A practical framework for considering not-for-profit director remuneration

This article explores the AICD publication Not-for-profit director remuneration guide – Considerations for boards, which has been developed to assist NFP boards grappling with the topic of director remuneration. It does not advocate for director remuneration. Rather, it provides a structured five-step approach to help boards assess whether remunerating directors is appropriate for their organisation.

As regulatory obligations and community expectations continue to rise in particular industries, and not-for-profit (NFP) and charity operations become more complex, some boards are assessing whether the traditional volunteer-based model of NFP and charity governance remains fit for purpose.

Voluntarism, professionalism and the modern NFP board

There are strong historical, cultural and legal reasons why directors of NFPs have generally been unpaid. For many NFP directors, serving voluntarily on a board has been an important way of ‘giving back’ to a community or a particular cause.

Over the past two decades, there has been a shift in the expectations and obligations on many NFPs. This has been most pronounced in human services and care sectors where NFP organisations are among the largest and most systemically important providers.

The annual AICD Not-for-Profit Governance and Performance Study findings reveal an identifiable trend of larger NFP and charitable organisations in certain sectors considering director remuneration in some form.

Boards of more complex NFPs, or those in more highly regulated sectors, are increasingly expected to meet governance standards and practices that are to the same level as corporate boards. Balancing commercial realities while recognising their operations are for-purpose rather than for-profit is a key challenge for NFP boards, especially with rising costs and increased demand for services.

Structured five-step board level approach

Step 1: Threshold questions

There are series of threshold questions the board should ask itself at the outset of any process.

First, the board should start with the organisation’s purpose – why it exists and what it has been established to achieve. Is payment consistent with the organisation’s purpose now and into the future? Second, the board should consider what governance challenge it is trying to solve, and whether director remuneration is likely to address it. Finally, the board should consider its legal obligations, including acting lawfully, in the best interests of the NFP, and managing conflicts of interest.

Ultimately, paying directors requires careful consideration of trade-offs. In considering whether to remunerate directors, boards should account for a range of factors, including governance frameworks, organisational culture, reputational implications and the views of key stakeholders, including donors and volunteers. The organisation’s core purpose should remain central to this assessment.

Remunerating directors would, for some NFPs, be unacceptable if it resulted in fewer resources being devoted to furthering the organisation’s purpose.

Step 2: Conduct due diligence

Having addressed the threshold questions, if the board has determined that it may be appropriate to move to a remunerated director model, it should consider delegation to a committee to undertake further work on the practical elements. This includes external advice on governance, legal, tax, superannuation issues and market benchmarking on remuneration.

Boards should also consider the level of internal and external resources that will be needed to support the project, within the defined parameters of time, cost, and scope. This is a significant undertaking and may divert time and attention away from delivering on the NFP’s existing priorities.

The board committee should evaluate the costs and benefits to the NFP and make a recommendation to the board on whether to proceed, not proceed, or potentially revisit at a later point in time.

Step 3: Consult with stakeholders

As a guiding principle, directors should take a long-term view of where the organisation’s interests lie, while seeking to maintain a respectful and transparent relationship with key stakeholder groups.

Genuine stakeholder engagement – particularly with volunteers, members and donors – should be at the heart of considering whether to remunerate directors. The appropriate level, timing and sequencing of consultation activities will be a matter for each NFP to work through.

Gauging the strength of support – or lack of support – for the proposal can indicate whether further work is needed to address certain issues (such as size of director fee pool).

Step 4: Confirm whether to proceed or not

By this stage, the board will have conducted its due diligence and consulted with key stakeholders. Ultimately, it is for the board to determine whether to proceed with taking the proposal to the membership for approval.

Boards should consider the final decision through an ethical decision-making framework. Moving from ‘can’ we do it to ‘should’ we do it, is the critical element at this stage.

The final proposed level of director remuneration will likely be one of the key focus areas for board discussion, debate and decision making. Boards should undertake appropriate benchmarking to ensure that the fees are reasonable and appropriate.

Step 5: Complete the implementation and review arrangements

With regards to the reporting of director remuneration, it is vital that financial statements are compliant with relevant accounting, audit, and disclosure requirements.

There is a wide range of disclosure practices when it comes to director remuneration. We encourage NFPs to adopt a transparent approach, rather than risk perceptions they are seeking to ‘hide’ payments.

It is appropriate for NFPs to periodically review the level of director remuneration (whether at an individual level or total pool) to ensure it continues to be fit for purpose and reasonable in the circumstances of the organisation, including its current and future financial position.

Insights from case studies

The guide includes case studies from Warrigal, Mental Health First Aid International International, and the AICD. These help demonstrate the critical importance of conducting effective due diligence and stakeholder engagement during the consideration of director remuneration.

Find out more about the board consideration of NFP director remuneration.