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Compensating board members is on the table

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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).

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

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

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. 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.

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