Special Section: Board Members

For talent, you've got to pay. When it comes to hiring the best, you'll find little argument about that in the for-profit world—or even in the nonprofit sector for top full-time jobs.

Most nonprofits, however, don't pay their board members. Sitting on the board springs from a sense of voluntarism or charity, a passionate commitment to the institution, or all three. But where do private foundations fit in? They, too, are considered nonprofit, yet most of the 100 largest private foundations in this country pay their trustees. Reimbursement can range from a few hundred dollars to more than $120,000 a year, according to 1998 IRS filings.

Trustee compensation is one of the most sensitive topics in the foundation world. Take, for example, the attitude some funders have toward public disclosure of IRS Form 990-PFs. Compensation of board members must be reported on 990-PFs. Some funders are resistant to making their 990-PFs public, claiming that public disclosure violates the privacy of trustees. (IRS regulations, however, require that funders either provide copies of their three most recent 990-PFs to anyone who requests them in writing or in person, or else make their 990-PFs widely available by posting them on a Web site.)

The questions of whether and how much to compensate trustees of nonprofits stir debate among some philanthropy observers. Anything more than travel and other incidental reimbursement is too much, critics argue, and blots the spirit of charity.

Is It Subversion?
"I think it subverts the whole volunteer process," says Thomas Layton, president of the Wallace Alexander Gerbode Foundation in San Francisco. "To the extent that private foundations pay their trustees, it contributes to a kind of alienation of private foundations from the larger charitable sector."

Trustees, many of whom have well-paying, full-time jobs on the outside, are paid for fulfilling the wishes of the donor, hiring top staff members and in many cases helping direct investment of the endowment. "The larger and more complex the private foundation becomes, the more time that is demanded of trustees, the more likely that directors will be compensated," says Eugene R. Tempel, director of the Center on Philanthropy at Indiana University.

At the W. K. Kellogg Foundation, most board members were compensated in the low $40,000s, and a few more than $50,000 per year, according to 1998 records. Karen Lake, spokesman for the Battle Creek, Michigan, foundation, gives several arguments for paying trustees. "One of the reasons we ought to compensate trustees is, first of all, the frequency of meetings," says Lake. Unlike other foundations, "our board comes together every month here in Battle Creek. We've never failed to have a quorum since 1930 (when the foundation was launched). Additionally, I think it would be fair to say that we seek a very diverse board& including from the for-profit sector. If we want to attract people from that sector at the level and quality we desire, we feel we ought to compensate."

At the Charlotte, North Carolina-based Duke Endowment, the 15 trustees in 1998 were each paid $128,929.70, according to the endowment's documentation filed with the IRS. They do not receive expense accounts or other allowances. There are ten meetings of the full board as well as 24 committee meetings per year.

David Roberson, communications director at the Duke Endowment, points out that the pay scale reflects the language James Buchanan Duke included when he created the endowment in 1924. Duke's so-called "indenture" calls for the trustees to share equally 3 percent of the endowment's annual net investment return. "It's a fairly time-consuming commitment," said Roberson. And many of the endowment's trustees, he adds, make substantial gifts to Duke and elsewhere.

In part because of the indenture, the Duke Endowment's trustee pay scale stands out. More typical of fee structures among large foundations are those of the Ford Foundation, which listed 15 trustees on its 1998 tax form; all were paid between $20,000 and $29,000. At the Miami-based John S. and James L. Knight Foundation, 11 trustees were paid between $16,950 and $33,250. Knight trustees, who periodically review and adjust the fees, receive base pay of $12,000 plus $750 to $1,000 for board and committee meetings, according to Larry Meyer, vice president for communications at Knight.

Wanted: Trustee Commitment
Among the multibillion-dollar foundations that don't pay, except to reimburse for travel expenses for board meetings and the like, is the David and Lucile Packard Foundation in Los Altos, California. "It was a philosophy of David and Lucile Packard's that nonprofits don't pay boards," says Colburn Wilbur, a trustee and former president of Packard. "Universities, hospitals and even the largest nonprofits seldom pay trustees, why should the Packard foundation? Just the fact that a foundation might have more money [than other nonprofits] doesn't mean you have to spend it on board members."  

At Packard, half of the ten trustees are Packard family members. Wilbur acknowledges that the family members' emotional investment in a foundation bearing the family name serves as a strong incentive for them to work hard for the organization. However, he adds, he sees equally strong commitment to the foundation from nonfamily trustees. "Whether you get paid or not may be interesting, but it's not the reason for one person doing a good job or the next person not."

Packard, according to Wilbur, does match grants made personally by its board members, up to $50,000 a year per member on a two-to-one basis. With its 11-figure endowment, Packard scarcely represents the scope or size of most family foundations, but its trustee nonpayment policy appears to be in accordance with the bulk of such groups.

"Most of the families we have been in contact with don't pay any" trustee compensation, says Virginia M. Esposito, president of the National Center for Family Philanthropy, a resource center for family foundations. "A few ask the question [about board compensation] during the early stages, but most don't even consider it. Trustee compensation is not one of the things we've really had to look at."

Esposito says many family foundation leaders adopt the following attitude: "I would be appalled if a nonprofit that I were thinking to fund paid their trustees, so we would not either."

Exactly, say critics of any compensation, whatever the size or nature of the foundation. "It's argued by many that you have to pay to get expertise," says critic Layton. But even at other well-functioning nonprofits, "you would never expect to be paid. Where's the difference?"

One difference may be the inherent level of commitment. "Even with a local community foundation...the board can be recruited from people who have a deep interest in the community," says Tempel. "But if you're talking about a major national foundation, it may be difficult to sustain your interest over time."The same is true of universities, which also do not pay but which have "a legitimate call upon a body of alumni. That's not true with foundations," says Joel L. Fleishman, a professor at Duke University who specializes in nonprofit research and is director of its public policy school's ethics center.

You've Got to Be Transparent
The law allows foundations to calculate trustee pay based on comparisons with other organizations of similar size, whether for-profit or not. But because of the philanthropic purpose of a foundation, such figuring for foundations should be skewed toward similar-size nonprofits and not the for-profit business world where many trustees dwell, some say.

"The guiding principle among operating nonprofits is that board members do not get compensated," says Pablo Eisenberg, a senior fellow at Georgetown University's Public Policy Institute who last year launched a study of trustee compensation and hopes to publish the results this spring. "It doesn't matter whether board members are working poor, middle-class or wealthy. The same principle should apply to private foundations," Eisenberg says.

Not necessarily so, says Fleishman. "I don't frankly see any major ethical issues involved." Potential good trustees, he says, "are in demand in the [for-profit, paying] private sector.... You need to be able to have a large pool. Everybody's got a limited amount of time."

Fleishman also stresses that in many cases, paid trustees give all their fees back in the form of charity. "The question really goes to the size of the trustee fees," says Fleishman.

When does just compensation cross into the unreasonable realm? In recent years, extraordinary payments to trustees have bruised the reputations of a few nonprofits. Perhaps the most notorious example was that of the Bishop Estate, the multibillion-dollar trust that administers a private school in Hawai'i. Until they were knocked from their positions through public and state court pressure, the school's five trustees, who were responsible for $5 billion of investments, were paying each of  themselves more than $1 million a year.

On the other hand, according to the school's IRS filing for 1997, the five highest-paid employees, who included the school's president, vice president, two principals and general counsel, each made between $150,000 and $178,000. "If you read the court decision [ousting the $1 million trustees], it was decided that $180,000 was enough but $1 million was too much," says Tempel of Indiana University.

In fact, in January 2000 a Hawai'i judge set a limit of $120,000 for the chairman of the trustees and $90,000 for the other four board members. The Bishop case notwithstanding, Tempel warns in general against setting a blanket dollar limit on compensation. He points to large universities with medical centers, for instance, which must pay upward of $1 million a year to attract a top-notch surgeon.

From an ethical standpoint, Tempel says, the primary issue is transparency: The public must be aware of the payment and what sort of commitment that requires. Knight's Meyer says, for example, that the foundation's trustees are paid in part for "seasoning" that's difficult to find and that fees "hardly ever approach the value of their contributions. It's certainly not equal to the compensation in their real-world lives."

A Different Animal
As for the fact that many operating nonprofits get by without paid boards, Meyer says the private foundation is a different animal. " Altruism is a wonderful thing....But there does come a time when the size, scope and complexity of an organization reaches a level where it's prudent—however modest—to pay trustees and advisers."

Eisenberg is unconvinced. A former executive director of the Center for Community Change, he advocates legislation directed specifically at trustee fees. He'd like Congress to ban trustee fees except compensation for incidental costs. Eisenberg acknowledges, however, that there's little likelihood of that gaining majority support. A politically more feasible solution, he suggests, is to place a limit on trustees fees, say about $10,000 in today's money, after which there would be a 100 percent tax levied on the foundation. Thus, a foundation that chose to spend $30,000 for trustee compensation would pay an additional $20,000 to the government. Such legislation, he hopes, would bring pressure on foundations to rethink their trustee compensation policies.

Besides guiding foundation spending, trustees also are charged with investment responsibilities. Eisenberg finds fault with this, noting that professional investors employed by foundations already do such work. "The most highly paid person [at many large foundations] is their investment director...." That person is "with few exceptions a much better bet than trustees" for determining how to perpetuate the endowment, Eisenberg argues. "I wouldn't pay a trustee a dime for investment advice."

In Fleishman's view, a trustee is precisely what is needed to oversee the investment process. Unlike many for-profit enterprises, for instance, whose stockholders may help ensure accountability, foundations face little or no such outside pressure, he argues. "It's all the more important with a foundation, where you don't have the built-in constituencies to enforce accountability, [to have] independent voices who can in fact serve as an accountability proxy," says Fleishman.

Kent Allen was the "Philanthropy: Give and Take" columnist for the Washington Post and is now a freelance writer covering nonprofits. He is also a news editor at U.S. News & World Report.