While some organizations struggle with decisions about eligible items and maximum reimbursements for actual expenses, those that compensate for board service have a more complex task.
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Compensating board members is on the table
1. 6
Legal precedent allows for board compensation
A Grant Thornton LLP client determined it was critical to pay
its board for a number of reasons:
• Despite its not-for-profit status, the organization operated
a business model that replicated those used by for-profit
organizations.
• There was a critical need to attract top fiduciary talent
to provide leadership for sustaining the organization,
particularly in light of organizational risks.
• Due to the complexity of the organization and increased
regulatory requirements, the amount of work required of
the fiduciaries was significant.
The state attorney general recognized the complex situation
and supported compensation after determining it was not
unreasonable when compared to the market.
In general, compensation to not-for-profit boards must be:
• Reasonable and necessary to support the organization’s
performance in its tax-exempt mission
• Supported by detailed documentation of the amount and
basis of the compensation, including each board member’s
responsibilities and skill sets
• Clearly for board services only and not for tasks usually
performed by staff
• Aligned with market practices and ranges for similar
responsibilities and qualifications in comparable organizations
Ken Cameron, Director, Not-for-Profit and Higher Education Practices
It’s a little-known fact that some not-for-profit board members
are being compensated beyond expense reimbursement. There
are many reasons for this. Nonprofits may do it to attract
and retain unique skill sets, compete with public or private
companies for board talent in some markets, or to be fair about
extraordinary time and effort expectations or exposure to high-
risk levels.
Historically, only a small percentage of not-for-profit
organizations have policies that address board remuneration.
According to The Grant Thornton 2014 Nonprofit
Compensation Survey, only 4% of participating organizations
reported compensating board members. The practice can vary
in prevalence across various types of organizations. Survey
results and our client experience indicate that it’s more common
in private foundations, professional and trade associations, and
educational and cultural institutions.
While some organizations struggle with decisions about eligible
items and maximum reimbursements for actual expenses,
those that compensate for board service have a more complex
task. Compared to their for-profit counterparts, not-for-
profit boards typically receive significantly less compensation.
The process also tends to be simpler (e.g., a flat annual fee as
opposed to retainer and individual meeting fees, or payments
based on role and committee membership).
Compensating board members is on the table
The State of the Not-for-Profit Sector 2015
2. 7
Respect IRS implications
As voting members of a governing board are making
compensation decisions for executives, it is important to
understand that those board members would be considered
disqualified individuals under the intermediate sanctions
regulations of IRS Section 4958 (i.e., a person in a position
to exercise substantial influence over the affairs of the
organization — and therefore, any compensation will be
subject to extra scrutiny).
The IRS provides guidance on best practices for establishing
reasonable total compensation opportunities. For some tax-
exempt entities, failure to adhere to the rules may result in
excise taxes, penalties and possible revocation of tax-exempt
status.
Regardless of the code section under which your organization’s
status is granted — e.g., 501(c)(3), (c)(4) — you need to become
familiar with IRS guidelines for establishing reasonable
compensation for board members in the same way as for
executive leadership. This may beg the question of how
the board meets IRS requirements for determining its own
compensation. A best practice approach would be through a
subcommittee — ideally, the governance committee.
Compensating outside of simple reimbursement for actual
expenses must be reported and disclosed on Form 990. In some
states, there are additional disclosure requirements to either
government funding agencies or the state attorney general’s
office. Therefore, it is prudent for those board members
responsible for making compensation decisions to review
reporting implications through a simulated projection of a
Form 990 disclosure document.
Prioritize independence in the process
Establish independence through a documented decision-making
process, outlining a reasonable and informed approach for
developing the policy of providing board compensation, the
amount or level, and the design (e.g., annual compensation,
meeting attendance fees and expense reimbursements).
Include these elements in documenting the decision-making
process:
• Language in a governance committee or other
subcommittee charter that explicitly authorizes members
to make recommendations to the full board about
providing compensation
• Retention of an independent adviser to gather comparable
market data and prepare a report addressing board
compensation practices and amounts, with the report
going to the governance committee or other subcommittee
(the adviser must be compensated without regard to
results and recommendations)
• Adoption of a comprehensive conflict-of-interest policy to
ensure that members of the governance committee or other
subcommittee will serve independently
Consider appearances and perceptions
As compensation decisions are made, be sensitive to stakeholder
viewpoints. Explain the rationale and process, and invite
feedback. The result will be informed stakeholders and
decision-makers, as well as board and executive leadership,
prepared to respond to inquiries from the media, watchdog
groups, regulators and others.
See The Grant Thornton 2014 Nonprofit Compensation
Survey at grantthornton.com/comp-benefitssvy2014
for more about developing compensation and benefits
practices in the not-for-profit industry.