In a recent post, Non-Profit Urban Myths Debunked, we discredited the myth that non-profit board members cannot be paid for their service. We related that IRS regulations do allow non-profit board members to be compensated for their services. We explained: First, non-profits can and many do enact board reimbursement policies for reasonable expenses incurred in the performance of board duties, such as travel to organization events, purchasing supplies for board business out of pocket, etc. Second, although most non-profit board members serve as volunteers, board members can be paid as board members for their services.
However, only approximately 13 percent of non-profit corporations compensate their lead board member for services, and far fewer compensate other board members. Non-profit corporations should carefully consider risks and benefits before deciding to compensate board members for service and should carefully implement risk mitigation steps if they do decide to compensate board members.
Pros and Cons of Paying Board Members
Non-profit corporations should carefully consider the pros and cons, risks and benefits, of compensating board members before deciding to do so. If a board member/director/trustee is compensated beyond reimbursement of reasonable expenses, he/she/they are no longer considered volunteers under the federal Volunteer Protection Act and many state shield laws. Thus, a compensated director would be personally liable for acts of ordinary negligence by the organization instead of being shielded from liability for all acts except those done with gross negligence. This may dissuade savvy and successful professionals from accepting a compensated board position.
There are several other non-legal risks to consider as well. First, many non-profit board members serve out of a sense of responsibility to give back to their community, and thus would be uncomfortable accepting a compensated board position. Second, the consideration of compensating board members would most likely be limited to only large and financially comfortable non-profits, and organizations with budgetary restrictions would most likely need to focus funds on programming and compensating employees (as well as other necessary operational needs). Third, there may be negative public relations consequences, if it becomes known that a non-profit corporation is using donated funds to compensate board members, as opposed to supporting direct programming costs. Finally, there may be negative effects on board and organizational culture if directors/trustees are compensated. Compensating a subset of directors/trustees may set up a perceived tiered system of importance within the board which would create another layer of cultural issues that need to be managed. Finally, a financial incentive may encourage board members to cling to their Board position even after their energy and passion have waned.
However, there are non-profits that compensate board members and thus there are some perceived benefits to director/trustee compensation. As it is a common practice in for-profit corporations to compensate directors/trustees, compensation of board members by larger non-profits may be necessary to compete for the time of busy and influential professionals. This may be particularly important if thorough meeting preparation and consistent meeting attendance are desired. Volunteers are, after all, volunteers. They are likely to have many other competing responsibilities which may take priority, when push comes to shove, over their volunteer commitments. The compensation of a board member may produce another layer of responsibility which could lead to increased meeting participation.
Other benefits of compensating board members include attracting a more diverse board. Compensating members for their time may permit less wealthy members to participate on a board that might otherwise take too much time away from paid endeavors.
Mitigating the Risk of Board Compensation
Non-profit corporations that decide to compensate board members should consult legal counsel to understand all legal risks and develop a risk mitigation plan. The following are steps, among others, that should be taken:
- Review State Law: Some states, such as California, restrict the ability for Board members to be paid.
- Conflict of Interest Policy: The board should have a detailed conflict of interest policy, and each board member should verify via documentation each year that they have reviewed the policy, and reveal potential conflicts of interest. The policy should ensure that any board member receiving compensation should not be part of the discussion or vote regarding such compensation, or, if the conflict is unavoidable because it impacts the entire Board, the decision should be based on objective data such as a qualified compensation consultant’s report and recommendation.
- Rebuttable Presumption Test: Ideally, the compensation of board members should comply with the IRS Rebuttable Presumption Test. The requirements of the test are:
- The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest concerning the transaction,
- Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and
- The authorized body adequately and timely documented the basis for its determination concurrently with making that determination.
The decision whether or not to compensate board members is a strategic decision based upon organization-specific context. It may or may not be beneficial but, if a non-profit does decide upon such compensation, a careful risk mitigation plan encompassing legal, public relations, and cultural considerations will go a long way toward making such a strategy a success.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.