The amount of time and energy invested by board members in the many decisions and projects surrounding the successful functioning of a building community can demand the kind of commitment and dedication required by a demanding part-time job. Anyone who has ever served in the line of fire of shareholder displeasure over a board decision—whether from an assessment levy to choices in lobby furniture—has probably wondered just why they set themselves up for so much uncompensated stress. While the rewards for an HOA or building community in having an outstanding board are obvious, the satisfaction of contributing a necessary service is typically the only compensation board members receive. Why is this the case?
Laws and Bylaws
There is currently no federal law expressly prohibiting co-op and condo board members from getting paid to serve, so in most cases it comes down to individual building bylaws forbidding it. There are also some state-by-state particularities that are worth noting. Adam Leitman Bailey, an attorney at Adam Leitman Bailey, P.C. in Manhattan, says that in New York State, “There’s no law banning compensation, but [the prospect of getting paid] might cause people to go on the board for ulterior motives. The few times I have seen people get paid, those buildings were tied to corruption. You want people running your building who don’t have a personal financial investment in just making money.”
Florida prohibits board members from being compensated unless compensation is specifically permitted in the HOA’s governing documents. “Some associations do have enabling language permitting board member compensation,” says Lisa A. Magill, a member of the College of Community Association Lawyers (CCAL) and of counsel at Florida-based law firm Kaye Bender Rembaum. “The amount and type of compensation is either specified by the board itself or voted upon by the members.”
Increased liability risks once may be one of the reasons why many building bylaws prohibit compensation despite no law out right prohibiting compensation currently nationally. “Governing documents typically prohibit compensation of board members. Additionally, compensating board members could have insurance implications as directors and officers (D&O) insurance covers volunteers,” says Cheryl Murphy, executive director of the Illinois chapter of the Community Associations Institute (CAI-IL). In Illinois, once compensation enters the picture, the protections that come with volunteer status could shift dramatically according to the General Not for Profit Corporation Act, which states, “No person who, without compensation other than reimbursement for actual expenses, renders service to or for a corporation organized under this Act… shall be liable, and no cause of action may be brought, for damages resulting from an act or omission in rendering such services, unless the act or omission involved willful or wanton conduct,” (805 ILCS 105/ General Not for Profit Corporation Act of 1986, www.ilga.gov, June 26, 2017).
Board members are taking hours out of their days to do this, payable workable hours, so why is this an unpaid position? “On the surface, it looks like people should be paid,” says Bailey. “When I first entered the business I wouldn’t have been surprised if people were compensated, but given the battles and cases I’ve seen in 20 years in the business, I don’t think it’s a good idea.”
With all of the responsibility that comes with service, the difference between experience of the kind that comes from dedicated long-term volunteer service, and professional expertise can be overlooked. “They are volunteers, not professionals,” says attorney Aaron Shmulewitz of Belkin Burden Wenig & Goldman, LLP in New York City. “Unlike major corporations, the members of these volunteer boards do not have professional expertise in the area they are working. As far back as anyone knows, this has always been the case. It is not outright illegal, but most building bylaws prohibit monetary compensation or have a 2/3 or ¾ shareholder majority vote needed to have anything of the sort.”
Beyond the Law: Conflicts of Interest and Bad History
The potential change in character and motivation of those who choose to take on the responsibility that comes with board service and leadership when money or other perks are potentially involved should not be overlooked. “Somebody who wants to serve should do so for altruistic purposes,” says Shmulewitz. “Not everyone is cut out for it, but if you’re going to do it, do it for the right reasons. Avoid choosing to serve to usher forward private agendas.” Some agenda-pushing is unavoidable, and one could argue that a functioning and flourishing building community could fall under the category of personal gain, but Shmulewitz warns; “Once you put money or other compensations on the table, it changes the color of the reasons for serving.”
Non-monetary compensation can have corrupting effects as well and may ultimately require more monitoring than those benefits could be worth. “I have heard of situations across the nation where a board is given credits toward assessments,” says Murphy, “This can create a conflict of interest as the board votes on assessment increases that they, themselves will not have to pay.”
Shmulewitz offers an example of seeing non-monetary board compensation backfiring. “In the early 1990s when flip taxes were relatively new, I worked with a building whose board wanted to have service on the board mean exemption from flip taxes in perpetuity. Not only did the shareholders reject this proposal, they elected a completely new board after they rejected the proposal. Board service can be a thankless job and a lot of hard work, but sometimes, when you ask for thanks, you run the risk of really upsetting some people.”
Perks Beyond Personal Satisfaction
There are some non-monetary advantages for those who serve already in place that come from simply being more involved. “The board is the first to know of comings and goings in the building,” says Bailey, “So they would have an advantage in terms of buying those properties in the building before non-board serving residents even know they’re available.”
And while it doesn’t seem like waiving assessment fees for board members would be an accepted practice, board service brings with it strong administrative clout. Bailey points out, “One of the biggest battles in Manhattan is maintenance and other increases. Serving board members get to vote on how increases go, [and] have more of an influence than non-serving residents on what will be discussed (and to what extent) at board meetings.” It could be easy to overlook these benefits that are already implicit in the responsibility of service.
Considerations of Transparency
If the shareholders do end up passing an amendment to include some form of board compensation, practical measures of full transparency should be taken to help deter abuse – or even the appearance of impropriety.
“In my experience, even if the owner-members agree to compensate directors, they resist writing a blank check,” says Magill. “The owner-members desire parameters or caps in the amendment itself or require the amendment to contain language requiring member consent to the amount and type of compensation.” These practices are implemented to protect board members themselves against suspicions of unsavory behavior as well as non-serving shareholders and the building culture on the whole.
“In Florida, owners are entitled to review financial records. Payments to directors, whether reimbursement or compensation, should be identified as such,” Magill advises. “Everyone involved needs a clear and concise understanding of the services expected in exchange for compensation and a mechanism in place to verify that services meet those expectations.”
When, If Ever?
Though it certainly appears that board compensation is discouraged by HOA professionals across the board, is there ever a scenario where board compensation of some kind could benefit the building culture, health of leadership, and quality of service a board delivers? If a building or association agrees that compensation in the form of outright payment could compromise the integrity of the association’s administration, is there any way to approach rewarding the kind of volunteer that goes above and beyond in board service?
“Maybe there should be a system to reward outstanding longtime service, or if someone takes on a specific project, especially if the work has saved the building money by doing a job that would have led to an outside hire without the volunteer board taking it upon themselves,” says Bailey. “Something maybe along the lines of bonuses at the end of the year, similar to those given to building staff like superintendents and porters.”
The worst-case scenario of the current model of unpaid, all-volunteer board service is that eventually, shareholders and unit owners may stop choosing to put themselves forward for the kind of commitment and criticism board service can mean. “There may come a time where disinterest in association operations, or the desire to avoid nasty criticism or harassment results in a complete lack of volunteers for board positions,” says Magill. “In that event, we may see a trend to change the law and/or association bylaws to facilitate non-owner board member compensation – professional board members, in other words – but this does not seem likely in the foreseeable future.”
In lieu of the development of mercenary, gun-for-hire boards, it seems as though the best practice is already in place with volunteer service. If nothing else, the best response to non-serving owner complaints remains intact: “We’re volunteers. If you don’t like the job we’re doing, join the board and make the change you want to see.”
Kristina Valada-Viars is a freelance writer and frequent contributor to The Cooperator.