Can a Nonprofit's Board of Directors Also Be Paid Employees?
Forming a solid board is integral to the success of any good nonprofit, as they are responsible for carrying out the mission and vision of the organization. 501(c)(3) board member compensation guidelines are different than they are in the corporate for-profit world. Good stewardship of donations and conflicts of interest muddy the waters of whether or not to pay board members.
Most nonprofit board members are not compensated financially.
Nonprofit boards are responsible for overseeing the mission and vision of the organization and making decisions that are in accordance with them. This includes making key financial decisions and overseeing the performance of the executive director. The board votes on the budget, makes decisions about the programs within the organization and conducts regular performance reviews.
When a nonprofit organization is new, it is fairly common for the founding executive director to serve as interim chair of the board. Most of the time, this is a short-lived transition, and the board seeks to find an outside president since the board is responsible for reviewing the executive director's performance and pay.
It is a conflict of interest when the executive director holds the leading role on the governing body responsible for evaluating her performance. Similar conflicts of interest are at play when it comes to other paid employees sitting on the board. Some boards exclude them from votes that would be a conflict of interest, while others do not invite paid employees to sit on the board at all. Instead, they are welcome to be present with a voice but not a vote.
501 (c)(3) board member compensation is not the same as it is in the corporate world, where board members regularly receive a large stipend or salary for sitting on the board. In the nonprofit world, it is important that donor dollars go to client services as much as possible rather than toward paying board members or other nonessential costs. Donors want to feel like they are making a difference for people rather than paying someone's salary.
Paying board members can also lead to IRS audits and other headaches for the nonprofit. Although most nonprofit board members are not compensated financially, sitting on the board is a bonus for their resume or the company they represent.
Every organization has its own standards and rules for those sitting on the board or applying for a seat. Here are some common 501(c)(3) board of directors rules:
- Not a paid employee
- Committed to the mission and vision
- Willing to volunteer a certain number of hours per month
- Giving or getting a certain amount in annual donations
- Being present at all or most board meetings
- Being present at appropriate committee meetings
- Maintaining good character in personal and professional life
In addition, particular roles on the board like the chair, vice chair and treasurer will have position-specific responsibilities and rules to consider.
Things can get sticky with a board member becoming an employee, and it is vital to have a policy in place before this situation arises. Many boards have a pool of candidates with whom they are building relationships for when a seat on the board becomes available. When a board member becomes an employee, he may step down, and new candidates may be interviewed. There might also be an allowed transition period before the board member hands off the baton.
Many 501(c)(3) board of directors rules state that family members are excluded from voting roles on the board of directors. The executive director's family could be biased when it comes to voting on her salary or performance. When included as voting members, they are likely to be excluded from voting on issues that present a conflict of interest.