What to Know About a Corporate Board of Directors and Compensation

Do Board Members Get Paid? Yes, But Usually Not Directly

Business meeting
••• Johner Images / Getty Images

As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. The people you will ask to serve on your company's board of directors are busy people, with their own businesses. They have limited time and will be serving as a favor to you, to help you get your business started. As a result, you should know a few things about a board of directors and what kind of compensation is expected.

What a Board of Directors Does

The board of directors of a corporation oversees the major policy decisions, hires corporate executives, and has specific legal duties regarding the corporation. Board members also may have some liability for the corporate-level decisions they make 

Because corporate board members are putting their expertise to work for your business and are making decisions at a high level, it seems only reasonable to compensate them for their time. Outside board members (those who are not also executives of the company) are typically compensated, but the level and type of compensation depend on the size and type of corporation.

Non-Profit Boards and Compensation

The situation for compensation is different for non-profits than in for-profit corporations, for a couple of reasons:

Tax Reports. Tax-exempt non-profits don't have to file and pay federal income taxes, but they do need to file an information return called Form 990. The organization must include information about compensation for bard members, officers, trustees, and the "highest compensated employees." Compensating non-profit board members, beyond reimbursing expenses, could leave an organization under scrutiny by the IRS, in part because it can bring up questions of conflict of interest. 

Volunteer Laws. Federal and state volunteer protection laws limit the liability of volunteers. In particular, the 1997 federal Volunteer Protection Act (VPA) protects nonprofit volunteers from harm caused by their "acts or omissions on behalf of the organization or entity." But it excludes compensated volunteers from this protection, including paid board members.

Information on executive and board member compensation on Form 990 is reported to the public. Anyone can find these documents from the web, the organization, or the IRS. 

Corporate Board Compensation Possibilities and Options

There are a few different options for compensating corporate board members:

Travel reimbursement. Almost every company compensates its board members for travel expenses to attend board meetings and retreats. If your board is local, you may not have to spend much for travel, but if you have directors coming from another city, you should at minimum compensate them for mileage or airfare, lodging, and per diem for incidentals. Some companies use board meeting locations as a way to reward their board members. For example, a board meeting on a cruise or at an exotic location makes the drudgery of board meetings a little more palatable. 

Stock options. If your corporation is publicly traded, you may want to offer stock options to your directors. An agreement should be signed before options are granted, so it is clear when these options will be vested, what happens if the director leaves, and under what circumstances the stock options may be exercised.

Officers and directors liability insurance. It's a good idea to purchase liability insurance for board members, especially those with public companies. 

Board Compensation – Pros and Cons

Pros
  • Could encourage diversity

  • Promotes professionalism

  • Stimulates attendance and participation

Cons
  • Diverts money from charitable work

  • Boards have fiduciary responsibility

  • Could lose protective status of VPA

Deducting Compensation for Corporate Board Members

Compensation paid to board members and reimbursement of expenses incurred in travel and hotels and other expenses for board members to attend meetings is a legitimate business expense and should be tax deductible. 

Be sure to keep good records and separate out personal expenses of board members. For example, if members are traveling with spouses, the spouse expenses are not business expenses and won't be deductible.

Article Sources

  1. IRS. "Form 990 Part VII – Reporting Executive Compensation – Officials included." Accessed Oct. 12, 2020.

  2. American Society of Association Executives. "Should Board Members of Nonprofit Organizations Be Compensated?" Accessed Oct. 12, 2020.

  3. Association of State and Territorial Health Officials. "Volunteer Protection Acts and Good Samaritan Laws." Accessed Oct. 12, 2020.

  4. GuideStar. "What You Need to Know about Nonprofit Executive Compensation." Accessed Oct. 12, 2020.

  5. IRS. "Corporate Executive Compliance." Accessed Oct. 12, 2020.