Is Compensating Board Members a Good Idea?

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by / Monday, 04 December 2017 / Published in Blog

A common sentence overheard in the office of a nonprofit organization is “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.

Consider the Pluses and Minuses

Board member compensation comes with several pluses and minuses that each nonprofit organization should consider. Different organizations might assign different weights to each factor.

On the plus side, offering compensation could help attract board members who come with specialized expertise, such as fundraising or a well-regarded community presence. It also could provide an edge when courting potential board members who would receive generous compensation from for profit organizations for serving on their boards.

Compensation could also be in order if board members are expected to invest significant time and effort, or if your nonprofit organization has a business model that competes with for profit organizations, such as a nonprofit hospital. In addition, providing compensation can help create an obligation for the board member to perform and promote professionalism. Pluses from this can be:

  • Incentivizing meeting attendance and accountability,
  • Helping achieve greater diversity for your board, and
  • Making it easier for individuals from different cultures, classes and ages to participate.

Board compensation also comes with several minuses. The biggest of these is that 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 can be 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 are not considered to be independent 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 would need to check 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 the formula for, board compensation. The compensation 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 what is paid by similar nonprofit organizations, as determined by compensation surveys or other data. Whomever sets the amount should be guided by a formal compensation policy.

That 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 board members) and how the compensation is structured (whether by flat fee, retainer or per-meeting fee).

The policy should also address what is expected of 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, the organization should document everything. There should be written evidence of a formal board vote approving the policy and the compensation amounts, related discussion and copies of the data the board used and relied on to make the decisions.

Leave no Loose Ends

Making the shift to a board compensation program is a major change. Preparation should also include checking to see how other nonprofit organizations with compensation programs handled communicating the change to the public, which can help you develop your own communication strategy.

Be sure to seek advice from an attorney who is familiar with the laws governing nonprofit organizations in your state. And lastly, consider getting feedback from supporters and major donors before making a final decision.

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