Non-profit board members are legally able to be compensated, and sometimes it might even be necessary. But is it right for your organization?
Pro and cons to board compensation
Board member compensation comes with several pros and cons to consider. One of the considerations for compensation is if it draws individuals who can bring tangible benefits to your organization such as:
- Highly specialized expertise or prominence in a growth field for your organization
- Investing significant time and effort into your organization
- Representative of diverse cultures, classes, and ages that will help guide your organization
In general, including compensation can improve your board’s performance and promote professionalism. For example, it may incentivize meeting attendance, accountability, and initiative among members. Also, if your non-profit has a business model that competes with for-profit organizations, such as a non-profit hospital, board compensation may be appropriate due to the opportunity cost for members of joining your organization’s board.
There can also be many drawbacks to compensation. First, it can look bad to your community. Donors expect as much of their funds to go towards program services and beneficiaries as possible, and board compensation can represent resources diverted away from the mission itself. 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.
Implementation matters
If your organization decides it will benefit by compensating board members, it is important that the compensation agreement comply with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules regarding “reasonable compensation.” Not doing so can result in your organization being levied excise taxes, penalties, or even loss of its tax-exempt status.
To ensure compliance with these regulations as well as minimizing any negative reception, compensation should be set by an independent third party. Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of, or formula for, board compensation. Regardless of exactly who sets the compensation amount, it should be guided by a formal compensation policy and make the amount comparable to that paid by similar non-profits.
This board compensation policy should outline:
- How compensating board members benefit your organization (for example, by allowing it to attract a member with research expertise)
- Which members are eligible for compensation (the chair, the officers, or all members)
- How compensation is structured (for instance, flat or per-meeting fee)
- Expectations for board members in exchange for compensation, such as meeting attendance, qualifications, and experience.
Also be sure to document all compensation discussions, including your board’s formal vote approving the policy and the compensation amounts.
The bottom line on board compensation
Whether your organization will benefit in the long term from paying its board members comes down to your non-profit’s culture, industry, the expectations of donors and members, location, and other similar factors.
Ernst Wintter & Associates LLP specialize in California non-profit audits and tax preparation. Contact us today for help with your non-profit audit or tax prep needs.