It is certainly legal to pay directors reasonable compensation for services rendered to the organization (including service as director). Even where the bylaws of a nonprofit corporation provide that directors shall not be paid, the bylaws usually make clear that this prohibition is against payment for their services as directors.  They do not prohibit payment for service in other capacities.  The lawyer on the board may be paid for legal services.  The marketing person on the board may be paid for marketing services. And many organizations provide ex officio status on the board for the chief executive.

The “conflict” in setting the terms of service and compensation can be dealt with by a good conflicts policy (See Ready Reference Page:  “Conflict of Interest Policies Help Avoid Problems”), and by following the proper procedures for independent review to avoid excess benefit transactions.  (See Ready Reference Page:  “Charities Must Avoid Excess Benefit Transactions”) It then becomes a matter of disclosure, with salaries of officers and directors and other conflict transactions disclosed on the Form 990 tax information return.  It is a sensitive situation, but neither unusual nor illegal.