Should board members be compensated?

Although nonprofit board service is usually a volunteer activity, reasonable fees for service are permissible if the bylaws state so or the majority of the board members so determine. However, such compensation is rare. According to a survey conducted by BoardSource, board service remains voluntary in the vast majority of responding organizations; only 2 percent provide board members with a fee or honorarium for their service.

Board compensation is more common in complex nonprofits, such as health care systems or large foundations. Many organizations believe a fee is appropriate when the responsibilities of board members are particularly time-consuming or when legal requirements make the service unusually demanding. Also, compensation can make it possible for individuals of very limited financial means to participate in board service.

According to the basic tenets of nonprofit law, directors and officers should not make any pecuniary (monetary) profit from the organization, and they should not receive personal financial benefit from their association with the organization. Paying a fee in specific circumstances can be defended, but fees that are out of scale with the market price of that good or service are always unacceptable. Excessive compensation can be a cause for a fine or for the organization to lose its tax-exempt status .

Tying board service to monetary benefits can cloud board members judgment by tempting them to make decisions based on personal interest rather than what is best for the organization. To avoid even a perception of personal gain, the board might want to have compensation determinations made by a task force of appropriate outsiders or a board committee whose members lack conflict of interest with respect to the arrangement.

Following are some common situations with board members that call for the development and implementation of clear policies.

Reimbursement of expenses. Traveling to a distant board meeting can become a major expense. Not every board member has equal financial capacity to absorb those costs. But paying for plane tickets, hotel accommodations, and meals, even in part, can become a substantial expense for the nonprofit.

Clarify the reimbursement policy for potential board members, emphasizing that board service should not cause personal economic hardship. Spell out, for example, whether the organization will not reimburse any expenses or will reimburse some or all expenses (up to a certain limit or according to a per-diem calculation). According to the BoardSource survey, 24 percent of the respondents organizations reimburse board members for the expenses they incur in attending meetings.

Business relationships with board members. Board members often recommend their own business services to the organization on whose board they serve. It is not inappropriate for a nonprofit organization to have business relationships with board members, provided ethical procedures are followed, such as full disclosure of conflicts of interest . The organization needs to openly seek bids to procure services, keeping in mind that what is best for the organization must be the determining factor.

Sometimes a board member is willing to provide services at a discount. In that case, the minutes should document that the final decision was made in the best interests of the nonprofit and that the board was aware of the potential conflict.

Board members wearing two hats. Often during the beginning phase in the life of an organization, the board may have two functions: it acts as the governing body while at the same time fulfilling the duties of staff members. In some arts organizations, for example, board members also act as directors or producers. In some hospitals, board members may also be physicians.

Such situations complicate the issue of accountability. Being compensated for staff activities while simultaneously serving as a volunteer overseer of the organization may create confusion between the two responsibilities . Board members may need to determine which activity they prefer to pursue being part of the staff or of the board. Or they may excuse themselves from some decisions (often with prompting from the chair or chief executive about their conflicting interests).

Donors expectations. Funders or individual donors generally expect their contributions to go to programs and services. The board should take into account possible reactions from funders and donors before it begins accepting compensation for board service.

Each board member should answer this question: “How does my commitment change if I am paid for the service?” Sometimes the time and monetary burden can be too demanding without any compensation. In that case, before accepting the commitment or before lowering the standards of promised involvement, it is important to communicate these concerns to the chair of the board. The best solution may be for the board member to rotate off the board.

SUQQESTED ACTION STEPS

1. Board members, if you are considering providing compensation to the board, conduct the appropriate market research to find out how many nonprofits in your area pay board members for their board work and how much board members receive.

2. Board chair, because board members are looking for personal, intangible rewards, take ten minutes of a board meeting to talk about the adequacy of those rewards.