Many non-profit organizations do not compensate their board members, but it could be beneficial. Many firms don’t even know compensation is an option. It depends on the type of organization and what the board members bring to the firm. Below we will explore advantages and disadvantages for compensating these workers.
Pros & Cons
There are advantages and drawbacks to compensating board members. Your organization might find it worthwhile to offer compensation to attract individuals who are prominent or bring highly specialized expertise — or are expected to invest significant time and effort. If you’re trying to build a more diverse board, it may be easier to recruit new members if you offer a financial incentive.
Some organizations, such as non-profit hospitals, may have business models that compete with those of for-profit companies. In such cases, board compensation is often appropriate. In general, providing compensation can improve board members’ performance and promote professionalism. It may even incentivize meeting attendance and accountability.
Still, there are drawbacks to paying board members. First, it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission. Further, there are legal and IRS implications. For example, in some states volunteer board members are protected from legal liability, while compensated members may not be.
Avoiding Taxes & Penalties
If you decide to compensate board members, make sure your arrangement complies with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as IRS rules regarding “reasonable compensation.” Failure to do so can result in excise taxes, penalties, and even the loss of your tax-exempt status.
Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of (or formula for) compensation. Whoever sets the amount should be guided by a written compensation policy and make the amount comparable to that paid by similar non-profits.
Your compensation policy should cover:
- How compensating board members benefits your organization
- Which members are eligible
- How compensation is structured (for instance, flat or per-meeting fee)
It also should spell out expectations for board members in exchange for compensation, such as qualifications and meeting attendance.
Whether or not your organization ultimately decides to compensate board members, be sure to document all compensation discussions, including any votes your board takes. If you’re still unsure, contact us. We can help walk you through the decision, including how to determine appropriate amounts.