Compensate Your Board? Legal and Ethical Considerations

Can we pay our board members? Should we?

Always a controversial topic, the issue of whether to pay foundation board members is likely to get even more attention. The 2008 precipitous decline in foundation assets has everyone trying to make the most effective use of their resources. Expect the media, regulators, general public, and even your grantees to scrutinize the decisions you make.

What is legal?

Though the rules may vary slightly by type of foundation, the law allows all types of foundations to compensate board members if the amount is reasonable. “Reasonable” is what similarly situated people are paid for similar work. “Compensation” refers to payment for overall board service. It should not be confused with reimbursement for reasonable and necessary expenses.

Who compensates?

Even though compensation is legal, new Council research, which will be available in early May, finds that only about 25 percent of foundations compensate board members. This number has stayed fairly even over the past two decades.

Compensation practices also vary by type and size of foundation. Large independent foundations are most likely to compensate board members, while it is almost unheard of for community foundations to compensate their boards.

Should You Compensate?

Knowing what is legal and knowing what others do is just a start. Determining what you should do—what the best allocation of your resources is—requires careful consideration. There are solid arguments in support of both sides of this issue.

The Case for Compensated Boards

Expertise and Skills: Pay helps attract individuals who are highly visible and well-connected in the community or who have technical, professional, or subject matter expertise essential to the foundation’s mission.

Diversity: Compensation may help attract individuals from different cultures, classes, ages, or personal situations who may not otherwise be willing or able to serve as volunteers.

Risk: The perceived personal and professional risks inherent in board service dissuade many from volunteering. Compensation may tip the balance in favor of serving.

Attentiveness: When compensated, board members may tend to be more responsive and attentive to their board responsibilities in light of all the other demands on their time.

Expectations: Trusts and for-profit boards compensate, often for the same work. Paying foundation boards helps establish the expectation that the professionalism and commitment are similar.

Loyalty: A paid person may be less tempted to manipulate the foundation’s operations and programs for personal gain.

The Case for Voluntary Boards

Stewardship: Board compensation reduces the amount of money available for grants, programs, and operations.

Public Trust: Paying board members sends the wrong message about the foundation’s priorities and leads to negative public perception.

Mission Commitment: Volunteers are more likely to be motivated to serve solely because of shared values and philanthropic goals and not out of economic interest.

Leadership by Example: Foundations often expect grantees to make the most of their charitable dollars, including keeping their administrative overhead low and using volunteer boards. A foundation can set the tone by modeling the same behaviors.

Fairness: Public charities rarely compensate boards, but the obligations and responsibilities of their board members are essentially the same.

Conflict of Interest: Volunteers are less susceptible to conflicts between doing the right thing for the foundation and staying in favor with management, who may have influence over board compensation.

Determining Compensation

If you decide to compensate, you next have to decide how much to pay. Take into account such things as:

  • size and anticipated growth of your foundation’s current assets
  • number, amount, and frequency of grants
  • the complexity of the grant process or programs
  • staff levels and staff capabilities
  • board member experience and management responsibilities
  • amount of time the board member spends on foundation matters

Also consider whether you offer board members an annual fee, pay them for attending each board or committee meeting, or some combination of both. “Determining Reasonable Compensation for Foundation Directors And Trustees” can help guide you.

Record Keeping

Whatever you decide, be sure to carefully document the process you followed and the factors you considered. If you relied on any data or an outside consultant to help you determine compensation, record that as well. Finally, be sure to carefully and accurately report board compensation on your IRS Form 990 or 990-PF.