid conflicts of interest in all services in this delicate, and potentially confusing area of head compensation.

Schools, colleges and other non profit foundations and educational agencies retain our firm to conduct an onsite, comprehensive, third-party review of the head’s/CEO’s overall compensation package every two to three years. The compensation review not only looks at absolute numbers but benefits, deferred compensation design, compensation structures, and guidance for the evaluation of heads of schools and other organizations.

In intervening years, we may provide a written, updated analysis for the board chair only. Every nonprofit is subject to potential legal scrutiny and media attention, and the importance of this annual update to insure “Safe Harbors” compliance should be acknowledged.

    1. The Current Climate

In the past year, several US metropolitan newspapers have published the salary and benefits packages, including the market value of housing arrangements and other benefits, of the heads of area nonprofits. The Safe Harbors Act allows anyone in the US to obtain a 990 form on the CEO’s salary and benefits package.

To avoid embarrassment and potential legal action, it is wise to ensure that your school or nonprofit has undertaken the following: practiced due diligence in setting, as well as in designing, the head’s salary and total package; has accurate documentation to demonstrate “Safe Harbors” compliance ANNUALLY; and understands the national pattern and practice of reporting on the 990.

With the proper professional guidance, independent schools and other non-profits will find that demonstrating “safe harbors” compliance is neither a complicated nor an onerous process.

John Littleford

For additional information about this topic, please click here:

John Littleford
Senior Partner

Income Opportunities In Tight Economic Times

With the value of their investment portfolios declining or uncertain, independent school parents may be decreasing their discretionary spending and charitable donations. However, from the research done by Littleford & Associates, independent schools will remain a vital option for those parents who consider educating their children to be a top priority and the best long term economic opportunity available.

Here are three areas in which independent schools can continue to enhance their income.

    1. Tuition Setting and Billing Procedures

Independent schools have been historically advised by some consultants to “bundle” fees so as not to “nickel & dime” parents. This has turned out NOT to be an effective strategy for either generating income or parental good will.

It is a distinct marketing and perception advantage to bill fees separately from tuition. Schools that charge a tuition of $15,500, with no other fees “look” more expensive to parents than schools that charge $13,500 with separate fee charges for athletics, labs, lunch, books, transportation and computers. As long as those fees are stated “up front” and are not a “surprise” for parents who have planned their expenses for the year, parents both understand and accept the separate fees. It is important to educate new parents and current parents each year about the rationale for certain fees.

Many schools have a “Renewal and Replacement” fee of $75-$300 for the damage (depreciation) each child causes to a school plant each year. This fee can be explained clearly, and its use is obvious to parents who see improvements and repairs each fall.

Schools today often use a front end “building fee” for NEW enrollees to ensure that they help to pay for new buildings from which they will benefit over time. For a K-8 school, a new technology center may be paid off not only with bonds, or fund raised dollars but also with building fee income which can run $7500 per child. A child entering at Kindergarten may pay the full fee while one entering at the 6th grade may pay a lesser amount.

Schools need to think of “unbundling” their cost package if they have begun to look uncompetitive or the market price leader over time. Schools that have NOT bundled their fees into their total tuition bill, should continue to explain periodically the use of fee income for specific projects and explore the creation of appropriate new fees that both enhance the program and clearly identify the improvements that flow from that fee.

    1. Annual Giving: Renewed Parent Interest

All schools want to increase the amount of unrestricted annual giving each year, and many schools have surpassed the one million dollar a year mark. In tighter economic times, however, schools may have to justify and explain better the uses of the annual fund.

One of the best tools to maintain or enhance annual giving is to earmark a portion of the program for the renewal and education of faculty AND ensure a portion of the money goes there. All parents know that their children will benefit from the annual professional growth and development of teachers.

Schools must do a better job of explaining how these monies are spent, who received them and why and how those experiences by specific teachers may lead to much enhanced experiences for children in the classroom. Appropriate and creative explanations and marketing of these programs will capture the attention and interest of parents and prompt them to INCREASE giving, not just to maintain it. This is a ‘win-win” situation as teachers, students and the school overall benefit.

    1. Profit Centers

Most schools know that they need to make a profit in some areas of school life to offset the shortfall per student between tuition revenue and costs. For example, many independent schools, not only universities, generate very significant revenue from their school stores.

Other income generating programs can include summer school, sports camps, food service, bus service, night classes for adults, and partnerships with area corporations for seminars and other uses of school facilities during the year and in the summers.

In the coming months, schools may see a downturn in giving or a pessimistic attitude on the part of boards. If schools look carefully at their billing approaches, tuition and fee setting policies, strategies for annual giving and the creation of more and better income producing profit centers, long term economic improvement may result, and the school’s financial picture need not suffer.

For more information on this subject, please read our article on profit centers and how other schools have successfully implemented them as revenue sources.

John Littleford
Senior Partner

The Intermediate Sanctions Act: The "Next Level" of Compliance

The “Taxpayers’ Rights Act”, of which the “Safe Harbors Act” or the “Intermediate Sanctions Act” is a part, provides that every 501 C3 institution in the United States must annually review the CEO’s compensation to ensure and document that it falls within a normal range for similar positions in similar institutions or meets criteria for “replacement costs.” Heads of independent schools, nonprofit CEO’s and their boards are appropriately paying much closer attention now to the language and interpretation of the Intermediate Sanctions Act to be certain that the school or nonprofit entity meets its legal requirements. More and more understand that through access to the 990 forms, the public can obtain and possibly misinterpret and/or misuse this compensation information, and that the penalties for non-compliance are severe both from the stand point of public relations and potential fines.

    1. Does the Act Apply to the Head or CEO Only?

For protection against these financial and non-financial repercussions, “disinterested” members of an organization’s board must review, approve and document every financial transaction between the organization and a person who could exercise substantial influence over the organization. This is to ensure that the transaction does not provide an “excess benefit” to that person. A “disinterested” person has no conflict of interest in a “financial transaction” referring to an agreement or transaction involving the organization’s income, assets or property. An “excess benefit” is one greater than the fair market value of the benefit received by the organization and/or greater than similar benefits paid by comparable entities. The comparison must be made to at least five other like organizations.

Littleford and Associates has guided over 1500 organizations through the process of establishing total compensation levels for the head of school or CEO that attract, retain and reward these key individuals AND meet the requirements of the Intermediate Sanctions Act. In an independent school or nonprofit, the business manager, development officer, athletic director, assistant head, administrative or program director are among the top five highly compensated employees. As such, their compensation would be reported on the 990 and thus subject to public scrutiny.

Thus, schools are wise to ensure that the compensation of these individuals does not signal an “excess benefit” when attempting to attract and retain these valuable employees. Littleford and Associates, as result, is now serving an increasing number of not for profit clients by reviewing the compensation of their most senior and highly compensated employees to ensure compliance with the Act.

Leaders of nonprofits must recognize that the following are considered part of the total compensation of such highly compensated persons: housing or housing allowance and tuition for children at other schools loosely or formerly affiliated with the school.

A long-term teacher may also be one of the five highest paid employees whose salary would be listed on the 990. The Intermediate Sanctions Act would not cover a teacher’s compensation, since a teacher is not in an “influential” position as defined by the IRS. Faculty or parents disgruntled about salary or tuition levels, however, could access and publicize this information and launch an attack. It has happened before.

  1. Are Some Schools Exempt from Filing the 990?

Schools that are affiliated with a Church by virtue of their articles of incorporation are exempt from filing the 990, but some schools are “pushing the limits” of that status.

There are some small and some prominent church related schools that believe that a past or loose affiliation with the Church, Society, or Order precludes their filing. These schools may find themselves challenged by the IRS and would be wise to be proactive in their reporting.

Understanding these regulations and ensuring compliance is not an onerous or complex process. The process can be summarized in this way: full advance disclosure of the details of a transaction to a disinterested board or designated board committee; consideration of fair market value and comparability; and documentation of the decision and facts.

John Littleford
Senior Partner

The Truth About Statistics: Why Head Compensation Information Fails to Deliver

It is important that a school benchmark officially the head’s compensation annually and be able to defend that placement if necessary for the school, the community, the IRS and even the media. Outside professional counsel further ensures that the compensation of senior administrators demonstrates compliance with the Intermediate Sanctions Act and reflects the realities of the marketplace and replacement costs.

To know how to compensate heads and other senior administrators, schools have often relied historically on data supplied by heads and business managers to NAIS or regional associations. The accuracy of association’s statistics depends on voluntary compliance in filling out the forms AND a willingness to provide complete information.

In our firm’s experience, association statistics tend to underreport actual compensation for heads because:

  1. Deferred compensation is not included at all, or the voluntary and elective deferral by the individual is not shown, even if the school’s contribution is included. (Usually it is not.)
  2. Assistance in buying a home is either never reported, inaccurately reported or reported only once even when annual contributions may be made.
  3. Assistance for the education of one’s children is often not reported, especially if it refers to the education at another school or a university.
  4. Spousal income, though infrequent, is seldom reported.
  5. Club memberships, assistance for financial and tax planning, and a wide range of other benefits are frequently omitted.

The 990 tax return forms for 501(c) organizations, made public since the Intermediate Sanctions Act was passed in 1996, are now reported on line. Guidestar is an excellent service that merely posts the information that the Schools and other not-for-profits provide. Most people who turn to Guidestar as a source are unaware, however, of the inconsistencies or the incompleteness of the underlying data and the reporting peculiarities.

Most 990 reports are two to three years out of date. In many cases, the top five employees listed do not include the highest paid officers. Why? The head and a few other senior managers may be listed with the board of trustees in another area of the 990 form. In some cases, compensation is grouped for several individuals. In a number of independent schools, there is a separate 501 © 3 trust or foundation where the head’s and other senior manager compensation may be listed rather than under the school’s name.

Schools with church relationships or association may not report. While most of those schools are not required to do so because of a legitimate relationship to a religious institution, a number can claim only tenuous connections.

Most 990’s do not include school owned housing because the head does not exercise control over its value. Where a house exists the head is expected to live there as a condition of employment, whether it be a mansion or a very humble abode.

Because deferred compensation plans, whether funded or unfunded, are to be listed on the 990 according to recent IRS guidelines, these plans ARE appearing with increasing frequency. Why do some auditors and tax attorneys of prominent US firms still not report it? Some deferred compensation plans appear to be “gentleman’s” agreements of an INTENT to pay at departure and subject to real risk of forfeiture.

While the trend is a notable increase in reporting deferred compensation on the 990 form, most schools that do report deferred compensation provide the school contribution (and head contribution if there is such), on an annual basis, not the cumulative amount.

Very few 990 forms which this firm has reviewed include detail on variety of other benefits which may be listed as a lump sum under “other benefits”.

Overall, the 990 reporting procedures increasingly have conveyed a much more accurate picture. However, in this Firms’ experience, they are still under reporting actual income, in some cases substantially.

Currently, the only methods to gain even more accurate data are: 1. Retain an outside firm to conduct an independent targeted survey assuming that those who participate submit accurate data; 2. Conduct confidential conversations by phone or in person with the head or chair; 3 Use a source of information that has reviewed and benchmarked head compensation for hundreds of schools over time, and thereby has a confidential proprietary base of information. Littleford & Associates has been uniquely successful and very effective in garnering data through the latter two modes.

Reviewing the head’s compensation package, contract AND a head evaluation process by a compensation/evaluation committee of the board are an important ANNUAL obligation of the board of trustees. This exercise further ensures that a school is able to retain a talented individual and to convey the message that the head is valued.

John Littleford
Senior Partner

In Defense Of Head Compensation

All aspects of the Head of School’s package are coming under more scrutiny, as is compensation of all leaders of for profits and not for profits. AT THE SAME TIME, boards want to design packages that are creative enough to attract, retain and motivate talent. This will not change.

Littleford & Associates is retained only by boards to benchmark compensation for the head of school. We do not suggest what boards should pay their Heads. We DO provide comparisons of what competing and peer schools offer in terms of salary, retirement and other benefits, while protecting the integrity and confidentiality of all. We do this for international schools as well.

Our Firm knows the “terrain” better than anyone. With 18 years of experience as a head of school and 22 as a consultant, and almost 2000 clients served on this topic alone, John Littleford is in a unique position to understand the nuances of these packages and what will “pass muster” and what might not.

A recent written survey on head compensation in Canada did not include some of the largest and most prestigious schools, and participation declined from the previous survey. These non participating schools typically pay higher salaries and offer better benefits. Even some participating schools may have chosen not to reveal all.

Through our personal contacts with US chairs and heads of schools, we have observed a similar pattern: while those conducting surveys may claim a high return rate, those heads who have very competitive compensation packages often do not return questionnaires. Those who may feel that they are not well compensated in terms of cash or benefits are eager to know what similar heads are paid and may also hope that this data might be useful in future contract discussions. These are the individuals who ARE most likely to respond.

Our Firm examines such surveys carefully, and they are still not as accurate as the 990 forms on Guidestar. Yet Guidestar data is at least two years out of date, and in most cases excludes school owned housing and certain other benefits. Furthermore, there is a wide range of 990 reporting practices. Some business managers fully disclose deferred compensation and other benefits, while others either do not report all components of the head’s package, or they include them in other school totals. Most heads are not even aware of how their compensation information is reported on the 990 until it is challenged. Heads and chairs need to know this. For 22 years, Littleford & Associates has sought and obtained accurate data for benchmark comparisons on an ongoing basis through confidential conversations with heads and boards. Our database is highly relevant since we are hired for benchmarking either annually or every three years to five years.

Women heads are still typically paid less than their male counterparts. Littleford & Associates has undertaken more than 300 compensation reviews for schools with female heads and places their packages within the realm for all independent school heads. Salary and benefits paid to a school head are not gender specific, but may relate instead to total years of experience as a head; achievements relative to goals, and especially to the profession of the board chair. Our experience indicates that chairs are greatly influenced by their own compensation experiences.

Littleford & Associates goes a step further. We help schools explore a particular new benefit, such as housing, when it is important and desirable, and how to deliver it wisely and most effectively.

If necessary, we will provide support, data and guidance to defend a client’s compensation decisions and have done so successfully. This assumes, however, the Board’s full disclosure to us of the package details. We do not defend what we did not know or may have cautioned against. The involvement of a Compensation COMMITTEE is important to protect all parties. We are not an accounting firm and do not provide specific advice on 990 reporting for US based schools.

Littleford & Associates delivers the following: the most accurate benchmarking data, patterns and trends; creative and customized compensation options; recommended safe harbors documentation and checklists; and a process applicable and praised worldwide. This is not a negotiation but a facilitation whereby the Board acknowledges and rewards the head’s worth, needs, experience and achievements appropriately and competitively within the context of the school’s budget and compensation for other staff. We offer a unique, safe and comfortable opportunity for the head to express his or her professional and personal goals and for the board to respond supportively and in a way that reflects both the market AND the school’s own culture. As one satisfied client noted about our process, “You get folks on the same sheet of music.”

John Littleford
Senior Partner

Head Compensation: The Process, The Product and the Reporting

Long before the Intermediate Sanctions Act and the requirement of a “safe harbors” analysis to benchmark the compensation of school heads, Littleford & Associates recognized an important need and potential benefit to independent schools, their boards and their heads. This was the need for an annual review, facilitated by an outside independent expert, of the head’s compensation and benefit package. This should occur within the context of supportive discussions involving the head and a small board subcommittee. The purpose of the discussion was to allow the head to feel valued and treated fairly and for the board AT THE SAME TIME to have an opportunity to influence school outcomes through a constructive, mutually productive head evaluation process.

The purpose of such reviews, when this consultant initiated this effort in 1982, was to:

  1. Assist boards in paying a head competitively and appropriately, thus helping to ensure longevity of leadership;
  2. Track the replacement costs to find and hire a new head in various independent school markets;
  3. Assist boards in ensuring that a long serving valued head can retire with dignity and feel treated fairly;
  4. Construct a useful annual evaluation process- a process often either neglected or unintentionally done poorly, but one that every school and every head needs;
  5. Develop through confidential discussions of propriety information the most accurate database available to benchmark the marketplace for school heads;
  6. Assure all parties that the methodology of compensation made sense for the school as well as for the head and the head’s family. The “methodology” referred to the “b uckets” in which schools allocate money for head compensation such as housing, deferred compensation, auto, life insurance, club memberships, tuition assistance for children, purchase of permanent housing, etc.
  7. Explore creative ways to allocate the available resources for administrative compensation that fit the local needs and may, in most cases, save the school money.
  8. Track the behavior and “thinking” of boards in setting head compensation

More than 22 years later, Littleford and Associates has expanded and improved the accuracy of its database and remains in the forefront of identifying trends in head compensation.

In light of the apparent expected IRS spotlight on compensation for school heads, NAIS is preparing a news bulletin about the absolute necessity for schools to report annually and accurately their compensation to NAIS “STATS ONLINE”. Heads have not always done so in the past because they did not want their compensation information to be easily available for access and interpretation. Basic privacy and assurance of some discretion seemed to be the reasons why some heads did not complete the forms at all, and others disclosed information selectively to NAIS.

Appropriately, NAIS has called for the need for more vigilant, accurate reporting on the IRS Form 990 as well as heightened awareness of trends in head compensation and in the reporting of that data.

The 990 forms have, in fact, become increasingly accurate, and the IRS is indeed pressing for full disclosure of all forms of compensation. It is important, however, not to become overly reliant upon the 990’s for data and to maintain some perspective in viewing them: The forms as viewed on are almost always at least two years out of date and for those who are experienced in researching them, it can be seen that schools use a wide variety of approaches in filling out the forms, and not just in reporting compensation. Certain forms of compensation, such as school owned housing, are consistently missing.

Attention to process must not be neglected in the desire and necessity to comply with the requirements of outside regulatory agencies. The need to engage in a meaningful and professional dialogue between a small board subcommittee and the head of school has become even more crucial given the challenges facing our schools and their leaders today.

    1. Goals of the Benchmarking Process

Boards NEED to do an annual assessment of a head’s compensation. However, the purpose should not be solely to ensure that the head is not overpaid in comparison to “safe harbors” norms or paid in a way that would not pass muster as a tool of compensation for a non profit (such as a “split dollar life insurance policy”). Boards should ALSO ensure that there is a PROCESS in place that ties compensation and evaluation together in a supportive, objective manner annually.

Many boards either forget to review their heads’ compensation and the contract rolls forward without a compensation change, or it comes to a “dead end” with the board seeming to be unaware of that fact or of the fact that the head feels very uneasy about having been “forgotten.” The PROCESS of an annual head compensation review is fully as important as the PROCESS of an annual goal centered evaluation. They should and can be tied together very productively.

A school can pay a head a very competitive salary and often tie elements of it, such as deferred compensation, to specific goals and outcomes. However, the ultimate package must be justifiable in total value compared to similar group of schools on a regional and often national basis as well. The package must also be tied in some way to similar practices of HOW other similar schools divide the compensation into its various component parts or “buckets”. The selection of the “peer” group of schools against which to be benchmarked must be thought through carefully.

This consultant, in volunteering to respond to questions from a state’s Attorney General’s office about the compensation decisions of a client was asked this question FIRST: how was the compensation decision related to the head’s written annual performance evaluation, and how that might compare to the evaluation of performance of other heads in similar schools? That question raised an intriguing set of assumptions by a state government agency, i.e., comparing one school head’s performance to another. It reminded this consultant of the US News & World Report desire to rank NAIS schools, a goal that NAIS opposed as prompting an inappropriate kind of comparison.

That Office, which has no relationship to the IRS or the Intermediate Sanctions Act, can, if pressured or prompted to do so, investigate the compensation of any CEO of any non profit under state law. This is within the purview of the Charitable Trust Division of a state’s Attorney General’s office.

Thus schools, when setting compensation, need to have an awareness not only of IRS expectations and guidelines but those of the charitable trust division of their own state as well.

    1. Benchmarking Data and Preparing Documentation

In order to assist its US and US based 501 (c) clients in satisfying the reporting requirements of the IRS, Littleford & Associates has been producing “safe harbor” letters for clients for 22 years. In addition, in the past two and one half years, our Firm has also been producing a “Rebuttable Presumption of Reasonableness Checklist” referred to recently by NAIS and suggested by a former IRS agent, Steve Miller.

This checklist is a more specific, narrower comparison of the head’s compensation to those in a similar marketplace. It further cites the time of decision, the parties involved in the decision; attests to their lack of a conflict of interest; and cites the outside source or sources utilized in making the decisions (in this case, Littleford & Associates).

Littleford & Associates has 22 years of data gathered from independent schools and other non profit educational organizations and agencies relating to the compensation of the CEO. While the data and its accuracy are increasingly important to all clients and potential clients, equally important is the PROCESS of understanding the data, comparing “apples to apples”, and for each “bucket”, understanding what is “normal” and what is not “normal” for compensating a head of school.

National, international and regional associations often organize their statistics on teacher or head compensation for convenience by region, school size, grade range, budget, endowment, boarding or day, single sex or coed. These are logical categories, but in the reality, there is some, but not an automatic correlation between these school characteristics and what a head of school is paid. Often a highly endowed school pays less than a less wealthy school.

Our Firm’s research and experience indicates that the most highly compensated heads tend to be those who are male; those who move every seven years; and those who are naturally more assertive. The other factor which significantly influences head compensation is the occupation of the board chair and of the compensation committee members.

Our work further suggests that those who are compensated less tend to be those who were promoted from within; those who were the founding heads and have stayed longer than ten years; and female heads except for a small highly paid group.

Increasingly, compensation is being tied more closely to performance, but historically, that has often not been the case.

    1. “Optics” and Transparency

As part of the exercise, it is also important to know the “optics” of any decision made, that is, what would this decision look like in the public eye, on the front page of the local paper, no matter how competitive and fair the ultimate compensation decision?

In California, for example, it is almost impossible to recruit a head without a head’s home or a significant loan package to help a head buy a home. Many California Universities have used the same tools to ensure that the booming costs of housing there do not make it impossible to hire and keep educators of talent. However, with more scrutiny on loans to executives flowing from the corporate realm to the non profit realm, how does this appear today from the point of view of the “optics”?

The school needs to stay competitive in the marketplace for school heads but at the same time, it must provide assurance to the parents, the board, and the media that it has exercised appropriate due diligence in setting head compensation and that of its four other highest compensated administrators. The school must have accurate documentation as proof of its compliance. It needs to know that it can rely on objective professional expertise to assist the school, if challenged. Littleford & Associates provides this consultation for the head of school position and for all other top administrative positions.

More and more of our clients now use our firm annually for a written benchmark and invite us back every two or three years for a formal onsite review with a compensation committee of the Board. In some cases, the compensation committee asks us to address the entire board on the topic of head compensation in general, the nature of the package, its placement in the marketplace, its ability to be defended or criticized and its competitiveness in attracting and retaining capable heads of school.

With all of the recent emphasis on “transparency”, and there is a need for it, it is important to note that if the head’s compensation package is disclosed to the entire Board, it should be done so most judiciously and accompanied by appropriate education on the subject. Despite our best efforts to train boards in the importance of respecting confidentiality, the behavior of boards on this matter varies widely.

  1. Conclusion

Littleford & Associates works only for boards not heads. Our firm believes that it is a conflict of interest to work for both parties on this topic. We facilitate a process to hold and conclude head compensation discussions that both parties will support. We neither recommend a package, nor any particular aspect of a package nor do we recommend how to fill out 990 forms. We do lay out the practices of similar schools in a clear fashion so that the compensation committee of the board will feel comfortable and informed in making an appropriate compensation decision.

Thus, the PROCESS is fully as important as the ultimate compensation outcome. In the midst of the discussion about potentially increased IRS scrutiny of head compensation and the personal liability of board members, all boards must pay attention to process and not just the mechanics of setting compensation and ensuring compliance.

John Littleford
Senior Partner