OCTOBER 05, 2020

Compensating your board has both advantages and disadvantages. This article explores them from the perspective of donor intent.

Board compensation is one means of tapping individual self-interest for the purpose of preserving your intent. Whether it makes sense in your individual case or not primarily hinges on the demands of board service—the time and effort it takes for meetings, site visits, proposal reviews, and service on committees, among other responsibilities.

You might conclude that compensation is simply unnecessary to attract well-qualified board members. Or you might decide that you specifically want people passionate enough about your mission to donate their time. You will have to strike the balance between pure volunteerism-based board service and enlightened self-interest in deciding what’s appropriate for your unique circumstances.

Ultimately, remember that there is simply no one “right” answer to the question of board compensation. Donors should identify the practice that best suits their needs.

Positives of board compensation

With regard to donor intent, there are several powerful arguments for compensating your board:

1. More clearly defines the relationship

It can establish a working relationship with your trustees with clear expectations that they will fulfill their responsibilities. The Peters Foundation, for example, chooses to pay its non-family trustees. While some of those board members refuse the compensation, President Dan Peters believes that as a result of the offer, “they take their job seriously—we expect answers, and they give them.”

2. Creates accountability

Whether they accept payment of $1 or $100,000, compensation clearly communicates to board members that they are working for the foundation and should uphold its mission, not pursue their own altruistic interests.

3. Widens the pool of available board members

If you want specialized expertise on your board, you may have to offer some form of payment in order to secure the service of people whose time is extremely valuable. World-class experts in biomedical research, for instance, may only be willing to serve on your board for a fee. Additionally, compensation can permit you to recruit board members who might otherwise be unable to spare the time to serve as volunteers. Perhaps you want to include schoolteachers, or employees of religious charities or small nonprofits, on your board. For family foundations, compensation is often key to recruiting younger family members or those from generations where family wealth has diminished.

4. Removes volunteer immunity

The federal Volunteer Protection Act of 1997 (as well as similar statutes in many states) provides broad—though not total—immunity from tort claims that might be filed against unpaid volunteers of nonprofit organizations. Harvey Dale, a professor of philanthropy and law at New York University, has suggested that if you provide compensation, you eliminate this exculpatory protection and are “likely to increase the attention directors pay to fulfilling their fiduciary duties.” (Your foundation should, of course, purchase directors and officers liability insurance, often called "D&O", to provide indemnification for losses or defense costs suffered as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers.)

Negatives of board compensation

Of course, compensating your board also has potential downsides:

1. Creates a “yes-man” problem

Boards who oversee foundations in perpetuity might become accustomed to the paycheck and “go along” with poor decisions just to ensure that it continues. That’s why the Jaquelin Hume Foundation has purposely decided not to pay its trustees for service. “Once you get somebody on the payroll, they want that money to continue. We pay their travel fees, but they don’t get a salary,” says the foundation’s president, Jerry Hume.        

2. Departs from the tradition of volunteerism

You should understand that compensated board service (beyond reimbursement for expenses incurred) is a departure from the nonprofit tradition of volunteerism. Board members at grant-receiving public charities are generally expected to serve without compensation and to provide some level of financial support to the nonprofit organization. As William Schambra noted in Philanthropy in 2008, “Voluntary service…is regarded as an essential expression of human devotion to purposes beyond self-interest and a moral obligation of American citizenship.” In fact, many foundations have adopted the policy of declining grant requests from public charities that compensate board members.

3. Reduces funds for charitable purposes

Critics of compensation argue that payments to trustees, which may legally be counted toward a foundation’s mandatory annual payout, reduce the monies available for charitable grants. Foundation leaders also dispute the notion that compensation is necessary to recruit high-caliber board members or to make those board members more effective. Others suggest providing trustees with a limited amount of discretionary grantmaking as an alternative to direct payments.

Guidelines for paying board members

If you choose to compensate board members, keep several factors in mind:

  • Remember that to avoid running afoul of IRS requirements, pay must be “reasonable and necessary.”
  • Additionally, if you have family members on your board and you choose to pay them, extra judiciousness is warranted to avoid “self-dealing.” One damning investigation by The Boston Globe revealed an indefensible compensation package offered by the Paul and Virginia Cabot Charitable Trust to Paul Cabot Jr. Between 1998 and 2002, Cabot was paid over $5.1 million for his service as a trustee, even though the foundation gave only about $2 million to charity during this period.
  • To guard against real or perceived compensation abuses, it’s wise to put in writing some sort of job description for your board members. At the very least it should explain the foundation’s expectations for the work they are doing, the number of meetings they should attend, the number of hours they spend on foundation business each week, etc.
  • You may want to look at foundation board compensation surveys to compare your foundation with those that have similar asset size. Your board meeting minutes should always record compensation decisions for directors and officers, including the data used to make those decisions.
  • Finally, remember that compensation information is part of your foundation’s tax filing and is readily available to the public.