Should Boards Get Paid?

Mark Hankin was appalled. As the attorney for a Queens co-op, he was invited by board members to their annual “getaway weekend” – alternatively called the “Thank You Retreat” – where the directors rewarded themselves for a year of hard work by spending a week in the Catskillls, at a price tag of $5,000. “We earned it,” the president said to the attorney, a partner at Hankin & Mazel.

“This is not acceptable,” he recalls saying to the president. “Serving on a board is a volunteer position, as in ‘no pay’ and ‘no thank-yous.’ Once you look to make a profit from this position, then you are looking for trouble. I think it’s a terrible idea, and it would only be acceptable if the shareholders voted to give a weekend retreat.”

Alan Bentz-Letts, the former board president at Parkway Village, would probably agree. After the board made one of its members the manager, Bentz-Letts wrote a letter to the directors protesting. The member intended to keep his board position and serve as a salaried agent for the property as well. Bentz-Letts labeled the employment a clear conflict of interest at the 109 low-rise brick buildings located on 37 acres in Kew Gardens Hills. His remarks, however, fell on deaf ears.

But was it as clear a conflict as all that or simply a recognition of realities? Many people don’t want to do something for nothing anymore.

And that brings us to the question of the hour. Why are professionals and most board members so dead set against the notion of paying for board service? To hear them talk, you’d think the discussion was about bribery and corruption not compensation for time spent. “I don’t think it’s appropriate. Most bylaws prohibit it,” says Arthur Weinstein, a veteran co-op and condo attorney. “It might create the wrong incentive for a person to serve on the board. They’d be serving for the money rather than for the good of the building. And I don’t think you could ever compensate people fairly for the amount of time they put in. It would be inadequate.”

“It doesn’t seem ethical from the outside,” notes CPA Jay Menachem. “The board isn’t supposed to make money off the building operation – to take compensation for what is supposed to be a voluntary job.”

“If they are running for the board to make a financial windfall, then that’s the wrong motivation,” argues attorney Steve Sladkus, a partner at Wolf Haldenstein Freeman Adler & Herz. “Board members should not be paid,” agrees attorney Matthew Leeds, a partner at Ganfer & Shore, adding unequivocally: “They would be looking at the job for the money.”

So what, you might ask, is wrong with doing a job for money? Does a corporate board expect its directors to serve without compensation? Of course not. With compensation, say some, those corporations get top-notch people, picked for their expertise, not for their personality or popularity with the shareholders. After all, would you rather invest your life savings in a corporation with a “professional” board that is trained in the matters with which the corporation must deal, or would you prefer to put your money down on the corporation with the “amateur” board that was learning as it went along? (Of course, that argument overlooks the fact that most non-profit boards don’t get paid.)

What’s stopping more boards from getting paid apparently begins with tradition. The reluctance to offer a salary goes back at least to the 1940s, when the “Model By-Laws,” issued by the Federal Housing Association, required that the unanimous consent of the shareholders be sought in order to compensate board members. But that hurdle can be overcome: although the bylaws generally prevent compensation for boards (other than reimbursement for money spent), there does not appear to be a city, state, or federal statute or regulation prohibiting it – if the shareholders/unit-owners agree.

So, should you try compensating your board members? What are the pros and cons of paying for their services? What might be the consequences? The issues raised by professionals include:

The Expectations Game. “You would just be raising expectations among shareholders,” Sladkus notes. “‘We’re paying you all this money,’ they complain, and you’re running the building into the ground.’”

Do They Care? If you recruited from outside the property to hire board members for their qualifications, you get people, “less interested in the building because they don’t live in it,” claims one veteran attorney.

The Discipline Conundrum. If you are paying resident-shareholders for their service, it is harder to discipline them. In one Manhattan building, an ex-board member/paid manager would often do what he wanted, regardless of board instruction. He was a neighbor, so it was difficult to come down on him.

Similarly, one co-op that CPA Menachem once represented had a problem because the board president was a three-man band. “We found some financial irregularities,” the accountant notes. But to whom was he to report them? The president was also the salaried bookkeeper and manager. He finally wrote a carefully worded letter to the board. “Normally, it’s much easier to rectify a problem when there’s a segregation of duties,” he explains. “There may be nothing wrong with it, but when you’re paying someone who is also in charge, there can be the appearance of impropriety.”

Nonetheless, there are boards that pay members for doing work. “These particular boards are not using a management company and are paying far less than they would for a management company,” says Menachem. “And they’re doing a lot of extra work.” He cites a 51-unit condominium in Queens where the board president and the treasurer, two long-time residents and retirees, were compensated by not having to pay common charges, which came to about $500 a month.

“The president and the treasurer would split the tasks, getting together the revenues, paying all the bills, keeping the books. They had to keep track of common charges. And so on. It was a great deal of work.” The treasurer subsequently gave up the job and it is now handled by an outside, salaried bookkeeper. The president still gets paid, though, and, says Menachem, “does a lot for very little salary.”

There is also a nine-unit Manhattan co-op in the East 50s that pays a shareholder/board member about $515 a month to handle the property. That’s no surprise, says the cooperative’s CPA, Menachem, because the co-op, with five people owning the property’s eight units, doesn’t have the cash for outside management. In addition, the manager has building maintenance experience in his day job as an outside project manager; for his building, he pays all the bills and handles all the problems. He has been on the job for over 20 years.

Others see nothing wrong with compensation if the board okays it. Gary Tung, who was ousted as board treasurer last year from the 27-unit Gleam Tower Condominium in Flushing, Queens, had served since 2001. At the very first board meeting he attended, the unit-owners reportedly voted to pay the president and treasurer a salary for managing the building.

“It was that way from the very beginning,” Tung, a New York native who grew up in Chinatown, said in December. “All of a sudden, people objected to the rise in common charges, and their lawyer said our pay was illegal. If everybody in the building voted for it, how is it illegal?”

That said, how then do you answer the question, “To pay or not to pay?” If you can cope with – or are at least aware of – all the issues raised by professionals, then you can at least make an informed decision. But, perhaps the best answer is to sidestep the debate altogether. If it’s a matter of know-nothing boards versus savvy ones, then you might agree with the position of managers and attorneys who say that the answer to the “amateur board” problem is not compensation but education.

A number of managers and law firms say they do this by staging regular educational seminars for their boards, and also encourage the members to attend seminars at the Council of New York Cooperatives & Condominiums – and to read Habitat and other real estate journals. “I think a training program is a great thing,” says Sladkus, the attorney. “I’m surprised that more businesses haven’t been started to train board members. If someone were to organize that I’m sure boards would pay for that.”

“We often have sessions with board members explaining their roles to them,” adds attorney Steve Wagner, a partner in Wagner Davis. “We explain what a fiduciary is, why they are fiduciaries, what that entails in terms of their conduct and the like. I think it’s very valuable because a lot of times people haven’t served on the board and don’t know what’s involved, and rather than ad-libbing it, that puts a frame on what they should and shouldn’t be doing. The training process isn’t that you get a two-hour session and then you’re qualified to be a fiduciary. Education is an ongoing process.”