To compensate or not to compensate board members, that is one of the most difficult questions to answer for nonprofit leaders. Most nonprofit leaders do not even consider compensating board members, but several reasons make paying your nonprofit’s most valued consultants a good idea.
Although compensating board members can generate conflict of interest, it also clearly conveys that each board member works for your nonprofit organization. Whether you pay each board member $1 or $10,000, compensation helps keep board members in line with your nonprofit’s mission instead of pursuing their interests. You also develop credibility with the rest of your nonprofit’s team by compensating the best consultants in their respective professional fields.
Keeps Board Members Motivated
Many board members serve more than one nonprofit organization. This can become an issue if a board member places another nonprofit’s interests above the interests of your charitable organization. One of the most effective strategies to develop loyalty among board members is to pay them for devoting more of their time and expertise to your group’s worthy cause.
Expands the Pool of Potential Board Members
If your nonprofit organization requires the strategic support of a team of experts, you are going to have to pay for the professional advice. Board members do more than simply offer advice and oversee operational strategies. They also lend their professional expertise to enhance the performance of a nonprofit organization. For example, if your nonprofit’s mission concerns achieving educational goals, you should consider compensating a team of educators to serve on your board.
Eliminates Volunteer Immunity
Enacted at the federal level in 1997, the Volunteer Protection Act, as well as many similar laws passed at the state level, offer immunity for volunteers that face some type of legal action. Compensating board members eliminates volunteer immunity, which according to Professor Havey Dale at New York University, is “likely to increase the attention directors pay to fulfilling their fiduciary duties.”
How to Compensate Board Members
If your nonprofit organization chooses to compensate board members, you should keep several factors in mind before establishing a compensation policy. First, to avoid IRS oversight, compensation must be “ reasonable and necessary.” Since this is a broad criterion for compensating board members, your nonprofit should enlist the support of a certified auditor. Second, compensation for any family members serving on your nonprofit organization’s board should be under more scrutiny to avoid “self-dealing, ” which represents a fancy term that describes getting rich off the back of a family member. Third, put any compensation arrangement in writing and have your nonprofit’s attorney review it to ensure full legal compliance. Finally, review nonprofit organization board compensation surveys to compare your compensation plan with other nonprofits that operate with similarly valued assets.
The Bottom Line
Once considered taboo for nonprofit organizations, compensating board members has become more of a standard than an irregularity for nonprofits supporting a wide variety of causes. Although board member compensation is associated with a couple of negative consequences, your nonprofit can benefit from the professional expertise of board members that help your nonprofit realize its mission. Just make sure your board member compensation plan follows the laws and regulations enacted at both the state and federal levels.
At Ernst Wintter & Associates LLP, we provide comprehensive audit, review, examination and compilation services as well as tax services that fit your business needs. Our professionals have specific expertise in the financial services industry, nonprofit sector, and employee benefit plan audit requirements. Please contact us today.