Director Remuneration and Dual Roles in Non-Profit Organizations: Legal Considerations and Governance Implications

Director remuneration is a complex area of corporate governance that varies significantly between for-profit and non-profit organizations.

For-profit directors are typically compensated for their work, but directors of non-profit organizations are often prohibited from receiving payment in order to preserve their registered charity status and other desirable statuses[1]. As a result, directors of non-profits frequently serve on a volunteer basis, which creates challenges when they also hold other roles such as officers or employees.

This article outlines the limits on director remuneration, the statutory frameworks that permit alternative compensation structures, and the key governance considerations that non-profit organizations must take into account.

Limits on Director Remuneration

Generally, the directors of an entity are entitled to fix reasonable remuneration levels for the directors, officers and employees of the company, unless the entity’s articles or by-laws provide for a different arrangement.

As previously mentioned, in for-profit corporations the directors are often compensated for the time they put into the company in their roles as directors. The articles of incorporation and by-laws of for-profit corporations rarely prohibit directors from receiving remuneration for their work.

However, in non-profit organizations, the articles of incorporation and by-laws often explicitly prohibit directors from being paid any salary or other remuneration for acting as directors. This prohibition is often in place to solidify a registered charity status. As a result, directors in non-profit organizations with a registered charity status often volunteer their time as they cannot be compensated by the organization. 

Alternative Remuneration Structure

Although directors of non-profit organizations are generally prohibited from receiving payment for their role as directors, the legislation provides alternative ways for organizations to fairly compensate directors for services performed in other capacities.

For instance, the Alberta Companies Act [2] permits any person or corporation to receive reasonable remuneration and expenses for any services for the promotion of the objects of the non-profit company or the conduct of its business.

Section 143(2) of the Federal Not for Profit Corporations Act [3] allows directors and officers to be reasonably compensated for services performed in another capacity.

Directors of non-profit organizations often hold other positions within the entity alongside their role as directors. For example, one director may also be the treasurer while another is both a director and the CEO. The services that these directors provide in their non-director capacities may usually be fairly compensated under the statutes, and this can allow the directors to receive remuneration for the services they provide to the non-profit organization.

Other board members who do not hold additional positions often participate in the governance of the non-profit organization through committees, and strategic planning. Non-director positions can be created for these board members to clearly separate their director and non-director services. The non-director services can then be compensated fairly in accordance with the Companies Act and the Not-for-Profit Corporations Act.[4]

In summary, these statutory provisions ensure that directors can be appropriately compensated for work performed outside their governance duties, while still complying with legal limits on director remuneration.

However, note, it is important to identify and review all the relevant legislation, and any grant agreements, or government policies which may impact a not-for-profit’s ability to obtain anticipated funding. For example, in some cases there may be specific rules about directors not being employees or persons providing services to the organization, which may prevent these solutions.

Key Considerations

When considering alternative remuneration structures, it is essential to balance fair compensation with compliance and good governance practices. Compensation for other services must be reasonable and based on the fair market value of the services provided in order to retain registered charity status, if applicable.

There are also potential concerns with conflicts of interest that can arise from these arrangements, and it is often best practice to have directors abstain from voting on issues where they would be involved in a non-director capacity. Specific rules may also be added to the bylaws mandating this.

Outside of statute, directors’ remuneration is ultimately governed by the articles of incorporation and the bylaws of a non-profit organization. It is important that any remuneration for non-director services be allowed within these rules and amendments may be necessary to incorporate this type of remuneration structure.

By ensuring that remuneration practices are transparent, reasonable, and aligned with both statutory and organizational rules, non-profit organizations can safeguard their charitable status while fairly compensating directors for their non-director contributions.

Conclusion

In conclusion, by structuring remuneration carefully and ensuring transparency, non-profit organizations can preserve compliance and governance integrity while appropriately valuing the work of their directors. If you have questions or are seeking advice about foundations, non-profit organizations, charities, or other corporate matters, please reach out to the Corporate Commercial Law group at McLennan Ross.