Nonprofitability September 2017
Is board member compensation a good idea?
Overheard in a nonprofit’s office: “It’s so hard to find good board members. It’s going to be really difficult to fill these board openings.”
If your organization struggles each time it needs to fill a board vacancy — and doesn’t always come up with the candidates it desires — it may be time to consider creating a board compensation program.
Add up the pluses and minuses
Board member compensation comes with several pluses and minuses your nonprofit should consider. Different organizations might assign different weight to each of the factors.
On the plus side, offering compensation could help attract board members with specialized expertise, such as fundraising or a well-regarded community presence. It also could give you an edge when courting potential board members who’d receive generous compensation from for-profit organizations for serving on their boards.
Compensation could be in order, as well, if your board members are expected to invest significant time and effort, or if your nonprofit has a business model that competes with for-profit organizations, such as a nonprofit hospital. In addition, providing compensation can help create an obligation to perform on the board member’s part and promote professionalism. This also might:
- Incentivize meeting attendance and accountability,
- Help achieve greater diversity on your board, and
- Make it easier for individuals from different cultures, classes and ages to participate.
Board compensation also comes with several minuses. In general — and this is a big one — it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from the organization’s mission.
Further, there are IRS and legal implications. The IRS looks carefully at whether any arrangement could create a conflict of interest. And, board members receiving compensation of more than $10,000 aren’t independent members of the board by the IRS definition. Reimbursing for expenses under an accountable plan isn’t considered compensation for measuring independence. Also, in some states, volunteer board members are protected from legal liability, while compensated members may not be. So you’ll need to check on your state’s laws.
Launch a compensation program carefully
If you decide to compensate board members, do it correctly. First and foremost, the compensation arrangements must comply with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in steep excise taxes, penalties and even the loss of your organization’s tax-exempt status.
Independence is indispensable when setting the amount of, or formula for, board compensation. It should be set by independent directors (who aren’t among those to be compensated), or an independent governance or compensation committee, with insight from an independent consultant. The amount should be comparable to that paid by similar nonprofits, as determined by compensation surveys or other data. Whoever sets the amount should be guided by a formal compensation policy.
The policy should include clear objectives outlining how compensating board members pays off for the organization (for example, by allowing it to attract a member with financial expertise). It should specify which board members are eligible for compensation (the chair, the officers or all members) and how compensation is structured (for instance, flat fee, retainer or per-meeting fee).
The policy also should address expectations for the board members in exchange for their compensation. Expectations can be described, for instance, in terms of number of meetings attended, hours worked or qualifications and experience.
Finally, document, document, document. You’ll want written evidence of a formal board vote approving the policy and the compensation amounts, related discussion and copies of the data the board relied on to make the decisions.
Leave no loose ends
Making a shift to a board compensation program is a major change. Your preparation also should include checking to see how other nonprofits with compensation programs handled communicating the change to the public, which can help you develop your own communication plan.
Be sure to seek advice from an attorney who’s familiar with laws governing nonprofits in your state. And you may also want to get feedback from supporters and donors before making a final decision.
© 2017
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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