The Cost of Compensation & Director Liability
How money changes the weight of responsibility:
This is a summary of the above Podcast.
Should Board Members Get Paid? The Liability Trap Many Associations Don’t See Coming
You’re halfway through a board meeting that’s dragging on longer than anyone planned. You’re talking roofs, budgets, and everything in between. People are tired, the coffee’s gone cold, and someone finally says what everyone’s thinking: “We put a lot of time into this… shouldn’t board members get something for all the work?”
It sounds harmless. Fair, even.
But here’s the part most associations never hear:
the moment a board member starts receiving compensation, their personal liability can increase, sometimes significantly. And for small condo communities, that’s a risk worth understanding before anyone votes “yes.”
Let’s break it down clearly, from a board member’s perspective, using real examples.
1. Why Compensation Changes the Liability Picture
Warning sign: Paying a director (even a small amount) may remove their “volunteer” status.
Why it matters: The law holds volunteer HOA directors to one standard, and paid professionals to a higher one.
Example: Consider a board that decides to pay its treasurer a small stipend. From that point forward, if there’s a dispute over a financial decision, a court may evaluate that treasurer’s actions the same way it would evaluate a professional manager or consultant. The scrutiny increases, and so does the potential exposure.
What to do: Before offering compensation, discuss the liability implications with your association attorney and insurance agent. Most boards decide the risk simply isn’t worth the benefit.
2. The Best Protection Directors Already Have (If They Follow It)
Warning sign: Directors who rush decisions or skip due diligence lose key legal protections.
Why it matters: The Business Judgment Rule (BJR) shields board members from personal liability only when they act in good faith, make informed decisions, and genuinely believe they’re doing what’s best for the association.
Example: A board relied on expert advice, sometimes even advice that later turned out to be imperfect, and the BJR still protected them because their process was reasonable.
What to do: Document your reasoning, ask questions, and always base decisions on facts and qualified opinions.
3. Relying on Experts: A Board’s Strongest Defense
Warning sign: Boards making big decisions without expert input.
Why it matters: The law explicitly allows directors to rely on professionals like reserve preparers, accountants, engineers, and attorneys. That reliance is part of the “reasonable inquiry” requirement under the BJR.
Example: A board approves a major roof replacement using cost estimates from a qualified reserve specialist. Even if the vendor later charges more, the board can show it relied on competent information, and that’s exactly what the courts look for.
What to do: Bring in experts when the decision touches legal, financial, or technical matters.
4. Insurance, Indemnification & Governing Document Protections
Warning sign: Assuming D&O insurance covers everything.
Why it matters: Volunteer directors receive statutory liability protections that paid directors do not. Once compensated, a director can lose certain liability caps offered under state law.
Example: Consider the board that discovers, after the fact, that compensated directors could be personally liable for amounts above the D&O policy limits, simply because their compensation disqualified them from “volunteer” protection.
What to do:
Confirm your D&O limits are appropriate for your association size
Review indemnity language in your bylaws
Ask your insurance agent what changes when a director is paid
5. So… Should Boards Pay Their Directors?
Here’s the truth most associations land on:
If you want to reduce liability, strengthen transparency, and keep expectations clear, keeping board positions volunteer is almost always the safer choice.
If your board does want to explore compensation, it should only happen after reviewing:
Legal implications
Insurance limitations
Bylaw requirements
The potential loss of liability protections
A Smart Way to Strengthen Board Protection (Without Paying Directors)
One of the simplest ways a board can strengthen its legal footing, and reduce liability for everyone, is to base major decisions on clear, well-documented financial analysis.
That’s exactly why associations now use ReserveScan™ to get a fast, unbiased snapshot of their reserve health. When decisions are grounded in reliable numbers and professional guidance, it strengthens the Business Judgment Rule protection that boards rely on every day.
