Should Board Members of Nonprofit Organizations Be Compensated?
Knowledge Center Staff
ASAE & The Center for Association Leadership
Source: Knowledge Center
The passage of the American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley legislation, has precipitated more concern about the compensation of board members in the last few years. This article provides statistics and various opinions on the legal issues which surround the subject of providing compensation, excluding reimbursement of expenses, to members of a board of directors in a nonprofit organization.
There are significant differences between the responsibilities of nonprofit and for-profit organizations. For-profits engage in commerce in order to earn financial return for their shareholders. Nonprofits operate to achieve their missions without the motivation of financial gain.
Nonprofit organizations do not have shareholders. Instead, nonprofits owe allegiance to members, funders, grant makers, beneficiaries and employees as well as to the public, which has given nonprofit organizations special status in society.
It is not illegal for a nonprofit to compensate its board members with reasonable fees unless prohibited by the organization’s bylaws. 1 If compensation is authorized, it is advised that compensation amounts be set by independent directors or an independent compensation committee with input from outside advisors. It needs to be clear that compensation does not imply monetary profit. It is very important that board compensation be comparable to that of other nonprofit organizations and not deemed excessive by the IRS. 2
Federal Laws to Consider
There are several laws that should be reviewed and interpreted when considering board compensation. First, there is the Federal Volunteer Protection Act of 1997 (42 U.S.C. 14501 et. seq.) which is intended to encourage volunteerism. This act also defines a volunteer as an individual performing service who does not receive compensation, other than reasonable reimbursement or allowance for expenses actually incurred.
Form 990, which has extensive reporting requirements, is the next point to consider. Starting in tax year 2005, this form (also known as the “Return of Organization Exempt from Income Tax”) will request thorough and complete information about an organization’s compensation arrangements, as well as possible conflict of interest for officers and others.
Finally, there is the private inurement and excess benefits regulation which directly impacts the amount of compensation nonprofits may reward board members. Organizations should be aware that section 501(c)(6) of the Internal Revenue Code prohibits any part of net earnings benefiting individuals. Section 501(c)(3) contains excess benefits rules, which bar board directors and officers from profiting from their positions within a nonprofit organization. Paying reasonable fees to board members for services may be legal in some circumstances, but paying more than the recognized market average can result in stiff penalties to a nonprofit organization.3
District of Columbia Regulations
Section 29-301.27 of the District of Columbia Nonprofit Corporation Act permits compensation only in reasonable amount to its members, directors, or officers for services rendered. The payment must be commensurate with the fair market value of services rendered. If the payment or service is deemed unreasonable, a court may order the payment returned to the corporation. 4
Relevant Statistics and Other Information
According to statistics in ASAE’s 2006 publication, Policies and Procedures in Association Management, compensating board members is not a norm in the association world. Serving on a board of an association is usually considered a volunteer commitment (see chart below).
Question: Do you pay a fee to any of your elected officers or directors (excluding expense reimbursement) for their services?
ASAE’s industry research publications from 1996-2006.
Here are some points to consider when deciding whether or not to compensate your nonprofit board members:
- Board members are thought of as volunteers
- Donors and members expect their monies to be spent on services
- Members are willing to give their time and themselves to further acause
- There are no stakeholders
- Nonprofits are organized and operated to serve a mission
- Boards that pay members could discourage the act of volunteering
- Boards that pay members could discourage charitable giving
- Boards have the fiduciary responsibility of managing the organizations’ funds
- Boards that pay members could be considered the same as staff
- Boards will not want to take a chance on loosing the protective status offered in the Volunteer Protection Act
- Promotes economic diversity, giving members an opportunity to serve who might otherwise be unable to do so
- Promotes professionalism rather than amateurism
- Attracts the most qualified and able individuals
- Awards in a tangible way valuable personal time and contributions made for the cause
- Promotes more risk taking
- Stimulates better attendance at board and committee meetings
- Holds board members more accountable for performance
(See chart below for statistics on how board members are paid)
Question: If you pay board members, how were they paid?
|Flat yearly fee||30%||60%||21%||61%||44%||57%|
ASAE’s industry research publications from 1996-2006
The decision of whether to compensate a nonprofit board is determined by the organization based on its culture, funds, members, donor expectations and the image it wishes to portray. If you pay board members or plan to pay them in the future, here are tips to consider:
- Establish policies with clear objectives and indicate how compensating the board of directors will benefit the organization
- Determine what is considered reasonable
- Determine which of the board members will be compensated - the chairman, board officers, or all of the board members
- Determine how the compensation will be structured (i.e., flat fee, retainer, per diem, formula), how it will be distributed, and the tax implications
- Determine how much each board member will be compensated and whether the chairman will be paid more
1 State law regarding compensation for non-profit organizations takes precedence over organization bylaws. Check with an attorney to see if there are any state regulations that will impact your decisions regarding board compensation.
2 See Treas. Reg. §53.4958(b)(1)(ii); Treas. Reg. §53.4958-3(c)(2),(3).
3 Such penalties could include fines or loss of tax-exempt status. See “Board Member Compensation,” [Online] BoardSource 2006. Cited 1 September 2006. Available from http://www.boardsource.org/Knowledge.asp?ID=1.102.
4Glassie, Personal email correspondence with author.
“Board Member Compensation” [Online]. BoardSource, 2006. Cited 1 September 2006. Available from http://www.boardsource.org/Knowledge.asp?ID=1.102.
Glassie, Jeff and Jay Kalinski. Personal email correspondence with author. 14 March 2006.
Glassie, Jeff and Lauren Bright. Personal email correspondence with author. 10 January 2001.
Orlikoff, James E and Kevin K. Murphy. “Face Off: Board Member Compensation” [Online]. BoardSource, March 2004. Available from http://www.tsae.org/associations/4468/files/Cd2%20Board%20Compensation.pdf.
Bryson, Ellen and Andrew Schultz. “Board Debate: Voluntary or Compensated Boards?” [Online] Foundation News & Commentary, September/October 2003. Available from http://foundationnews.org/CME/article.cfm?ID=2620.
Buhl, Alice C. “Trustee Compensation: What’s Appropriate?” [Online]. National Center for Family Philanthropy, January 2004. Available from http://www.ncfp.org/Trustee_Compensation-What_is_Appropriate.pdf#search=%22board%20debate%20Ellen%20bryson%22.
“Conflicts of Interest at Foundations: Avoiding the Bad and Managing the Good” BoardSource, July 2005. Available from http://www.boardsource.org/dl.asp?document_id=25.
“Sarbanes-Oxley Act and Implications for Nonprofit Organizations.” [Online] BoardSource and Independent Sector, January 2006. Available from http://www.boardsource.org/clientfiles/Sarbanes-Oxley.pdf.
“Strengthening Transparency Governance Accountability of Charitable Organizations: a Final Report to Congress and the Nonprofit Sector.” [Online]. The Panel on the Nonprofit Sector, June 2005. Available from http://www.nonprofitpanel.org/final/Panel_Final_Report.pdf.
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