Can You Pay Nonprofit Board Members?
One question I hear regularly is: Can nonprofit board members get paid?
Our society has a lot of confusion about what makes an organization a “nonprofit.” Some people are confused about how a nonprofit can compensate anyone.
They assume everyone is a volunteer. Those working in the nonprofit sector know that it’s nearly impossible to run any organization long-term without paid staff (though it is possible). To get great talent and entice people to give their all to a nonprofit organization, compensation is standard.
But what about paying board members? Is that legal? Is it common? Is it dangerous? Is it unethical? There is no clear answer, but we will disentangle the issue while keeping it practical for most readers.
*Disclaimer: I am not an attorney. Do not take this column as legal advice. Every state is different, and there may be laws and legal rulings in some states that make this issue more complicated locally.
What Makes a Nonprofit Different From a For-Profit Entity?
First, we must understand what a nonprofit is in order to know if board members can be paid.
Not-for-profit (nonprofit) corporations are legal corporations that must be incorporated (created) in a state. An entity can incorporate as a not-for-profit corporation which gives it special powers and limitations.
After an organization incorporates at the state level, it must request tax exemption and nonprofit status from the IRS. If this tax status is granted, then the organization becomes an approved nonprofit exempt from income taxes at the federal level and possibly exempt from some state taxes.
Surprisingly, the main thing separating a for-profit corporation from a not-for-profit corporation is that the revenue to a nonprofit must not be distributed to shareholders. The entity is designed to work in the public interest and the public good, not for private or personal gain.
“The board, funders, and other stakeholders of a nonprofit should not be paid directly based on revenue. This is in stark contrast to the way for-profit shareholders and investors are paid. ”
But this does not mean that compensating board members for some things is illegal.
There is no federal law saying that you cannot offer some form of compensation to nonprofit boards. IRS rules state that compensation must be “reasonable.” State laws are a different matter, and anyone interested in this topic should check your state law.
Paying Nonprofit Staff Members
Nonprofit organizations have a mission to accomplish and, therefore, must do all they can to achieve that mission. Nonprofits do not draw “investors” who hope to make a return on investment. Instead, they draw donors willing to donate to a good cause. People donate their time and money to have an impact, not to get rich.
Nonprofits rely heavily on volunteers to achieve their mission. But if an organization is successful in fundraising, they can pay independent contractors or staff to help them achieve their goals.
Paid staff have different incentives and are more reliable and more likely to complete the tasks given to them than volunteers. Many of us would not want volunteers doing a lot of the needed work in nonprofits because the volunteers may not be qualified.
A key thing to remember here is that nonprofit staff are not paid more simply because the organization brings in more money. Sure, compensation may increase for staff based on performance, inflation, and budget size, but staff are not paid more because of revenue alone.
This is one of the key reasons it is taboo and widely considered unethical (though not illegal) to pay fundraisers based on performance. It could cause a conflict of interest if fundraisers were paid this way, and they could possibly earn more than the executive director, which most people think is not a nonprofit best practice.
This is where it gets murky because fundraisers may get “bonuses” based on performance, but salary is not determined based on revenue. To add more murk…some people believe campaigns are different. If you have a high-stakes “campaign” to raise a lot of money quickly, the best way, some feel, to achieve the goal is to compensate fundraisers based on performance. This approach is highly controversial – and not recommended – but still happens.
Can Nonprofit Board Members Be Paid?
While paying nonprofit staff is standard, the compensation of board members is a much more fraught question. I am aware of no law that bans it or any court decision limiting compensation.
There are two main types of 501(c)(3) nonprofits in the United States: 1) public charities that need money (most nonprofits), and 2) private foundations that must give away money.
It is widely accepted to compensate board members of private foundations. A casual look at the 990 information returns for private foundations will see that board members may be compensated. As an example, make-believe billionaire Steve S can start a foundation and put $1 billion of his money into it to receive a tax deduction and then put his family on the board and compensate them for their board service.
Unlike private foundations, the vast majority of public charities rely on volunteer board members.
There is much debate about whether this model works. Peer pressure, industry norms, fear of backlash, and fear of liability keep nonprofit public charities from paying board members. In fact, most of the nonprofit sector expects board members of public charities to raise money.
“Since board members are expected to raise money, if they are then paid money it looks like self-interest, which is illegal. Nonprofits are not allowed to “self-deal” and are supposed to avoid conflicts of interest. ”
That said, there is an argument to be made that “compensation” does not need to be generous or even a salary. Compensation could be nominal and flat, and certainly not based on revenue. Organization X could decide that all board members are paid $50 a year regardless of their income as an expression of gratitude and to reinforce that their behavior is subject to certain rules to “earn” that nominal compensation.
There is certainly nothing federally prohibiting board members from being reimbursed for reasonable expenses like mileage, travel, airfare, time during board meetings, or conference costs. States may have more restrictions though.
Corporate vs Nonprofit Boards: Paying Board Members
Corporate boards are very different than nonprofit boards. Nearly anyone serving on a for-profit corporate board is doing so not just to enhance their reputation and resume, but also to enhance their revenue. These positions are most certainly compensated because there is not a conflict of interest with the public interest.
Why You Should Not Pay Nonprofit Board Members
At the end of the day, while it may be legal on the federal level, compensating nonprofit board members is really bad public relations.
It is very difficult to explain to donors why their funds are being used to compensate people for a role that is normally reserved for volunteers.
I am certain some organizations have found a compelling case to compensate board members with nominal amounts to demonstrate respect and justice, or because there would be no board at all without compensation. For example, a small nonprofit made up of refugee immigrants in the US who have fled a natural disaster or war. Let’s say they have no money whatsoever but must organize to find aid. Would anyone blame them for offering modest compensation to do the larger work of raising millions in aid? See…its complicated.
Above all, an organization should avoid self-dealing and conflicts of interest. By being compensated, it makes it hard for a board member to be unimpeachable in their behavior or motives. You don’t want wealthy donors paying board members to make decisions that aren’t in the public interest but instead are in the private interest. It could irreparably damage the nonprofit's reputation to offer even a little bit of financial compensation.
Conclusion: Avoid Paying Nonprofit Board Members
Nonprofit corporations differ from for-profit corporations because they are motivated by impact, not profit. The revenue raised by nonprofits is not distributed to shareholders. It is put back into mission attainment, which may include paying staff.
Although it is not illegal under US law to compensate nonprofit board members, some states may regulate this and it is widely considered taboo and unethical.
Nonprofit organizations hold a special place in the conscience of most Americans. To maintain positive public sentiment and enthusiastic public engagement, we should not tarnish the sector with conflicts of interest. Public sentiment for our venerated institutions like the presidency, Congress, the Supreme Court, the media, and corporations is at an all-time low. Nonprofits, on the other hand, are held in high regard.
If you are a nonprofit looking to build a high-performing board, check out my course on how to build a rockstar board or get started with the free tools on my site. For more on the topic of nonprofit board compensation go here.
