Pluses and minuses of paying your board

Have you considered compensating board members for their services, thinking you might be able to attract better qualified leaders? Compensation could be in order, but first you should weigh the pros and cons of this decision.

Making a change

Here are several factors to consider before making the change from volunteer to paid board leadership:

Specialized expertise. Offering compensation can help attract board members with specialized expertise, such as in fundraising or finance, or one who’s a well-regarded community leader. Giving board members a stipend also could give your nonprofit an edge when competing with the generous compensation that for-profits can offer their board members.

Recognition of time and effort. Compensation could be in order, if your board members are expected to invest significant time and effort in the position. Offering pay can promote professionalism and help create an obligation to perform on the board member’s part. It also might incentivize meeting attendance and accountability, and make it easier for individuals from different cultures, classes and ages to participate.

A negative message. On the minus side, paying members to serve on your board of directors can simply look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission.

IRS implications. The IRS looks carefully at whether arrangements between nonprofits and their board members create a conflict of interest. And, board members receiving compensation of more than $10,000 aren’t independent members of the board by the IRS’s definition. (Reimbursing for expenses under an accountable plan, on the other hand, isn’t considered compensation for purposes of measuring independence.)

Any compensation arrangements must comply with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in steep excise taxes, penalties and even the loss of your organization’s tax-exempt status.

Legal implications. In some states, volunteer board members are protected from legal liability, while compensated members may not be. You’ll need to check your state’s laws.

The independence factor. Independence is indispensable when setting the amount of, or formula for, board compensation. The compensation should be set by independent directors (who aren’t among those to be compensated), or by an independent governance or compensation committee with insight from an independent consultant. The amount should be comparable to that paid by similar nonprofits, as determined by compensation surveys or other data. Whoever sets the amount should be guided by a formal compensation policy.

Fleshing out a policy

Your compensation policy should include clear objectives outlining how compensating board members benefits the organization (for example, by allowing you to attract a member with financial expertise). It should specify which board members are eligible for compensation (the chair, the officers or all members) and how compensation is structured (for instance, flat fee, retainer or per-meeting fee).

The policy also should address expectations for the board members in exchange for their compensation. Expectations can be described, for instance, in terms of number of meetings attended, hours worked or qualifications and experience.

Make sure that you document everything. You’ll want written evidence of a formal board vote approving the policy and the compensation amounts, related discussion and copies of the data the board relied on to make its decisions.

Play by the rules

After debate, your organization may decide that board compensation could be a useful tool in attracting the caliber of board members your nonprofit seeks. If you come to that conclusion, just be sure to adhere to your nonprofit’s internal policies and IRS rules.

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