Board compensation: NPO versus for-profit boards

Board compensation: Pay or no pay?

The business thrust of for-profit ventures and non-profit organizations (NPOs) varies greatly. For-profits actively pursue strategies to enhance shareholder value while NPOs owe their reason-for-being to their members and the community.

While many of the guidelines for establishing governance apply alike to both profit and non-profit ventures, the subject of compensation differs between those who seek to create profit and wealth and those who seek to assist or improve some element of society.

NPO boards are different

NPOs have one thing in common: their members and directors cannot make a financial gain from their investment of time and money. This includes social enterprises that are basically NPOs that generate surpluses for their good works, not profits.

The Globe and Mail’s “Report on Business” (August 12, 2009) commented that Canada has 84,771 registered charities that together reported donations of $10 billion for the previous twelve-month period for which statistics were available. It also reported that “charities are more market-driven than they appear. They got more of their revenue from the sale of things ($11.5 billion), for example, than they did from straightforward donations.”

One might think there is much to be said regarding the advantages of paying compensation at the board level of a venture. Offering compensation could make it easier to attract the most qualified individuals to an NPO board whose time has value.

Compensation should make it easier to hold board members accountable for their actions. But does it? Plenty of evidence across our society demonstrates that busy people with huge job loads or responsibilities find time to serve voluntarily when they buy into the vision, mission and values of an NPO.

The bottom line, simply stated, is it is illegal to pay compensation to an NPO board of directors in Canada. A 2006 study of the voluntary sector of Canada includes statistics showing that when asked about revenue allocated to governance expenditures, 90% of respondents reported an allocation of between 0% and 2% of revenue. Less engaged NPO boards had an even higher percentage who reported no allocation for governance expenditures for fees or expenses.

Compensating for-profit board members

Regarding for-profit businesses, consider the following guidelines when setting up your first board:

• Use the structure of a voluntary advisory committee as the first form of governance
• Ensure you include qualified, independent people along with the key executive
• As the for-profit expands and requires a better form of oversight, shift to a formal board
• Begin with a minimum of three, but preferably five, directors for the board
• If management or other insiders are included, balance their presence with the right mix of independents
• Meet monthly to establish the rhythm of governance, shifting to quarterly meetings when the board and management are comfortable with their working relationships. Move family members to a family council that also meets regularly, reporting to the board
• For board members who are non-management, set up a board compensation policy along the lines of “equal pay for equal work.”
• Advisor compensation should be a reasonable balance of the value of an advisor’s time and what an early-stage venture can afford to pay

For example, if at the start the president earns $80,000 per year, his or her daily pay over a 250-day year would work out to $320.00. Assume that board members meet four times per year and are expected to spend one day getting prepared for each meeting, and one day off and on between meetings dealing with company business. These 12 days at $320.00/day would work out to $3,840.00 or an annual stipend of $4,000.00

• If the president earns a raise or a bonus, consider increasing the board members’ compensation by the same relative amount
• Consider granting stock to board directors if the existing stock plan in your for-profit allows for it. Bear in mind that family companies may have a problem with this as it would break down the family unit as a single owner. But if the right friends are willing to help the owner-operator, you may wish to include them in the proceeds of growth and financial success

Complexities of board compensation in for-profit boards

The matter of board compensation grows more complex as management becomes stockholders and grants or options are created. Regardless of the nature of the venture, boards should have a compensation committee made up of independent directors to review these matters and to make recommendations to the board.

References

Reynolds, N. (2009, August 12). Charity industry gets some needed scrutiny.
The Globe and Mail, “Report on Business”. Retrieved September 21, 2009 from v1.theglobeandmail.com/servlet/story/LAC.20090812.RREYNOLDS12ART1936/TPStory/TPBusiness/