Contrary to popular belief, it’s usually perfectly legal to compensate nonprofit board members — and sometimes it might even be necessary. But is it right for your organization?
Pros and cons
Board member compensation comes with several pros and cons your nonprofit should consider. Different organizations might assign different weight to each of the factors.
For example, some might find it worthwhile to offer board compensation to attract prominent individuals or those bringing highly specialized expertise. Compensation also could provide a valuable edge when courting potential board members who would 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 create an obligation to perform on the board member’s part and promote professionalism. It may incentivize meeting attendance and accountability. Moreover, paying board members can help achieve greater diversity on your board; compensation might make it easier for individuals from different cultures, classes and ages to participate.
Board compensation also comes with several drawbacks. In general, 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 legal and IRS implications. In some states volunteer board members are protected from legal liability, while compensated members may not be.
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 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), an independent governance or compensation committee or 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 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 data relied on.
The bottom line
Ultimately, the decision whether to pay your board members will come down to your organization’s culture, member and donor expectations and similar factors. If you decide to move forward with it, though, discuss the matter with your attorney. Make sure that any applicable legal restrictions are taken into account.