Paying for Performance

 

SHOULD CO-OP BOARD MEMBERS BE PAID?

[[wysiwyg_imageupload:90:]]I never thought much about it, but some cooperative housing association board members think they should get paid for what they do. My small, 22-unit Manhattan co-op, like others of its type, flirted with this idea some years ago when a board member took over as the manager.  Our smallish management company had been falling down on the job, and one director – who worked at home anyway – found himself taking on more and more of the manager’s duties: dealing with contractors, keeping watch on the building systems, responding to shareholders’ requests, even going to the Department of Buildings to appeal rulings.  When we had finally had as much as we could take from our manager (at one meeting, I asked why some long-standing task had not been completed, and her response was: “Well, you can pick up the phone and make a call to the contractor, too, you know”), we decided to hire our director as manager. We had to pay him, of course, but we were traditional enough to have him step down from the board.

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 that 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. And with the compensation, say some, those corporations get top-notch people, picked for their expertise not 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?

What’s stopping more boards from getting paid 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.

So, should you try compensating your board members? What are the pros and cons of paying board members for their services? What might be the consequences? The issues raised by professionals include:[[wysiwyg_imageupload:91:]]

The Expectations Game. “You would just be raising expectations among shareholders,” Sladkus notes. “We’re paying you all this money 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. I know that in my building, the ex-board member/manager we paid, would often do what he wanted, regardless of board instruction. He was our 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,” he 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 for less than they would for a management company,” says Menachem. “They’re doing a lot of extra work and paying a little money.”

He cites a 51-unit condominium in Queens where the board president and the treasurer, two long-time residents and retirees, were “paid” by not having to pay common charges, about $500 a month. “The president and the treasurer would split the tasks, getting together the revenues, paying all the bills, keeping the books. You have to keep track of common charges. Possibly sending fines. And so on. It was a great deal of work.” The treasurer has since given up the job and it is now handled by an outside, salaried bookkeeper. The president still gets paid, and says Menachem, “does a lot; he walks the grounds every day. You could go out and get an outside management company, and they’d pay more.”

There is also a nine-unit Manhattan co-op in the East 50s that pays a shareholder/board member about $515 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. And, anyway, 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.

That said, how then do we 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 question altogether. If it’s a question of no-nothing boards vs. savvy ones, then we 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 told me that they do this by staging regular educational seminars for their boards, and also encourage the members to attend seminars at the [[wysiwyg_imageupload:92:]]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. “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 liker. 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 training session and then you’re qualified to be a fiduciary. Education is an ongoing process.”

August 24, 2010