CLIENT ADVISORY

equipoSummary: Can foundation trustees be compensated for their service? If they follow legal guidelines, yes. But should they be compensated? The question is a provocative one with conflicting responses, with the more vocal and strongly opinionated side saying no.  If managed properly, reasonable trustee compensation may be warranted and can stand up to public and IRS scrutiny. But if your foundation pays trustee fees or is contemplating doing so, here are some things you should think about. 

Some Background

Under current law, trustees of private foundations may be compensated in three ways: for professional services (accounting, legal, investment and banking), for grantmaking (by serving as the equivalent of a staff program officer or executive director) and for “routine” service. The last is usually equated to token reimbursement for board service, often on an annualized or per-meeting basis. If trustees stay within these categories of service and avoid self-dealing, reasonable compensation is allowed. (Self-dealing for private foundations is a topic unto itself, including a variety of illegal transactions between a private foundation and its managers, directors or family members.)

Approximately one-quarter of U.S. foundations compensate their trustees in one form or another. Compensation amounts vary greatly and are influenced to some degree by the size and type of the foundation and the nature of board service for which compensation is granted.

Arguments Against Compensation:

Arguments against trustee compensation usually follow one of three positions: ethical (trustees should not be paid for charitable work), reformist (abuses should be rectified), or good governance (the line between board and staff or service providers must be preserved).

The ethical argument maintains that since public charities rarely compensate board members, there is no reason for private foundations to do so. Private foundations, like public charities, are classified by the IRS as 501(c)(3) charitable organizations. The ethical approach has been advocated by reputable associations including the Independent Sector and the National Committee for Responsive Philanthropy.

The reform-minded argument stems from isolated cases of trustee abuse, where board members have received wildly exaggerated compensation, or when routine or nonexistent service is compensated at levels that are anything but routine. Although the law requires that trustee compensation be fair and reasonable, exposure and enforcement continue to be the exception to the rule.

These two arguments occupy the most air time, but the third argument, the question of good governance may carry more weight. The charitable sector functions best when a clear line is drawn between decision-making (usually a board function) and implementation (usually a professional service function). Given that most foundation boards are small and collegial (and many include family), the blurring of this line can compromise judgment and lead to board dysfunction in instances of sub-par performance.

Arguments For Compensation:

Good grantmaking takes time, and time is money. Since most foundations are a) small, and b) operate without professional staff, it is reasonable to rely on trustees to do the work of staff, and for those trustees to be remunerated. Compensation serves as an incentive to do responsible work, and can be necessary to attract busy professionals or valued individuals for whom unpaid service on a board would cause financial hardship.

If a trustee takes on the chief grantmaking responsibility, she or he is really no different from a compensated staff person. In this regard, it is notable that the compensation debate for trustees is rarely placed in the larger context of total staff and board compensation, itself a subset of foundation administrative expense. These total costs, including grantmaking, accounting, investment, and legal, can be excessive in foundations without compensated trustees. Conversely, foundations with paid trustees can serve as models of restraint.

 Some Pointers

As with so much of foundation management, the question of trustee compensation remains a matter of individual choice. For foundations with compensated trustees, here are a few pointers:

Resolve the Ethical Question. Some boards will be comfortable in awarding trustee compensation, others not. As a first step, it is important for trustees to engage in honest discussion and to reach consensus on this point. Once a board has justified its compensation rationale and moves toward a system of compensation, it is important to adhere to the highest ethical standards.

Compensate Fairly. Except for minimal payment for routine service, it is important to set compensation at fair rates. The question of fairness is a tricky one, but at a minimum compensated trustees should account for their time and be able to justify their fee in terms of billable hours. It is also important to keep administrative costs in reasonable proportion to a foundation’s charitable contributions: a foundation that makes only $100,000 in grants will have to justify $100,000 in administrative costs.

Govern Wisely. If trustees are compensated significantly for professional rather than routine services, some method for performance evaluation should be in place. Ideally, a significantly compensated trustee should be subject to the equivalent of an annual review. The process for this review need not be elaborate, but it may require a special mechanism, such as a designated board committee or outside review.

Live Transparently. Trustees should be aware of the climate in which they operate. Compensation of trustees is practiced only among a minority of foundations, and many people in the field feel the practice should be abolished. A board should remember that private foundations are not private: compensation information is readily available to the press and the general public through www.GuideStar.org, which publishes tax returns for all charitable organizations, including private foundations. This transparency is welcome and is a reminder that all grantmaking, no matter how personalized, belongs properly in the public realm.

– Phil Hall

Phil Hall is a managing partner at GMA Foundations