Compensation as an Incident of Board Office
Compensation of directors and trustees is regulated because those who control corporate property are fiduciaries of the corporation and of the stockholders or members. The office is not treated as an ordinary employment relation where the holder may freely bargain with the corporation for pay; it is a position of trust whose compensation must come from law, valid by-law authority, or the constituent approval required by the Revised Corporation Code.
The governing rule concerns compensation received in the capacity of director or trustee. It covers amounts paid for attending meetings, sitting in committees, exercising oversight, voting on corporate acts, formulating policy, and performing the normal incidents of board service. A director or trustee has no inherent right to salary merely because the office involves time, judgment, risk, or responsibility.
The policy is protective and preventive. It prevents the board from transferring corporate earnings to itself, preserves the stockholders' or members' power over fiduciary remuneration, protects creditors from disguised withdrawals of assets, and keeps board decisions from being influenced by self-fixed personal benefits.
Default Rule
In the absence of a provision in the by-laws fixing compensation, directors or trustees do not receive compensation as such, except reasonable per diems. Compensation other than reasonable per diems requires approval by the stockholders representing at least a majority of the outstanding capital stock, or by a majority of the members in a nonstock corporation, at a regular or special meeting.
The rule is not satisfied by a mere board resolution granting compensation to the board. The board cannot be the primary judge of its own remuneration because the directors or trustees are interested persons in that determination. A payment is therefore vulnerable when it rests only on approval by the very persons who will receive it.
The required stockholder or member approval is an absolute approval threshold, not merely a majority of those who happen to attend if that number is below the statutory majority. The matter must be taken up in a regular or special meeting where the proposed compensation and its amount are disclosed with enough specificity for an informed vote.
Lawful Sources of Board Compensation
| Source | What it may authorize | Limits that remain |
|---|---|---|
| By-laws | A standing rule fixing the compensation of directors or trustees as part of the corporation's internal governance. | The provision must be validly adopted, consistent with law and the articles, and unable to evade the ceiling, fiduciary duties, or conflict rules. |
| Stockholder or member approval | Compensation other than per diems, including fixed fees, retainers, allowances, bonuses, equity-linked benefits, or similar benefits for board service. | The approving vote must come from the statutory majority, the amount must be approved, and the total yearly compensation must remain within the statutory cap. |
| Reasonable per diems | Amounts paid for attendance or participation in meetings, usually tied to actual board or committee service. | The amount must be reasonable, must not operate as disguised salary, and must not be self-determined by the recipients. |
| Separate services | Salary or fees for distinct services as officer, employee, consultant, counsel, or contractor. | The services must be real and separable from board functions, and the transaction must comply with authority, fairness, disclosure, and self-dealing rules. |
Reasonable Per Diems
A per diem is an allowance for attendance or participation in board or committee work. It is permitted because directors and trustees may reasonably be compensated for the direct burden of attending meetings even when no broader compensation package has been approved.
Reasonableness is measured by the corporation's size, financial condition, industry practice, frequency of meetings, actual work required, and the relation of the amount to the corporation's resources. A per diem becomes suspect when it is so large or so regular that it functions as a fixed salary, profit distribution, or indirect withdrawal of corporate assets.
Payment for actual expenses is different from compensation. Reimbursement for travel, lodging, meals, communication, or other expenses incurred for legitimate corporate business is generally allowable if documented, proportionate, and not used to disguise additional pay.
By-Law Compensation
The by-laws may fix the compensation of directors or trustees because the by-laws operate as a charter of internal corporate governance. A valid by-law provision gives advance authority and reduces uncertainty about whether later board payments are unauthorized.
The by-law should identify the nature of the compensation or the method for computing it. A vague clause giving the board unrestricted power to compensate itself is weak because it conflicts with the fiduciary rule that directors or trustees must not determine their own per diems or compensation.
When the by-laws are amended to add or increase board compensation, the amendment should come from the stockholders or members, or be ratified by them when necessary. A board-adopted or board-driven amendment that benefits the board is vulnerable to attack for conflict of interest, especially where the corporation has minority stockholders, nonparticipating members, or strained finances.
Stockholder or Member Approval
Compensation other than per diems may be granted only by the stockholders representing at least a majority of the outstanding capital stock, or by a majority of the members. The approval must be given at a regular or special meeting and must cover the amount of compensation, not merely a general permission to pay whatever the board later decides.
For stock corporations, the reference to outstanding capital stock means the voting base is the issued shares held by stockholders and not treasury shares. For nonstock corporations, the approval comes from the members because the trustees administer property dedicated to the corporation's nonstock purposes rather than to dividend distribution.
Approval may be prospective or ratificatory if the payment is otherwise lawful, fully disclosed, and within the statutory limits. Ratification cannot validate compensation that exceeds the statutory ceiling, conceals material facts, constitutes fraud or waste, or prejudices creditors and other persons protected by mandatory law.
Statutory Ceiling
The total yearly compensation of directors or trustees, as such, cannot exceed ten percent of the net income before income tax of the corporation during the preceding year. The ceiling is mandatory and applies even when compensation is found in the by-laws or approved by the stockholders or members.
The base is the corporation's net income before income tax for the preceding year, not gross revenue, gross profit, retained earnings, market capitalization, projected income, or cash on hand. If the preceding year produced no positive net income before income tax, there is no statutory base for compensation dependent on the ten percent ceiling, although properly reasonable per diems and actual expense reimbursements remain separately controlled by their own limits.
The cap is applied to total yearly board compensation, not to each director or trustee separately. The corporation must therefore consider all board-level payments for the year, including cash fees, meeting allowances, committee fees, retainers, bonuses, and benefits with measurable economic value when they are paid for board service.
The form of payment does not control. A corporation cannot avoid the ceiling by labeling board compensation as an allowance, honorarium, representation expense, success fee, incentive, stock option, equity award, retirement benefit, or special bonus if the economic benefit is in substance given for serving as director or trustee.
No Participation in Own Compensation
Directors or trustees must not participate in the determination of their own per diems or compensation. The prohibition reflects the fiduciary duty of loyalty and the rule that a fiduciary may not place personal financial interest above the corporation's interest.
Participation includes proposing, deliberating, voting, approving, or otherwise influencing the amount or structure of the compensation from which the director or trustee will benefit. Abstention is required when a particular director's compensation is under consideration, and collective board action is insufficient when all or substantially all directors are interested in the same compensation package.
When every director or trustee is affected, the safer governance route is to place the compensation in a valid by-law provision or submit the matter to the stockholders or members for approval. Independent review, full disclosure, and documentation of reasonableness reduce but do not replace the statutory approval requirements.
Compensation for Separate Corporate Services
A director may also be an officer, employee, lawyer, accountant, consultant, contractor, or other service provider of the corporation. Compensation for such separate services is not automatically governed by the board-compensation ceiling if the services are real, necessary, and distinct from ordinary board functions.
The distinction depends on substance. Attendance at meetings, participation in board deliberations, committee work, policy supervision, and fiduciary oversight are board functions. Day-to-day executive management, professional work, project implementation, legal representation, technical consulting, and employment duties may be separate services if actually performed under proper corporate authority.
Separate-service compensation must still comply with corporate authority and conflict-of-interest rules. If the contract is with a director, trustee, or officer, the corporation must be able to show fairness, disclosure of the interest, proper approval by disinterested decision-makers when available, and ratification when required by law or by the circumstances.
Camouflage is ineffective. A corporation cannot convert prohibited director compensation into officer salary or consultancy fees by changing the label while the consideration remains ordinary board service.
Nonstock Corporations and Trustees
Trustees of nonstock corporations are subject to the same fiduciary restraint because they administer corporate property for the purposes stated in the articles and by-laws. Nonstock status does not mean trustees may distribute income to themselves under the name of compensation.
Reasonable compensation may be paid for authorized services, but it must be consistent with the corporation's purposes, non-distribution character, by-laws, donor restrictions when applicable, and the statutory compensation rule. Excessive trustee payments may be treated as diversion of funds from the corporation's stated purposes.
Corporations Vested with Public Interest
Corporations vested with public interest have an additional transparency duty: they must submit to their shareholders and to the Securities and Exchange Commission an annual report of the total compensation of each director or trustee. This duty reflects the public's stake in entities whose operations affect investors, depositors, policyholders, creditors, consumers, or the market.
The report should present total compensation in a way that reveals the full economic benefit received by each director or trustee. Cash payments, per diems, committee fees, bonuses, allowances, retirement benefits, stock options, equity-linked incentives, and other material benefits should not be fragmented to obscure the total amount.
Disclosure does not substitute for authorization. A corporation vested with public interest must still observe the by-law or stockholder or member approval requirement, the ceiling, the nonparticipation rule, and the fiduciary standards governing interested transactions.
Effect of Unauthorized Compensation
Unauthorized compensation is not merely an internal irregularity. The director or trustee who receives it may be required to return it, and those who approved or participated in the unlawful payment may incur liability for breach of fiduciary duty, bad faith, or unlawful corporate act when the facts warrant.
The corporation may sue directly to recover the improper payment. If the corporation refuses because the wrongdoers control the board, stockholders or members may seek appropriate relief through the remedies available for injury to the corporation, including derivative relief when the requisites are present.
Excessive or concealed compensation may also support claims of corporate waste, self-dealing, oppression of minority stockholders, breach of trust in a nonstock corporation, or violation of disclosure obligations in corporations vested with public interest. The same payment may be scrutinized under tax, accounting, and withholding rules, but tax treatment does not cure a defect in corporate-law authority.
Proper board compensation is therefore built on four linked requirements: a lawful source of authority, an amount within the statutory limit, a process free from self-participation, and disclosure where the corporation's public-interest character requires it.