*The propriety of pay for board members serving tax-exempt organizations is in the news again. While not a new topic (it has been raised at any number of points in past years), the sentiments of some opposed to the practice has intensified. Undoubtedly, the financial turmoil of recent years, the gloomy economy and the predictable appearance of excesses in executive pay, in for-profits and nonprofits alike, have all contributed to this opposition. The outcry from the public has, in at least one recent instance in Massachusetts, prompted pending legislation to prohibit the practice of compensating board members altogether.

This article explores the topic of compensation for board members of nonprofit organizations from a few different perspectives. The intent is to discuss some of the background factors associated with the topic and acquaint readers with some criteria that may be useful for a thoughtful, rather than a reflexive, decision about volunteer versus paid board members.

The general public’s frequent and interchangeable use of the “nonprofit” designation with the “tax-exempt” designation gets things started on the wrong foot. All types of exempt organizations are then thought of as “charitable” and operating under an assumed “vow of poverty” versus being only a description of their tax status. It leads to suspicions about pay for any full-time staff member that makes more than $____ (note: the reader is free to insert the number of their choice here). Still worse, it can produce outrage over board members getting anything more than a nice lunch and reimbursement of parking fees for their service.

Increased disclosure requirements for nonprofit organizations and continued media publicity of compensation levels have also played a part in the current situation. They have contributed to greater public awareness of pay levels, but not necessarily any understanding of the subject. To further complicate matters, media coverage often comes about in adverse circumstances. An organization’s disappointing performance, discovery of a significant irregularity, departure of an executive or some combination of these events often gets the  organization’s board members (and their compensation) in the spotlight.

Public outrage predictably prompts a reflexive reaction from legislators and regulators. Eager to get out in front of the issue with constituents, these individuals quickly demonstrate determination to “do something” about the problem by proposing new laws and regulations that will “fix” it. Like the many constraints imposed on pay in the for-profit sector following the recent financial crisis, the nonprofit sector has experienced similar instances of increased disclosure requirements and regulation (i.e. Intermediate Sanctions, new Form 990, etc.). Massachusetts is now proposing legislation that would prohibit pay for board members in any exempt organization unless the state’s Attorney General can be convinced with “sound justification” of the need for it.

In light of current circumstances, what should a nonprofit organization that pays its board members (or wants to) do? Opponents of the practice point out that a board member should serve out of a sense of community service or the mission of the organization in question. They cite statistics that show only a small percentage of exempt organizations offer board members pay. Some go on to explain that volunteer status ensures the board member’s independence and ability to govern objectively because no pay is at stake. The case for, or against, board member pay in an exempt organization rests squarely on the strength of the business need for it. The fact that a particular organization always has paid board members or never has really falls short of the requirement for deciding the question one way or another. The explanation that “everyone else does it/doesn’t do it” may be slightly more persuasive, but still falls short of a satisfactory answer.

Information from surveys or public filings about the prevalence of pay for nonprofit organization board members shows that only a small percentage of ALL nonprofit organizations do so. However, looking more closely at certain types and sizes of nonprofit organizations reveals the practice is far more prevalent and a growing one. As an example, more than 50% of large independent foundations (and many smaller ones) are offering pay to some or all of their board members. Other types of exempt organizations (i.e., some associations/trade groups, specialized service organizations, etc.) also have some instances of pay for board members.

The organizations offering pay for board members frequently cite several factors as the basis for doing so. At the top of the list in most cases is the need to attract, engage and retain outside expertise that is essential to fulfilling the mission of the organization. The expectations and the exposure for individuals serving on boards have increased significantly in recent years. Organizations committed to complex mission issues, stewarding substantial financial resources and/or having complex structures cannot necessarily expect to obtain the outside expertise they require for board members from volunteers.

For example, a large private foundation may determine it is in the best interest of perpetuating its donor’s bequest to secure significant involvement from a particular type of individual to serve as a board member. An individual with the required experience/expertise may be supportive of the organization’s mission but unable to devote what is required on a strictly volunteer basis. In other instances, nonprofit organizations may have an ample supply of qualified individuals willing to serve on a volunteer basis.

It is interesting to note that these volunteer situations sometimes present their own set of challenges. There are, of course, those individuals who work tirelessly as volunteer board members and others who simply join the board for little more than “yearbook credit.” Sometimes, no-show volunteers seriously impede an organization’s ability to secure the outside  expertise and independent advice it requires.

The answer to the question “Board pay or not?” seems, therefore, to lie in each exempt organization’s commitment to a process that will define or affirm its own basis for the answer to this question. I would suggest the following steps as a way to arrive at the answer:

1. Develop a clear understanding of the specific role of a board member in the organization. This should be as specific as possible in terms of the experience and expertise sought, time commitment required, responsibilities/accountabilities, etc.
2. Evaluate the impact that compensation can/should play in retaining and engaging qualified individuals to fill the specified role.

a. Outside advisors/consultants can provide helpful information on competitive practices – prevalence and levels of pay for board members in similar situations
b. Input from significant stakeholders committed to the organization’s mission

3. Based on steps #1 & #2, develop a formal policy stating the organization’s  policy for a paid or volunteer board and, if board pay is adopted, a detailed description of the process that will be used to govern and administer board pay.
4. Keep the documentation associated with all the preceding steps and contemporaneous minutes of all meetings held to discuss and decide the organization’s position on pay for board members.
5. On a regular basis, every two or three years, review the board pay policy and practices adopted to ensure they continue to be fully supportive of the organization’s needs.

The process outlined above follows the guidelines offered in the IRS Intermediate Sanctions in order to afford an organization the “presumption of reasonableness” available to those that comply with the process. These steps would appear to offer a nonprofit organization a path to determining the right course for it to follow in terms of the board member pay question. The information produced can also be extremely useful in communicating the organization’s board pay policy. It works far better than a board member confronted with a street corner interview or telephone call from a reporter trying to develop a policy on the spot.

In many respects, the Intermediate Sanctions may be all the legislation/regulation needed to address the question of board pay for exempt organizations.

*This article originally appeared in BDO USA, LLP’s “Nonprofit Standard Issue 30 (July 2011)“. Written by Mike Connover, BDO CPA. Copyright © 2011 BDO USA, LLP. All rights reserved. http://www.bdo.com