Board of Directors and Compensation
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.
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.
Corporate Board Compensation Possibilities and Options
- 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.
- Indirect Compensation: Directors of small closely-held corporations are typically not compensated directly with cash, because there is little cash available for this purpose and because they usually are willing to serve without such direct compensation. If a potential board member wants to be compensated directly, this person probably will not make a good board member, because he or she is more interested in the money than the service. For these individuals, their name on your company's board and the pro bono work they are doing may be compensation enough.
- 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.
Why Board Members Should Not Be Directly Compensated
Should you compensate directors directly by paying them? Directors have a fiduciary responsibility, and being compensated interferes with that responsibility. Being compensated could be considered a conflict of interest for directors. At the least, it causes directors to work for the money, not the benefit of the company. Beyond paying for their expenses, there is no requirement that you compensate these individuals. If you do decide to compensate board members - per meeting, for example - prepare a compensation agreement.
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.