If your organization struggles each time it needs to fill a board vacancy and does not always come up with the candidates it desires, it may be time to consider creating a board compensation program.

Add Up the Pluses and Minuses

There are advantages to a board compensation program. Offering compensation could help attract board members with specialized expertise, such as fundraising or a well-regarded community presence. Compensation also might be a good idea if your board members are expected to invest significant time and effort, or if your not-for-profit has a business model that competes with for-profit organizations, such as a not-for-profit hospital. In addition, providing compensation can help create an obligation to perform on the board member's part and promote professionalism, such as board meeting attendance and accountability.

However, there are also some disadvantages to compensating board members. Likely, the most important disadvantage is that is perceived negatively by the public — it can look bad. Donors expect their funds to go to program services and board compensation represents resources diverted from the organization's mission. There are also IRS and legal implications. The IRS looks carefully at whether any arrangement could create a conflict of interest. Additionally, board members receiving compensation of more than $10,000 are not independent members of the board by the IRS definition. Also, in some states, volunteer board members are protected from legal liability, while compensated members may not be. So, you will need to check on your state's laws.

If you decide to compensate board members, do it carefully. First and foremost, the compensation arrangements must comply with the Internal Revenue Code's private inurement and excess benefit regulations, as well as the IRS rules about "reasonable compensation." It should be set by independent directors who are not among those to be compensated, an independent governance or compensation committee with insight from an independent consultant. The amount should be comparable to that paid by similar not-for-profits, as determined by compensation surveys or other data. The consideration, evaluation and formal vote should be formally documented. The policy also should address expectations for the board members in exchange for their compensation. Expectations can be described, for instance, in terms of number of meetings attended, hours worked or qualifications and experience.

Leave No Loose Ends

Making a shift to a board compensation program is a major change. Your preparation also should include checking to see how other not-for-profits with compensation programs handled communicating the change to the public, which can help you develop your own communication plan. Be sure to seek advice from an attorney who is familiar with laws governing not-for-profits in your state. Finally, you may want to solicit feedback from supporters and donors before making a final decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.