Compensating Nonprofit Directors – Trend or Taboo?


Practice Areas

Robinson Bradshaw Publication
June 29, 2015

Providing cash and other taxable compensation to directors is one tool for nonprofits to attract and retain experienced leadership. This article addresses high-level legal concerns facing public charities and private foundations as they consider whether and how to compensate their directors. Equally important to the analysis are practical considerations – particularly for operating charities – related to reputational risk associated with the nonprofit’s compensation practices. This article concludes with a brief discussion of these critical practical questions.

Public Charities

Compensating public charity directors is uncommon and, for most organizations, disfavored. When a public charity does choose to compensate its directors, it must do so with the IRS’s intermediate sanctions rules in mind.1 These rules allow the IRS to levy an excise tax equal to 25% of any excess benefit transaction between a tax-exempt organization, including a public charity, and a disqualified person. Directors fall squarely within the definition of “disqualified persons” because they are in a position to exercise substantial influence over the organizations they serve. When compensating directors, then, a public charity must take care not to engage in an excess benefit transaction by providing a compensation package that exceeds the fair market value of the director’s services.2 Because compensation for public charity directors is uncommon, gathering the necessary comparability data to validate that the compensation is fair market can be a challenge. Limited information is available on publicly-disclosed IRS Forms 990 on

Private Foundations

Director compensation is more common for private foundations than public charities. Different rules apply depending on whether foundations reward their directors with either cash compensation or non-cash benefits.

When using a cash compensation method, private foundations must keep the rules against self-dealing in mind, subject to the applicable exception for payment of necessary and reasonable compensation for personal services.3 To be considered “necessary,” the services for which the director is compensated must be consistent with the foundation’s purpose and mission. The relationship between the complexity of the services performed and the compensation paid is also relevant. What is “reasonable,” on the other hand, is a metric based on market information. To ensure that director compensation is reasonable, the foundation should compare its proposed director compensation packages to those of other private foundations of a similar size, in the same geographic location, and with the same or similar mission or purpose. Comparability data for private foundations is much more readily accessible than data for public charities. For example, the Council on Foundations publishes an Annual Salary and Benefits Report that may be used to conduct this inquiry.4 Foundations also may use IRS Forms 990-PF, which also are available on

Private foundations may also want to consider providing directors with non-cash benefits in the form of self-directed grants, which allow directors to direct grants to the nonprofit organizations of their choice. To properly make use of self-directed grants, foundations must remember two important points. First, self-directed grants may not be used to satisfy the legally binding personal pledge of the recipient director or his or her family. For example, if a director has pledged a $50,000 donation to another nonprofit, she cannot use the foundation’s $50,000 self-directed grant to satisfy that pledge – to do so would be a per se violation of the self-dealing prohibition. Second, the independent members of the foundation’s board must still consider and approve the director’s choice of recipient – unless the grant otherwise complies with a board-approved policy or procedure. This approval process should ensures that the board does not inadvertently cause a violation of the self-dealing rules or fail to appropriately discharge its fiduciary duties.


Some commentators note that the benefits of paying compensation extend beyond attracting and retaining top talent. They observe that directors who are compensated are more likely to discharge their duties with diligence and dedication. Paying compensation has many practical risks, however, particularly for operating charities that rely on charitable contributions for survival. Even if compensation paid by your nonprofit complies with applicable legal standards, you must anticipate whether donors, the media and other stakeholders might find amounts paid to be objectionable. Also query whether the nonprofit might be better served by individuals drawn to serve your nonprofit primary to advance its mission, rather than by the possibility of financial gain.

1The intermediate sanctions rules are detailed in I.R.C. § 4958.
2The intermediate sanctions rules also impose a lookback period, so that any individual who was a disqualified person in any of the five years immediately preceding the excess benefit becomes liable for the 25% excise tax imposed on the benefit received.
3I.R.C. § 4941 imposes an excise tax of 10% of each amount involved in every self-dealing transaction between private foundations and disqualified persons during the taxable period.
4While members are able to view the Report free of charge, non-members may access it for a fee.

Main Menu