Board of Director Compensation: What to Pay, or Not to Pay
In recent decades, it’s a whole new world regarding the responsibilities and compensation of corporate board members. New trends are developing as to how various size companies are paying their boards and how they are breaking down the compensation.
Trends in the nonprofit arena are not seeing nearly as much change; however, nonprofit organizations have other compensation-related matters of which to be aware. Here’s an overview of board compensation in the corporate and nonprofit spaces.
What Are the Trends in Board of Director Compensation?
When you consider that boards of directors are taking on increasing responsibilities, it should be no surprise that director compensation salaries are increasing. A 2015 guest blog post by Steve Pakela and John Sinkular from Pay Governance, LLC, states that the pay for board directors is increasing, but pay increases don’t exceed 5% a year.
A 2015 Director Survey by Steven Hall & Partners showed that general director compensation typically follows revenue size. The report also showed that larger companies paid higher rates of compensation and had larger percentages of equity-based pay, although directors in this demographic were less likely to get stock options or to have their meeting fees paid.
Basil Peters, a merger and acquisitions adviser, further defines company size by noting that midstage, angel-backed companies realize profits in the $10 million to $50 million dollar range, and this is the point where companies start compensating in cash. Peters also states that public companies pay board compensation about 50% higher because of their board members having increased responsibilities due to compliance and regulatory matters.
The Steven Hall & Partners survey also evaluated smaller companies, which were likely to use the opposite approach from larger companies. Smaller companies paid lower levels of compensation, but were more likely to give a larger percentage in the form of cash. Directors of smaller companies were also more likely to get stock options and payment for board and committee meeting attendance.
Variables and Other Considerations for Paid Board of Director Positions
In an article titled “How Much Should I Pay the Directors on My Board?”, board analyst Bernie Tenenbaum notes the variables that affect board of director compensation, including:
- Number of yearly meetings
- Nature of the industry
- Size of the business
- Structure of the business
Since the financial crisis of 2008, companies have been more willing to increase board of director compensation because of requiring directors to be more greatly involved in strategic planning, decision-making, and any real or potential litigation concerns.
Another matter of importance is that Director and Officer (D&O) policies are covering less and less, as they see increased exposure to unmitigated board of director risks.
Paid Board of Director Positions
The talent search for paid board of director positions is becoming more competitive. Companies look for candidates who have a portfolio of skills that are directly related to the industry and the company’s goals. Here are some of the other qualities that help to secure a paid board of director position:
- Good communication skills
- Financial expertise
- Strategic planning aptitude
- Proven track record of excellence
- Professionalism under pressure
What Is the Average Corporate Board of Director Compensation?
Lodestone Global evaluated 331 companies across 33 different industries and 39 countries and published the in 2016. The respondents to this worldwide survey were all CEOs of companies with revenues ranging between $10 million and $1 billion.
The survey showed some interesting results, including the industries that paid the highest board compensation packages. The transportation and logistics industries gave the top board compensation packages.
The survey reported that the average board of director compensation is $25,000 for a retainer. Companies are also paying an average of $2,250 per meeting and $1,000 per telephone conference, for a total annual compensation of about $36,000 per year. Some companies also paid additional amounts for attending committee meetings.
Should Directors of Nonprofit Organizations Get Board Compensation?
The National Council of Nonprofits gives the best answer to the question about board compensation for nonprofit directors, stating that the vast majority of nonprofit boards consist of unpaid volunteers.
The overriding conviction in the nonprofit arena is that board members typically serve on a part-time, voluntary basis and should not benefit personally from their service. While they should not receive any board compensation, neither should nonprofit directors pay expenses above and beyond their personal donations.
Nonprofit board directors should not be asked to cover any debts for the organization and should not suffer personally or financially for their services. It is customary for nonprofit organizations to reimburse their board directors for organization-related expenses.
Avoiding a Potential Conflict of Interest
Board members of nonprofit organizations who receive compensation from board-related duties can cause problems for the board if the compensation appears to stem from a conflict of interest.
For example, if one of the board members is an attorney and the organization continually refers clients to the attorney board member, the attorney is essentially profiting from his or her service to the board. Thus, the attorney/client relationship constitutes a conflict of interest. The solution is either for the organization to discontinue referring clients to the attorney or for the attorney to step down from the board.
Nonprofit boards should add a conflict of interest policy to their bylaws that identifies who needs to disclose a potential conflict of interest and should prohibit board members from voting on any matter where there is a potential conflict.
Nonprofit Board Director Reimbursement and Tax Considerations
Nonprofit board directors may deduct mileage expenses for trips to meetings and other organizational events on their tax returns.
Board members who receive more than $600 per year should receive an IRS 1099 form from the nonprofit organization and should file it along with their annual tax returns.
Nonprofit Director Compensation: One Exception
There is one exception where the directors of nonprofits can receive payment without having a conflict of interest. The IRS sets a standard that is called the rebuttable presumption test. To meet this standard, the organization must satisfy three requirements:
- The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest concerning the transaction.
- Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability.
- The authorized body adequately and in a timely manner documented the basis for its determination concurrently with making that determination.
The Final Wrap-up on Board of Director Compensation
As the dynamics of the financial playing field evolve, it’s important to pay attention to changing trends in board of director compensation packages, including whether all or part of the package gets paid in cash or in equity.
The most revolutionary issue is that board directors are taking on increasing responsibility, which is prompting the move toward increased competitiveness for board seats and higher compensation.
Compensation isn’t as much of an issue with nonprofit board directors, but they should still be conscious of potential conflicts of interests and IRS implications.