The treasurer of my theatre company is a very close friend of the artistic director, and has used the finance committee to give the artistic director a huge raise. The executive director, who also reports to the board, will receive a small raise. I think he has brought more value to the organization in the past year. Does the finance committee have a right to make such decisions?

Board committees have no authority beyond what is delegated to them via the bylaws or terms of reference approved by the board. Board committees normally have decision authority only over their own operations, such as how often and when to meet, how to keep minutes, etc. Their primary responsibility is to support the board by looking into issues in more detail than the full board has time to do, and bring good recommendations to the board for decisions.

So the decision is likely not valid, and the board can still act to deny or reverse the increase while it puts a proper procedure in place. And the treasurer was not ethical putting friendship ahead of fiduciary duty by implementing such a process. However, the organization may end up deciding the finance committee came to the right conclusions.

Many organizations no longer have finance committees, but that is a topic for a future column. If one exists, I suggest its only proper role in compensation is to advise the board to what extent the current financial situation provides room for increases. A finance committee with a lead role might put too much emphasis on financial results when evaluating.

So how is chief executive compensation usually or properly decided? Let me outline an ethical process, without claiming it is the only possible approach. I am using “chief executive” to mean the employee or employees, as arts organizations often have two, who report directly to the board.

The board, in cooperation with the chief executive(s), first decides on an executive performance evaluation system. Within wise governance practices, lead responsibility for the process and the evaluation might be assigned to the executive committee, or the governance committee, or a human resources policy and compensation committee. Or it might just be the chair and vice chair. I do not believe it is ethical or wise to leave this critical function in the hands of any one person, whose biases might unduly influence the decisions, so I do not support EVER leaving this job with just the chair.

Ethically, the function cannot be assigned to anyone related to the chief executive(s) or in some other conflict of interest situation, such as a romantic or business relationship, directly or via family members. Close friendships are not usually specified in conflict of interest policies as they are hard to define.

In any case, whichever group has the lead will decide on performance measures and targets in collaboration with the executive staff. The strategic and business or operational plans will guide this, but other measures may be added. After the time period has elapsed for meeting the targets, the group will solicit input from other board members and whoever else they would like feedback from (e.g. staff, key partners) to help them. They then meet with the chief executive(s) (individually if more than one reports to the board) to review performance. The chief executive(s) will have prepared a self-assessment for consideration. Overall results are reported back to the board.

AFTER the performance evaluation is complete, the group meets to discuss compensation. They review their compensation policy, as well as any recent comparative data, such as the Canadian Society of Association Executives compensation survey or advice from their compensation consultants. They review the other compensation changes being considered or implemented in the organization, such as cost of living increases, changes negotiated with the union, and the financial room for merit increases or bonuses for other staff.

Their compensation policy should address the percentage range available to them, criteria for exceptions, and what the compensation policy is trying to achieve with regard to retention, job satisfaction and future recruitment. There may be options other than straight compensation increases that affect the base salary. Bonuses, benefit changes, new professional memberships, and extra professional development may all be considered and discussed with the executive to find out what matters most to him or her. However, the executive staff should not be present when the group discusses its recommendation to the board.

After this group has developed a recommendation for compensation change, or no change, it comes to an in camera session of the board for a decision. The head of the group informs the executive immediately thereafter.

Should this treasurer be involved? There are two options. One is to include the treasurer if he or she would normally be a part of the group assigned to handle executive performance and compensation. However, the other members should give little weight to his or her comments knowing of the close friendship. The other members of the group must be truly independent.

The other option is for the treasurer to declare a conflict of interest, even though the grounds are not mandatory within the conflict of interest policy. If the treasurer is not willing, the board could force the issue. The treasurer is then precluded from influencing the recommendations in any way, and from the board voting.

Since this treasurer has already tried to do an end run around board authority to help a friend, there is a perceived conflict and I would prefer option two.

Again, unless the board delegated explicit authority to the finance committee to decide executive compensation, the “decision” mentioned in your question is not valid.

I suggest that the chair quietly advise the artistic director that the treasurer and finance committee had no such authority and that a new process is being put in place. Existing performance measures, such as the business plan, must be used if no others were agreed upon a year ago. The new process then becomes top priority, and must be done in close, amicable cooperation with the artistic director. Otherwise, a parting of the ways is almost guaranteed.

The compensation change should not be implemented, and should be reversed if it is already reflected in the payroll. If it is simply too late to reverse the increase without destroying the organization, then at least put a better process in place for next year – one that does not involve the treasurer.

Since 1992, Jane Garthson has dedicated her consulting and training business to creating better futures for our communities and organizations through values-based leadership. She is a respected international voice on governance, strategic thinking and ethics. Jane can be reached at jane@garthsonleadership.ca.

To submit a dilemma for a future column, or to comment on a previous one, please contact editor@charityvillage.com. For paid professional advice about an urgent or complex situation, contact Jane directly.

Disclaimer: Advice and recommendations are based on limited information provided and should be used as a guideline only. Neither the author nor CharityVillage.com make any warranty, express or implied, or assume any legal liability for accuracy, completeness, or usefulness of any information provided in whole or in part within this article.