How to Reward Deserving Directors

Most boards do not have the resources to pay their directors as much as the reported fees of major listed companies. They are not ‘distracted’ from governing their business by the demands of proxy advisors or activist shareholders; they are busy trying to grow the business and safeguard its future. But...

They still want to reward directors for their time, care, and effort.

Often directors on these boards put in more hours than those of the large listed sector that dominate the financial press and, in the not-for-profit sector, very few directors receive monetary recompense for all their time, effort and skill. Governments often discourage payments to directors when approving grants or contracts to not-for-profit organisations, even as they insist on good governance practise and an informed, educated and involved board.

When things go wrong directors can find their board work explodes to almost the equivalent of a full-time job. The personal risks and potential liabilities also increase.

What can you do?

So, what can a not-for-profit board do to recognise and reward these outstanding individuals for their contribution?

There are a range of possible responses, each of which requires careful thought to tailor to your organisation’s precise circumstances and those of the director(s) you wish to reward. The responses include:

·     Payment of director fees

·     Payment of committee fees

·     Consulting or contracting arrangements

·     Non-monetary compensation

Before you start

It is important, before embarking on any reward strategy to understand the governance and contractual arrangements of your organisation. Read the Constitution or Articles of Incorporation, then read the By-laws and any relevant policies. These documents set out how the organisation is intended to operate and the rights and duties of members (or shareholders), directors, and other stakeholders.

Read the Constitution or Articles of Incorporation

Company Constitutional Limitations

Many non-profit company constitutions will have a clause prohibiting payment of directors. It might be worded like this “The Company may not pay, transfer or apply, directly or indirectly, any portion of the income and property of the Company, by way of dividend, bonus or otherwise howsoever by way of profit, to or for the benefit of a Director”. Or it might simply state “The directors are unremunerated”.

In the government sector there may well be a clause in the enabling legislation that sets out the quantum of payment by reference to an external scale or determining authority. Many government boards simply state that directors are unremunerated volunteers.

Commercial companies often operate with a total sum approved by the shareholders for payment of board costs and this sum is then shared among the directors and chairman (usually with sufficient left over for the board to be able to make an additional appointment if needed without having to call an EGM and get approval for the expense). Once this sum is reached the board cannot spend any more on themselves.

Contractual Limitations

If your company has government contracts or grants these must also be checked to ensure that they do not contain any provisions that would prevent the company from remunerating directors.

government contracts or grants could prevent the company from remunerating directors

You may also find limitations imposed through membership of associations, compliance with guides and standards, or other external instruments. Breaching these rules can result in expulsion and that may be something a board would wish to avoid. Knowing what registers, groups or associations your organisation is a member of is not always easy. Good boards will keep a register of compliance requirements; many others will only discover them after they have been breached.

Reasons for and against

Before making a decision on something as important as board remuneration it is worth listing the reasons for and against and being sure that these reasons are valid and persuasive when considered on their own.

Subjective decisions can be hard to defend.

If you find yourself thinking about individuals and their deservingness of remuneration and other benefits, rather than the organisation and its need to pay to get the right directors then your decision is likely to be subjective. Subjective decisions can be hard to defend.

Reasons to remunerate:

·     The company needs directors with certain skills that are not obtainable ‘pro bono’

·     Remunerated directors are sometimes considered to be more ‘responsible’ and likely to put in the work when it is needed rather than when it is convenient (beware that this argument will infuriate some directors)

·     Payment of a directors’ fee to the directors’ employer will encourage them to make time available for their employee to attend board meetings

·     Payment of a fee might encourage others to view the organisation as a professional or businesslike enterprise and to deal with it in a rational rather than emotional manner.

Reasons not to remunerate:

·     Members will not want to see the organisations’ funds diverted from its mission

·     Donors and alliance partners may not feel so inclined to support the organisation if they know the directors are getting paid

·     Receipt of fees may be the prime motivation for board service rather than supporting or advancing the organisation’s purpose

·     There may simply not be enough money available to pay.

Courses of action

Once you have reviewed the pros and cons given your organisation and its stakeholders you will be able to select and implement a course of action to reward your deserving directors.

review the pros and cons

Remuneration of directors

It is not generally necessary for a not-for-profit board to be unpaid, and even charities can pay board members if the organisation genuinely believes that payment is necessary to support or advance the organisation’s purpose.

Charities can pay board members

This is (part of) what the Australian Not-for-Profit and Charities Commission (ACNC) has to say about the issue “Charities registered with the ACNC must remain not-for-profit and, as such, cannot offer private benefit to people involved in the charity. As long as payments to board members are in furtherance of the charity’s charitable purpose, permissible under the charity’s rules, and properly authorised within the charity, the ACNC does not prohibit them.”

If your organisation does not permit payment of directors, you will need to change the constitution (usually by vote at the AGM or an EGM) to allow this before starting to remunerate. Many members of charitable or for-purpose organisations will not support director payments. A well thought out and resourced campaign of member engagement may be required before such a vote can safely be put to a meeting with a high chance of success.

Payment of committee fees

This is a ‘cheeky’ evasion of the rules. Rather than paying board members for their director services, they can be placed on committees and paid for their committee service. Because these are related party transactions they should still be disclosed to the members and may lead to some fierce questioning at the next AGM but they will not lead to a vote and may allow the board to remunerate the individuals who are doing the most work rather than everyone on the board.

Related party transactions should be disclosed to the members and may lead to fierce questioning at the AGM

Some boards, especially in the government sector, involve non-directors on their committees and pay these individuals (for example an accounting professional who sits on an audit committee but is not on the board). It is then easier to make a case to pay the directors who sit on that committee a fee for their committee service.

Consulting or contracting arrangements

This is the most common form of ‘non-remuneration payment’. When a director undertakes work that is above and beyond the role of a non-executive director they can invoice for their services as either a consultant or contractor. This is a related party transaction and should be disclosed in the accounts. If the invoiced costs seem reasonable in comparison to the tasks undertaken then the members – and other stakeholders such as major donors of grant providers – should accept that this was a necessary course.

On many occasions it is simply more convenient to use a director who is aware of the nuances of an issue rather than to bring in an outside consultant who will take time to get up to speed on an issue.

A great advantage of fee for service is that it is a temporary response to a set of circumstances; when the circumstances change and the work is discontinued, so are the payments. This is far more flexible than remuneration arrangements which, once started, may become considered as an inalienable right by the directors.

Non-monetary compensation

Not every director is on a board to gain monetary rewards. This is especially true in the not-for-profit sector where directors get immense satisfaction from supporting and advancing the purpose. For an organisation that wants to reward certain (or all) directors there are ample opportunities to offer non-monetary compensation.

The most impactful reward of all is a simple ‘Thank you’. It is amazing how much difference these two words can make to the way in which board service is perceived and enjoyed. 

The most impactful reward of all is a simple ‘Thank you’

Other rewards that can be given include:

·     Education – about the director role, about a business issue of interest and value, or about the mission of the organisation – is often valued very highly as a motivator. Directors are not at the end of their working lives; they will appreciate skill accretion as it will help them to add value both on this board and elsewhere. Formal and informal courses, conferences, webinars and even books are all good ways to show how much you appreciate the service and wish to invest in the director. You can send individuals to education events or bring a presenter to provide education in your own boardroom.

·     Travel & entertainment – this does not need to be exorbitant or outside of the sphere of activity of the organisation. If your organisation provides affordable housing the directors will probably value a chance to visit some recent developments (yours and the competition’s) and learn more through on the ground activity. Visits to other boards for a shared lunch and discussion of an area of interest (cyber security for small NFPs?) can be highly motivating and immediately useful.

·     Acknowledgement – a mention in the annual report, a wine glass engraved with the director’s name and presented at a meaningful event, being invited to an event that the director would not be able to attend as an individual, all can be inspiring and motivating.

·     More work – strangely enough many directors love what they do and their biggest and most valued reward is doing more of it. Being recommended to another board or to a committee that is relevant to their area of expertise will often be valued more any thing. It is important to remember that if directors joined an unremunerated board they did so out of personal interest. Allowing them to give back to their community in a bigger and more meaningful way is often the most highly valued reward of all.

What is your experience?

I am always interested to hear what my peers think. What have you tried, what has worked, what has been more trouble than it was worth? Please comment below, share this article and connect to me on LinkedIn. I would love to hear from you.

About the author:

Julie Garland-McLellan is a company director and board adviser. She is also a public speaker and professional conference MC in demand for courses, seminars and conferences, combining personal anecdotes, humour, world-class expertise and extensive experience as a director to engage, stimulate and educate.

As the author of many books and training materials for company directors, Julie is an acknowledged expert on resolving a wide range of complex governance issues. Her newsletter 'The Director's Dilemma' reaches readers in 33 countries. Get your copy free at https://www.directorsdilemma.com/

 Photo Credits:

Stock photos in this paper are provided courtesy of Shutterstock.com

Author Photo ? Julie Garland-McLellan