Board Member Compensation
Serving on a nonprofit board is usually a volunteer commitment. There are circumstances where reasonable compensation is acceptable, but it is always critical that board service neither leads to personal financial gain nor violates the public trust.
Offering compensation for board service raises issues that need to be studied carefully.
Do Board Members Get Paid?
Strict legal and IRS guidelines govern how and when board members can be compensated, making this a complex area for many nonprofits to manage.
While nonprofit board members can be compensated for their work, they are generally expected to serve as volunteers driven by a shared passion for the organization’s mission. Paying board members raises issues of inurement and redirects resources away from the nonprofit’s core activities and programs.
According to 2012 Leading with Intent, a BoardSource survey, only three percent of the organizations completing the survey compensated their board members. Even for the majority of that three percent, the fees were nominal.
Board compensation is more common in complex nonprofits, such as research institutions, healthcare systems or large foundations, when board members’ responsibilities are time-consuming or when legal requirements make the service unusually demanding. In other organizations, compensation can also allow individuals of limited financial means to participate in board service.
Nonprofits are encouraged to establish a written agreement or policy that clearly outlines the types of expenses that will be paid, can be reimbursed and the process for claiming them.
Donors’ expectations
Funders or individual donors generally expect their contributions to go to programs and services. The board should account for possible reactions before it begins paying itself.
Legal Aspects of Paying Nonprofit Board Members
In the United States, the Internal Revenue Service (IRS) provides guidelines on nonprofit compensation practices, which must be reasonable.
The IRS requires such compensation be documented and disclosed on the organization’s Form 990, an annual nonprofit tax filing. The laws of your state may impose additional restrictions or require disclosures.
Failure to adhere to these regulations can lead to serious consequences, including losing the nonprofit’s tax-exempt status. Therefore, it’s critical for nonprofits considering board member compensation to consult with legal professionals and ensure they fully comply with federal and state laws.
How Nonprofits Decide on Board Member Compensation
Deciding whether to compensate board members is a significant decision that depends on various factors, including the mission area, composition of the board, and organizational goals. Additionally, the organization’s specific needs and goals should be considered, including whether compensation aligns with its mission and values.
The private inurement doctrine prohibits personal gain. According to the basic tenets of nonprofit law, directors and officers should not financially benefit from their association with the organization. Excessive compensation can result in a fine or the organization losing its tax-exempt status.
Who should determine the ‘reasonableness’ of potential compensation?
Although it is not a common practice, the board may consider a task force of appropriate outsiders or a board committee composed of members who do not have conflicts of interest. This would ensure that compensation decisions are made to avoid any perception of personal gain.
Do board members get paid reimbursements?
It is acceptable to make reimbursements available and the board should consider the financial and board equity impacts and establish a policy. Not all board members have equal financial capacity to absorb board meeting expenses such as plane tickets, hotel accommodations, and meals. Long travel to board meetings can become a major expense. Clarify this reimbursement policy with potential new board members. Many organizations ask their board members to absorb travel costs to support the organization. However, board service should not cause personal economic hardship.
Doing business with board members
A nonprofit organization having a business relationship with a board member is a conflict of interest. However, if one is being considered, following appropriate and ethical procedures before establishing an agreement is crucial.
If a board is considering doing business with a board member, take care to follow your financial policies, openly seek bids for services, and ensure the determining factor is what’s the best option for the organization. Even in the case when a board member is willing to provide services at a discount, bids should still be collected and reviewed. It is important to document that the final decision was made in the nonprofit’s best interest and that the board was aware of the conflict and appropriately followed its policies. A conflict-of-interest policy ensures board members’ personal and professional affiliations and conflicts are disclosed.
Conflicting Roles
During the beginning of an organization’s life, individual board members may fill two functions: the full board governs while individual members may fulfill staff duties. In established arts organizations, board members may also be paid as directors or producers. In some hospitals, board members may also be physicians. Private universities may have a faculty representation on the board. This situation complicates the issue of accountability. Being compensated for staff activities while simultaneously serving as a board member of an organization is a conflict of interest. Dual roles are best avoided. If there are no other options, board members being paid as staff should recuse themselves from decisions that will benefit them personally. All conflicts should be disclosed as per the organization’s policies.
Improprieties
Boards must thoroughly review all compensation situations to avoid improprieties and should practice vigilance when creating and implementing policies. Tying board service to monetary benefits may be an appropriate choice for your organization, yet it could also open the door to decisions being made for personal interest rather than what is best for the organization.