Three-quarters of grantmakers do not compensate board members, according to a 2007 national Council on Foundations (COF) survey. Board compensation is most common for independent foundations, of which 60 percent provide compensation to some or all board members, compared to 28 percent of family foundations, 12 percent of public foundations and just 1 percent of community foundations.
Board compensation is more common for larger organizations, especially for family and independent foundations. Ninety-two percent of independent foundations with assets of $500 million or more compensate some or all board members, compared to 43 percent of those with assets under $5 million, according to the COF survey. Half of family foundations with assets of $500 million or more provide some board compensation, compared to 16 percent of those with assets under $10 million.
Federal self-dealing rules allow a private foundation to pay its board members reasonable compensation for their personal service on the board. For community and other public foundations, there is a similar requirement for reasonable compensation under the intermediate sanctions regulations.
Board compensation must not be excessive, and should be evaluated for reasonableness based on the functions or services required and actually performed by board members; the level of skill and experience necessary for board members to fulfill their duties; and the amount of time spent by board members in fulfilling their duties. The payment of excessive or unreasonable compensation can result in IRS-imposed excise taxes against a foundation's participating board members.
Federal law requires that all board compensation be reported on the IRS form 990 or 990-PF. Foundations should also note that payment of compensation to board members may cause them to lose immunity from liability under Minnesota and federal volunteer protection statutes.
Current law leaves open to interpretation what is considered reasonable compensation for a foundation's board members. A foundation may want to use the rebuttable presumption procedure described in the excess benefit transaction rules when setting board compensation. Although doing this will not give a private foundation the benefit of a rebuttable presumption, it will provide good evidence that the board took appropriate steps to ensure the compensation is reasonable (see Excess Benefit Transactions).
Of those grantmakers that provide board compensation, 60 percent compensate all their board members and 40 percent compensate just some members, according to the COF survey. For grantmakers that compensate selected board members, the most common people to be compensated are the board chair/president (23 percent), non-family members (20 percent) and staff members who are also board members (20 percent).
Most foundations that compensate their directors use some combination of set fees, including per meeting or annual fees. COF advises against the practice of compensating board members by providing a fee based on a percentage of assets or income, utilized by a few foundations, because that practice provides much greater potential for excessive compensation.
Aside from compensating board members for their service on the board, some grantmakers pay board members for professional services they provide to the organization, such as accounting, investment, legal and public relations. However, the COF survey shows that many grantmakers (59 percent) receive such services from board members on a pro bono basis. If a foundation pays its board members for professional services, this is another situation in which it will be advisable to follow the rebuttable presumption procedures that are applicable to community foundations and other public charities (see Excess Benefit Transactions).
Although most grantmakers do not compensate their board members, a larger number have determined that it is appropriate to reimburse board members for certain expenses. According to the COF survey, more than half of grantmakers (53 percent) reimburse board members for expenses tied to foundation business activities such as site visits, and 40 percent reimburse for expenses incurred to attend board meetings.
Foundations that compensate and/or reimburse board members should consider developing a compensation and reimbursement policy. Although having such a policy does not guarantee that the reasonable compensation requirement is met, a policy will provide clear documentation of how the organization handles such matters, and can help bring clarity to the issue for the board.
As an alternative to board compensation, some grantmakers use one or more of the following options to honor and encourage their board members' service:
Discretionary Grants: Foundations may permit board members to make a small number of discretionary grants to nonprofits of their choice, within stated guidelines, or provide a small discretionary grants budget to each board member. One-fourth of all grantmakers (and nearly half of family foundations) allow discretionary grants for board members, according to a COF survey.
Matching Grants: Some grantmakers make matching grants in recognition of a board member's personal gift to a nonprofit, up to a certain amount each year. Matching grants are more common for larger organizations. A COF survey shows that about half of grantmakers with assets of $500 million or more provide board matching grants, compared to 10 percent of organizations with assets under $5 million.