Nonprofits often wrestle with the question of whether to compensate board members. Federal legislation, such as the Sarbanes-Oxley Act of 2002, and IRS regulations relating to excessive compensation add to the concern.

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.

According to 2011 ASAE benchmarking research, compensating board members is not the norm in the association world: Only 13 percent of associations have some kind of compensation arrangement with the chief elected officer, such as an annual stipend or per-meeting fee; compensation for other board positions is even less common.

Although it is an uncommon practice, it is not illegal for a nonprofit to compensate its board members with reasonable fees unless prohibited by the organization’s bylaws or state laws. If compensation is authorized, compensation amounts should 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 important that board compensation be comparable to that of other nonprofit organizations and not deemed excessive by the IRS. (See Treas. Reg. §53.4958(b)(1)(ii); Treas. Reg. §53.4958-3(c)(2),(3).)

Federal Laws to Consider

Several laws should be reviewed and interpreted when considering board compensation. First is the Federal Volunteer Protection Act of 1997 (42 U.S.C. §14501 et seq.), which is intended to encourage volunteerism. It 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. This form, also known as the “Return of Organization Exempt from Income Tax,” requests thorough and complete information about an organization’s compensation arrangements, as well as possible conflicts of interest for officers and others.

Finally, the private inurement and excess-benefits regulation directly affects the amount of compensation nonprofits may provide to board members. 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, including fines or loss of tax-exempt status.

Pros and Cons

Here are some points to consider when deciding whether or not to compensate your nonprofit board members.

Reasons not to compensate 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 of their time and of themselves to further a cause.
• There are no stockholders.
• Nonprofits are organized and operated to serve a mission.
• Boards that pay members could discourage 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 risk losing the protective status offered in the Volunteer Protection Act.

Reasons to compensate board members:

• Compensation promotes economic diversity, giving members an opportunity to serve who might otherwise be unable to do so.
• Compensation promotes professionalism rather than amateurism.
• Compensation attracts the most qualified and able individuals.
• Compensation awards, in a tangible way, valuable personal time and contributions made for the cause.
• Compensation promotes more risk taking.
• Compensation stimulates better attendance at board and committee meetings.
• Compensation holds board members more accountable for performance.

The organization’s culture, funds, members, donor expectations, and the image it wishes to portray will all factor into the decision whether to compensate board members. If you pay board members or plan to pay them in the future, consider these tips:

• Establish policies with clear objectives, and indicate how compensating the board of directors will benefit the organization.
• Determine what compensation is considered reasonable, and review the compensation regularly.
• Determine which board members will be compensated (the chair, board officers, or all 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 chair will be paid more than others.

Careful attention to legal requirements and the details of any payment arrangements will ensure that nonprofits make informed decisions and set responsible policies for board compensation.