Because most not-for-profit board members serve voluntarily, you may not have known compensating them was an option. But depending on the type of organization, the expertise and experience expected of board members, and the required time commitment, it may make sense to compensate these hardworking individuals.
Pros and cons
There are advantages and drawbacks to compensating board members. Your organization might, for example, 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. Also, 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 nonprofit hospitals, may have business models that compete with those of for-profit companies. In such cases, board compensation often is appropriate. In general, providing compensation can improve board member performance and promote professionalism. And it may incentivize meeting attendance and accountability.
But 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 and 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 about “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 nonprofits.
Your compensation policy should cover:
It should also 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.