Can private foundations pay board directors?

Compensating private foundation board directors is perfectly legal and allowable as long as certain guidelines are followed. Approximately 25% of foundations pay compensation to directors, with the likelihood of director pay increasing with the endowment size. Paying directors is very common for the largest of foundations while it is quite rare for small foundations. Private foundations are allowed to pay compensation to independent directors as well as to directors who are members of the founder's family.

So, foundations are allowed to pay compensation to directors, but should foundations pay compensation? There is no one size fits all answer. There are some public voices who argue that directors should not be paid because their time should be viewed as a kind of volunteer work. Afterall, if you volunteer your time with a local charity, you do not get paid. Although this is a reasonable assertion, if board membership is restricted to only those who can afford to volunteer their time, then only the financially well off can commit a substantial amount of effort. 

Volunteer boards of directors are known to spend less time providing oversight in comparison with paid directors. Effective grant-making takes time. Even a small amount of compensation can elicit a disproportionate amount of additional effort from directors. When directors spend a substantial amount of time on foundation business, conduct themselves professionally, and the foundation has more complicated operations, it is much easier to argue that compensation for directors is justified. If, however, the directors only spend a de minimis amount of time or the payments would put the foundation’s endowment in danger of depletion, then director compensation shifts toward the improper. Ultimately the board of directors themselves will need to resolve any ethical questions they may have regarding compensation–it is sensible for some foundations while for others it is not. 

The most common form of compensation is a base retainer for carrying out director duties. Sometimes foundations pay an additional amount per meeting or for participating in certain committees such as the investment committee. For many foundations without employees, the directors are essentially doing the work of professional staff, so the compensation they receive is akin to a salary. Regardless of the form of compensation, it is important to remember that private foundations are subject to a great deal of public scrutiny. Private foundations file their annual tax return on Form 990-PF, which is considered a public document and can easily be found online. Form 990-PF contains a great deal of accounting information including compensation details of directors, so foundations cannot legally disguise director compensation. 

It is very important for director compensation to be reasonable considering all the facts and circumstances. The largest foundations oftentimes hire a compensation consultant to ensure that any compensation is justifiable and fair. It is common for these foundations refresh these compensation reviews every few years to make sure everything is up-to-date. Although quite rare, there have been cases where directors have received excessive compensation for doing little to no work. Paying excessive compensation is unethical and can result in severe financial penalties and even the revocation of the foundation’s 501(c)(3) status.

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