Compensating Nonprofit Board Members

Published on: by Gene Takagi Category:BOARDS / GOVERNANCE, DIVERSITY EQUITY INCLUSION
Word "COMPENSATION" on black background

Many of us serve as volunteer board members of a charitable nonprofit organization. But some nonprofit board members get paid for their service. There are strong feelings about the propriety of compensating nonprofit board members that are worth exploring before arriving at any conclusions.

The Law

Federal tax laws applicable to public charities do not prohibit reasonable compensation to board members. Federal tax laws applicable to private foundations also do not prohibit reasonable compensation to board members, but this is subject to the prohibition against self-dealing. Additionally, the very limited protection offered by the Federal Volunteer Protection Act would not apply to compensated board members.

State laws may limit compensation paid to board members. For example, no more than 49 percent of the board members may be compensated or related to someone compensated by a California nonprofit public benefit corporation, but this prohibition excludes any reasonable compensation paid to a board member as a board member. This means that a California nonprofit public benefit corporation can pay all of its board members for serving as board members, but can only pay a minority of its board members for other types of services. State laws may also provide certain immunity protection to volunteer nonprofit board members that may not apply to a compensated board member.

Some Old Guidance

In the original published draft of the IRS publication Governance and Related Topics – 501(c)(3) Organizations (2008), the IRS provided:

Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.

See https://www.icnl.org/resources/research/ijnl/good-governance-practices-for-501c3-organizations-should-the-irs-become-further-involved-2.

This provision appears to have been removed from the publication, which is otherwise still available at the link referenced above. We’ll discuss reimbursement of expenses in a future post.

Why Nonprofits Should Not Compensate Board Members

  • It’s a widely held custom for public charities not to pay board members.
  • Stakeholder trust and confidence may diminish if a nonprofit’s board members are compensated.
    • May adversely impact fundraising and public relations.
    • May adversely impact board’s relationship with the nonprofit’s executive and employees.
    • May increase public, media, and regulatory body scrutiny.
  • Volunteer board members are less likely to make decisions based on self-interest.
  • Volunteer board members have certain statutory liability protections.
  • Certain individuals who would be willing to serve as volunteer board members may not be interested in serving on a compensated board (partly because of how they might be publicly perceived and partly because of the other complexities created by this arrangement).

Why Some Nonprofits Should Compensate Board Members

  • Nonprofit board members have considerable responsibilities and to properly meet their fiduciary duties may be very demanding of their time.
    • Recruiting and retaining diligent board members may be enhanced by the offer of compensation.
    • Compensating board members may encourage greater diligence on their part (in terms of attendance and observance of their duties).
  • Compensation may open up the pool of strong candidates for the board by attracting persons who may not otherwise have financial or other resources to serve (this can also be a way to increase diversity and inclusion).

Additional BIPOC Considerations

As many nonprofits go through their Wake to Woke to Work journey, there has been more attention on recruiting more racially diverse board members and creating and modifying policies and practices to build more inclusion and equity throughout the organization. Not surprisingly, because BIPOC board members are generally better situated, through history and lived experiences, to create and modify such policies and practices, and their input is essential to the process, they can easily end up having greater responsibilities than White board members. This inequity has led some people to question whether there may be cases in which BIPOC board members of nonprofits should get compensated for bearing such greater responsibility and being subject to greater demands on their time and their mental, emotional, and spiritual health (this work is not easy).

Almost two years ago, I had a discussion on this topic with some of the leaders of the Nonprofit Association of Oregon who had already been collecting comments from the field. I promised to follow up after having discussion with several other nonprofit leaders and governance experts, a majority of whom were Black. But there were strong and conflicting opinions on this issue, and as I went through my learning journey, which is far from over, I believed the matter to be overly nuanced to offer much helpful guidance. Nevertheless, I share some thoughts here in hopes that others will also pick up and advance the thinking on this issue.

  • The law would generally prohibit, within one organization, paying some board members for serving as board members and not others, based on their race. This could raise Title VII, Section 1981, and state civil rights law issues.
  • The law may generally allow for a public charity to pay some, but not all, board members, for services offered other than as a board member, including, for example, for serving on a task force charged with creating and modifying policies and practices to build more inclusion and equity throughout the organization (“equity task force”).
    • If paying equity task force members for their services, the public charity should enter into a written contract with each task force member, memorializing that these services are separate from any service they may provide as a board member and that the payments were determined to be reasonable as to the charity. While this presumes that the task force members will be independent contractors, it should be preceded by an analysis of proper employee-independent contractor classification.
    • If a private foundation wants to pay some, but not all board members, for such services, the private foundation should first analyze whether such relationships will be violations of the self-dealing laws or fall within the personal services exception.
  • Assuming that any or all BIPOC board members want to serve on the equity task force is absolutely wrong.
  • Offering to compensate a BIPOC board member or candidate and not all board members may be viewed by the BIPOC board member or candidate as highly insulting.
  • Not offering or, in some cases, agreeing, to compensate a BIPOC board member or candidate expected to have more work and responsibility than other board members may be viewed by the BIPOC board member or candidate as unfair and inequitable (note that many will say that a BIPOC board member may have a greater burden than other board members even if they are not on an equity task force, particularly on a board lacking racial diversity, but compensating for this reason alone may run afoul of civil rights laws).
  • Requiring that compensated equity task force members be BIPOC individuals may be a violation of civil rights laws.
  • The equity task force must be sufficiently supported by the board and the organization with resources and meaningful authority.

Other Resources

Can board members be paid? (National Council of Nonprofits)

Should Board Members of Nonprofit Organizations Be Compensated? (ASAE)