In this not-for-profit sector Insight, we explore the oft-asked questions around director remuneration in a charity context. Is it reasonable for the community to expect that charity directors contribute for free and that a charity’s expenditure on administration is kept close to zero?
Registered charities face an increasing regulatory compliance burden which challenges the community’s expectations that every dollar donated should be distributed to the intended beneficiaries.
Small charity board members typically donate their skills, time and expertise on a voluntary basis.
Is it reasonable for the community to expect that charity directors contribute for free and that a charity’s expenditure on administration is kept close to zero?
We are sometimes asked about having a salaried managing director.
To meet the legal definition of a charity, the entity must be ‘not-for-profit’ and be conducted for charitable purposes.
To be ‘not-for-profit’ the assets and income of the entity must be applied to further the charitable objects of the entity. They cannot be paid or transferred, directly or indirectly to, or for the benefit of any member of the charity except as bona fide compensation for services rendered or expenses duly authorised and incurred on behalf of the charity. So, it is common for a charity’s governing document or constitution to permit members to be remunerated in return for services actually rendered to the charity or for goods or services supplied in the ordinary course of business.
We have looked at the details of whether directors can be remunerated in another article which you can read here.
Paying bona fide compensation
We noted typically, a charity is permitted under its constitution to pay its directors’ reasonable authorised travel and other expenses incurred on charity business – for example in attending meetings of the directors and general meetings.
A charity constitution may also expressly permit it to pay directors for services rendered other than as a director – for example a director’s accounting, legal or consulting firm may provide services to the charity on an arms-length basis, subject to prior approval of the arrangement by the directors.
Changing the charity constitution to appoint a managing director
Some charities are not large enough to employ full time staff to undertake the day to day management of the charity and this duty falls to one or two individual directors. The question sometimes arises for the Board about whether it is fair for the charity to rely on this type of contribution on a voluntary basis and if it is possible to pay the individual for this extra work beyond the person’s role as a director?
The answer will depend on the charity’s constitution. Apart from the exceptions for professional services rendered mentioned above, it is possible to establish or amend a charity constitution so that it permits the directors to appoint a managing director, to delegate certain functions to that director and to agree to terms and conditions by which that director is remunerated for their work. This may be on an ongoing basis or to undertake specific projects. It might not be financially possible or responsible to pay the director the full value for their work that they might be entitled to as a salaried employee – however a little financial recognition as a lump sum to perform specific tasks in the day to day management of the charity additional to and outside of a director’s usual duties – can go a long way to retaining the involvement of a charity’s key people.
Getting the balance right between the interests of the charity’s stakeholders when it comes to remunerating directors is a challenge for a small charity board and requires careful attention to managing conflicts of interest.
Get in touch
We have assisted countless charities in developing and improving their governance and policy documents. If you have any questions regarding this article, would like a review of your charity’s governing document, or your charity in general – please get in touch for a confidential discussion with the Birchgrove Legal NFP Team today on (02) 9018 1067.