The question of paying or not paying directors is a perennial nonprofit debate. The reasons cited by each side are discussed in a recent ERI white paper.
The vast majority of members of boards of directors in the nonprofit sector are not paid for their services. Board members typically serve on a part-time, voluntary basis, and many in the sector feel that they should not benefit personally from their service. While board members do fall under the IRS prohibition on “self-dealing,” there is an exception made for “payment of compensation … for personal services,” which includes fees for board members. Payments, however, must be “reasonable and necessary to carry out the exempt purposes” and “not excessive.” So, compensation is permitted – but it cannot be “unreasonable” and “excessive.”
Research Findings on Compensation for Nonprofit Board Members from ERI’s Form 990 Data
ERI has created a database of executive compensation data from IRS Forms 990, the annual reporting legally required from nonprofit organizations, used in ERI’s Nonprofit Comparables Assessor. This software program calculates average competitive compensation levels for the executive jobs reported on the Form 990, finding comparable organizations using the characteristics of revenue size, type of organization, and geographic location, deemed relevant by the IRS when it evaluates whether compensation is reasonable or not.
The ERI database includes almost 223,000 tax-exempt organizations. Observations were taken from each organization’s most recent Form 990 for 2015, supplemented with 2014 data if the 2015 form had not yet been processed. About 76% were charitable organizations, tax-exempt under IRC Section 501(c)(3). This group is the one of most concern, as the IRS regulations dealing with compensation issues contain penalties for excessive payments for charities. Organizations given tax-exempt status under 501(c)(4) add another 4% to the total of organizations covered by the excessive payments rules. Thus, about 80% of tax-exempt organizations should be aware that their compensation levels for board members, as well as executives, have to pass IRS scrutiny.
In summary, the Form 990 data analyzed by ERI reveal these findings:
- Charitable organizations, exempt under IRC Section 501(c)(3), represent 76% of all tax-exempt organizations, and about 2% report paying their board members.
- Some organizations exempt under other IRC subsections are slightly more likely to pay their board members (e.g., labor groups, life and mutual insurance companies, etc.), but the incidence of payment is still low; these organizations are not covered by IRS regulations that provide penalties for excessive compensation.
- The charitable organizations most likely to pay board members are hospitals (5.4%), followed by universities (2.7%).
More details on the findings by type and size of nonprofit are available in the white paper, Nonprofit Board Members – To Pay or Not to Pay in 2018?
If an Organization Does Want to Pay Directors
Based on the ERI’s analysis of compensation for board members reported on the Forms 990, care must be taken to collect data that support compensation for board members and stand up to IRS scrutiny.
The organization’s culture, funds, members, and donor expectations, as well as the image it wishes to portray, will all factor into the decision whether to compensate board members. It is very important to pay careful attention to legal requirements and the details of any payment arrangements. ERI’s Guide to Setting Nonprofit Executive Compensation can also provide guidance to nonprofits setting compensation for executives and board members.
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