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Should I Compensate My Board of Directors?

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Question: Should I Compensate My Board of Directors?
Answer:

As soon as you start inviting individuals to your board of directors, you will be asked about compensation. Outside board members (those who are not also executives of the company) are typically compensated, but the level and type of compensation depends on the size and type of corporation.

Travel Reimbursement
Almost every company compensates its board members for travel expenses to attend board meetings and retreats. If your board is local, you may not have to spend much for travel, but if you have directors coming from another city, you should at minimum compensate them for mileage or air fair, lodging, and per diem for incidentals.

Directors of Small Private Companies
Directors of small closely-held corporations are typically not compensated directly with cash, because there is little cash available for this purpose and because they usually are willing to serve without such direct compensation. If a potential board member wants to be compensated directly, this person probably will not make a good board member, because he or she is more interested in the money than the service.

Directors of Public Companies
If your corporation is publicly traded, you may want to offer stock options to your directors. An agreement should be signed before options are granted, so it is clear when these options will be vested, what happens if the director leaves, and under what circumstances the stock options may be exercised.

Why Not Directly Compensate Board Members
It is not a good idea to provide board members with direct compensation. Directors have fiduciary responsibility, and being compensated interferes with that responsibility. Being compensated could be considered a conflict of interest for directors. At the least, it causes directors to work for the money, not the benefit of the company. Beyond paying for their expenses, there is no requirement that you compensate these individuals.

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