Determining Board Member Compensation

Board members may or may not be employees of a corporation, but if they’re not, you’ll need to consider how to compensate them for their time and expertise.

The newspapers are filled with stories about the overinflated salaries of board directors and members, but these are mainly positions at large corporations or in government. In a small, entrepreneurial company, board members are usually compensated in a less extravagant fashion, yet you still need to make it worth their while to be involved.

Most board members receive some shares of company stock. You can determine how much stock to award based on a variety of factors, such as how long they have been involved with the company, whether they invested any capital into the company, and whether they have contributed any special expertise or knowledge. Is one of your board members a high-profile executive? You’ll need to offer more if you’re getting more in return in terms of credibility and attention. Highly sought-after board members can receive a substantial percentage of shares just for signing on, along with additional shares for time spent working with the company or based on the company’s progress.

You should also reimburse board members for any expenses associated with advising or doing business on behalf of the company. For example, board members may incur travel expenses when they attend meetings at your office. If you have a very active board member, you could offer to pay for the person’s cell phone or tablet computer. And remember, all of these are considered deductible business expenses when it comes time to prepare your company’s tax returns.

If board members request directors’ and officers’ liability insurance, as frequently happens, you’ll need to obtain this insurance, which protects the directors and officers on your board from liability if they are sued in connection with the work they do for your company as board members.

If your company can afford to provide it, offering a cash stipend based on company performance is a nice way to compensate your hardworking board members. You can make the cash stipend contingent on meeting specific company goals, or you can decide to set a specific stipend for one year of board membership, for example $2,000 to $5,000.