Reasonableness is absolutely essential. If your organization is a 501(c)(3) public charity, it must comply fully with the "excess benefit rules" of IRC sction 4958. They address 3 key requirements for establishing "reasonableness" of compensation: comparables, approval by an independent governing body and documentation. This area is of extreme importance, especially because a violation can result in personal liability of persons approving a transacton.

Maybe it is only me, but it strikes me as odd as to why a financial "award" would be given to this individual who is retiring, despite being a founding director. Is he or she expecting one?

I have been in the non-profit world for 15 years and no long-time employee that I am aware of has ever expected "parting" monetary or other benefits upon retiring from an organization .

Now, on the other hand, if the person still has valuable contributions to make and wants to continue working in a different capacity - and you can afford to do so - setting up a consulting arrangement might be a win-win situation. But, the individual might actually be looking forward to retiring?

Perhaps someone close to this individual could talk to him or her and find out what his or her retirement plans are. I would hope this person is financially secure and that he or she would think your dollars would be better spent, particularly since you are a small non-profit.

One role could be for your founding director to be a planned giving consultant. Each year, she could call all members who have told you they've left a planned gift, and thank them. You could have a simple contract for her with the general ideas. You could use her name (say a Founder's Society) for planned giving, and have periodic articles. She would not have to spend much time -- other than the calls, have her attend an annual Founder's Society dinner (or lunch) for these planned giving donors. Back to the retirement issue, non-profit plans are not qualified as other plans are under ERISA, although they have many of the same constraints. I think speaking with someone who works with ERISA rules is the best plan if the retiring director does not have an ongong role.