To Pay or Not To Pay: A Practical Guide to Nonprofit Board Compensation
Should nonprofits pay their board members? Melissa Sampson McMorrow, a legal expert from Nutter Law Firm, and Eric Curtis explore the complex debate surrounding board compensation:
The question of whether to compensate nonprofit board members is a complex one, with arguments both for and against the practice. While tradition often dictates that board service be a purely voluntary endeavor, the increasing demands and responsibilities placed on nonprofit boards are challenging this long-held assumption. This article delves into the heart of this debate, exploring the philosophical underpinnings of volunteerism versus compensation, the practical implications for both the organization and the individuals involved, and the critical considerations nonprofits must address when exploring this option.
We'll examine the potential benefits of offering compensation, such as attracting a more diverse and skilled pool of candidates, and weigh them against potential drawbacks, including concerns about mission drift and the erosion of public trust. By providing a comprehensive overview of this multifaceted issue, we aim to equip nonprofit leaders with the knowledge and insights necessary to make informed decisions that align with their organization's unique needs and values.
Pro-Compensation:
Recognition of Value: Board service demands considerable time, expertise, and responsibility. Compensation acknowledges the valuable contributions board members make and incentivizes a higher level of commitment.
Attracting Talent: In an increasingly competitive market, offering compensation can attract highly qualified individuals with diverse skill sets, broadening the pool of potential candidates.
Promoting Diversity: Compensation can help overcome financial barriers that may prevent individuals from lower socioeconomic backgrounds from serving on boards, leading to greater diversity and representation.
Enhancing Accountability: Compensating board members may instill a greater sense of accountability and encourage a more professional approach to board duties.
Anti-Compensation:
Maintaining Volunteerism: The ethos of volunteerism is deeply ingrained in the different nonprofit sectors. Compensation may undermine this spirit and lead to a transactional relationship between board members and the organization.
Financial Burden: Many nonprofits operate on tight budgets, and compensating board members may divert resources away from program services and mission-related activities.
Potential for Conflicts of Interest: Compensation could create conflicts of interest, with board members potentially prioritizing personal financial gain over the organization's best interests.
Perception Issues: Donors and the public may perceive compensated board members as less committed to the mission, potentially damaging the organization's reputation.
Liability Considerations: Understand the potential implications of shifting from a volunteer to a paid board model. Consult with legal counsel to assess any changes in liability protections and insurance requirements.
Practical Implications
Beyond the philosophical debate surrounding nonprofit board compensation, there are several practical implications that demand careful consideration. Firstly, legal and regulatory hurdles must be addressed. Nonprofits must navigate state laws governing board compensation and adhere to federal tax law regarding reasonable compensation to maintain their tax-exempt status. Secondly, financial capacity is a crucial factor. Organizations must realistically assess their resources to ensure that compensating board members doesn't divert funds away from essential programs and services central to their mission. Transparency and accountability are also paramount. If a nonprofit chooses to compensate its board, clear policies and procedures must be established to avoid conflicts of interest and maintain public trust. Finally, it's essential to recognize the potential impact on organizational culture. Compensating board members may alter the dynamics between the board and staff and even shift the organization's overall values.
Deciding to compensate a nonprofit board is not a decision to be taken lightly. It requires careful alignment with the organization's mission, values, and long-term goals. A strategic and multifaceted approach is crucial for effective and ethical implementation. This includes establishing a fair and transparent compensation structure, optimizing board composition and operations to maximize effectiveness, proactively managing public perception, and diligently adhering to all legal and regulatory requirements.
By thoughtfully addressing these critical areas, nonprofits can harness the potential benefits of board compensation while mitigating potential risks and safeguarding their organization's integrity.
Compensation Structure & Board Composition:
Tiered Compensation Model: Design a compensation structure based on objective criteria like revenue tiers, budget size, or organizational complexity within each sector. This ensures fair and equitable compensation while aligning with the organization's capacity.
Strategic Board Composition: Define clear criteria for board size and composition, considering affordability, expertise needs, and sector-specific requirements. Prioritize diversity to leverage a wide range of perspectives and skills.
Term Limits and Attendance: Mandate term limits as a prerequisite for compensation to encourage fresh perspectives and prevent stagnation and conflicts of interest. Establish a strict attendance policy to ensure active engagement and fulfillment of fiduciary duties.
Board Operations and Talent Optimization:
Elevated Expectations: Clearly communicate the increased expectations and time commitment associated with compensated board service. Ensure board members understand the heightened fiduciary responsibilities and are prepared to dedicate the necessary time and effort.
Talent Acquisition and Utilization: Leverage compensation to attract and retain high-caliber individuals with specialized expertise. Develop strategies to effectively utilize their skills and knowledge to drive strategic decision-making and organizational growth.
Optics and Public Perception:
Fundraising Considerations: Carefully evaluate the potential impact of board compensation on fundraising efforts, particularly for organizations heavily reliant on philanthropic giving. Develop transparent communication strategies to address donor concerns and highlight the value board members bring.
Sensitivity to Socioeconomic Factors: Exercise caution when considering compensation for boards serving vulnerable populations or operating in sectors with low to moderate income levels. Explore alternative forms of recognition and support to avoid perceptions of inequity or conflict of interest.
Legal and Regulatory Compliance:
Conflict of Interest Mitigation: Secure an outside consultant to determine what is fair and reasonable compensation. This will avoid conflict of interest issues and help with legitimacy. Establish robust conflict of interest policies to identify and manage potential conflicts related to vendors, family members, or other stakeholders. Implement strict disclosure requirements and recusal procedures.
Competing Board Service: Develop clear guidelines regarding board service on other for-profit, nonprofit, or competing organizations. Ensure board members understand the potential for the organizations to have conflicting interests and have a clear policy for transparency and determining when recusal is required
Bylaw Amendments: Review and update bylaws as needed to remove any language prohibiting compensation. Clearly articulate the rationale for compensation and the benefits it brings to the organization.
IRS Compliance: Adhere to the federal tax law regarding reasonable compensation for 501(c)(3) and 501(c)(4) organizations. Seek legal counsel to ensure compliance and avoid potential penalties or loss of tax-exempt status.
By carefully considering these factors, nonprofits can make informed decisions about board compensation that align with their mission, values, and resources.