Is Percentage-Based Compensation Unethical?
There are two sides to every conflict. It doesn't matter if it's warring nations, a small boy who comes home with a shiner on his eye, or a family split by divorce -- there are at least two differing opinions.
The same is true of percentage-based compensation for fund raisers.
Recently I was addressing a large group of not-for-profit organizations in Indianapolis. One participant asked me how fund raisers are compensated? I explained development professionals can be full-time, part-time, hired as a contract employee, or a consultant can be obtained. I continued with, "In some situations, a fund raiser may be compensated by a percentage of the dollars raised."
An individual in the rear of the room took immediate and vocal exception to my statement about percentage-based compensation. He stated it was an unethical practice and under no circumstances should a fund raiser accept a percentage of dollars raised.
Following the program I learned this individual was a long-time member of the National Society of Fund Raising Executives (NSFRE). His frenetic comments were backed by the published Code of Ethical Principles of that organization.
"There is never a time when percentage-based compensation is acceptable with NSFRE," stated Patricia F. Lewis, President & CEO of NSFRE. "Our Code of Ethics prohibits this practice. NSFRE has been against percentage-based compensation since we were established in 1960. This organization has always felt that basing compensation on the percentage of funds raised is a disservice to donors and can place undue pressure on the donor. Philanthropy is something that people should do on a voluntary basis, of their own free will. Donors should contribute because they believe in the cause or the mission of the organization and want to support that cause or mission, not because somebody is trying to negotiate a gift that will ultimately compensate them personally."
William C. McGinly, President & CEO of the Association for Healthcare Philanthropy (AHP) takes a similar position for his organization. "The fact is percentage-based compensation is not the answer for a small struggling organization. Quite frequently the amount of money they're going to receive, and the position it's going to put them in the community as a result of using that technique, is only going to be valuable to them on the short term, and it's going to be harmful in the long term. There are other things they need to do to build slowly and safely and make sure they are building their ability to do fund raising. They're going to be there for the long term."
Patricia Lewis agreed it takes time to build a productive fund raising program. "There are always those organizations who say we have a very small budget; how can we afford a fund raiser if we don't pay them on a percentage basis? Our premise is those organizations need to be building themselves to the point where they can afford this kind of investment and really help them do a good job in fund raising. If an organization hasn't been fund raising, then they aren't going to be able to raise money in a year anyway. It takes time to develop a fund raising program that will produce results. A brand new organization or a young organization will not raise major dollars in such a short time frame. They need to develop boards and recruit volunteers that will help them be successful."
Legal vs. Ethical
Professional fund raising organizations emphatically state percentage-based compensation is not a legal issue but an ethical one.
"Percentage-based compensation for fund raising is not illegal," stated McGinly of AHP. "But what we're trying to say here is it's unethical from the standpoint that the interest of the donor is greatly diminished. I have seen telemarketers take 95 percent of the money they raise. We don't believe the donors are served when you have that kind of percentage going to the fund raiser. When you do fund raising on that basis you have a telemarketing firm or an individual that may do things that could jeopardize your organization and the organization's good name because their incentive is to raise more to earn more. The donor is lost in that scenario and the organization is put at risk."
Betty Vermillion, State Coordinator of Charities and Telemarketing for the Office of the Arizona Secretary of State, agrees percentage-based compensation should not be considered a legal issue but a moral one. "There is nothing in state or federal law that specifies a certain percentage has to go to the charity. As long as a fund raiser or telemarketing firm does it in an open and above-board manner, it's fine. It could become unethical if the fund raiser doesn't disclose the percentage being received, or keeps related costs hidden. In that case they may have something to hide."
The American Dream
Working on a commission or percentage, whether in a profit or not-for-profit organization, is not only legal but in many situations an excellent way to excite and motivate employees to increase production. It's the basis of the American dream. A person who works hard deserves to be compensated in a manner that will allow them to seek a better standard of living, own a nicer home and provide for the future of children.
In 1994 Doug Tieman, President and CEO of the Caron Foundation in Werensville, PA discussed percentage-based compensation at Fund Raising Day in New York. At a former position he had coordinated a percentage-based compensation program. "Our program was rather simple. If we had a fund raising goal of a million dollars and the goal was met, the fund raiser would receive X. If the fund raiser exceeded the goal by 10 percent we would pay the individual 2 percent of that increase -- a bonus of $2,000. We're not talking about huge amounts of money. Hitting the mark to get the bonus actually became more important than the actual money. Because we are competitive and goal oriented, the fact that we achieved the mark was a victory in and of itself and provided significant gratification."
"It's always baffled me why the national fund raising organizations have taken such a strong negative stance against percentage-based compensation. It's legal. It works. It builds longevity at an institution. It makes people feel good about what they're doing. To my knowledge no donors ever complained, and we never had a problem with our compensation program. We never had anyone say, we're not going to give because you're going to get a percentage of my gift. I keep asking myself why wouldn't an organization do this?"
"I believe too many people in the development field feel that a development professional can be compensated by salary only, yet in private enterprise or any type of sales related business there have been countless studies that show that people who have some financial stake in how well they do, do better than when they don't. I suspect that my colleagues feel development people are above that. We have such high, lofty ethics that in no way are we driven by personal remuneration. That's a nice perspective, but let's face it, we're human."
Disservice to Donors?
The controversy of percentage-based compensation lies squarely on the philanthropic intentions and wishes of the donor. Are they being treated unfairly? Are they being misled?
"Donors don't like percentage-based compensation," stated McGinly of AHP. "The more educated the donors are the more they understand ethical vs. unethical practices. Some of the more naive or less sophisticated non-profits view percentage-based compensation as an opportunity. In some cases the business leaders who are involved with the organization view percentage-based compensation as acceptable because they pay their sales people by commission. So it's not uncommon to hear the leadership of a small organization say, 'hey this is a good deal for us,' but that is a very short-sighted focus."
Bill Stillwell, a philanthropist and non-profit board member in Arizona, disagrees that donors are naive or uninformed. "I would guess that very few substantial gifts have ever been made where the donor wasn't familiar with the institution and the solicitor. I wouldn't be giving to someone if I didn't at least know the mission of the organization and something about the individual soliciting me. The solicitor isn't going to get a major gift from me unless they've won my convictions, and they are going to have to work very hard to accomplish that."
Is percentage-based compensation a disservice to donors? Will donors become angry and stop giving if a fund raiser is paid by a percentage of dollars raised? "Probably not," stated Karon Krause, Director of Charities Research for the Better Business Bureau. "But it certainly depends on the people approached and the methods used. Sometimes there's a great deal of pressure and deception. There are many legitimate groups out there. But there are others who have stepped out of bounds who give everyone raising money a bad name."
Because of a lack of definitive research, on one really knows if donors are opposed to this type of compensation method. "Some people may not like it, but it just wouldn't make a lot of difference to me," stated Bill Stillwell. "Obviously you know the person is being compensated either by salary or by a percentage of what I give. I can't really see much difference. I know the solicitor isn't working hard just for the fun of it. The person is doing it for a livelihood."
Attract Better Staff?
High turnover in the fund rising staff is a major financial burden to charitable organizations. The organization has invested in salaries, benefits, professional development, office equipment, supplies, telephone, travel and dozens of other costs, all in the hopes that the new fund raiser will generate needed revenues. Unfortunately, the fund raiser may be gone in less than two years. With the national turnover rate for fund raisers at 16 to 24 months, non-profit organizations must take a closer look at the way development staff are hired, nurtured and compensated. "The small non-profit is the one that suffers the most from turnover," explained Doug Tieman. "They can't pay $65,000 for a seasoned professional so they invest $25,000 for someone with very limited skills -- in other words they hire a beginner who will stay a short while then leave. The organization would be in a much better position if they could say "we'll pay you $25,000, but if you raise X amount then we'll pay you $35,000, and if you raise X+Y amount we'll pay you $50,000 and so on. They would be able to pay a seasoned professional who's willing to take a little risk. The totally unfair aspect of the development field is the best people go to the best organizations because they get paid the best. Yet the organizations who need the best fund raisers don't get them because they can't afford them."
Fund raising through telemarketing has been sharply criticized for the practice of percentage-based compensation. To counter this criticism and to establish standards for the telemarketing industry, the American Telephone Fundraisers Association (ATFA) based in Vienna, Virginia, was established last year. In their ethical standards they state: "There is no fee structure that is best for all non-profits under all circumstances. The most typical fee types for telephone fund raising include hourly rate fees, other unit-based fees such as per contact or per donation, percentage-based fees, and blends of these. Whatever the fee structure, a member (telemarketing firm) will fully explain it to the client and make it a fair fee based on the services and goods provided and the allocation of risk. A percentage-based fee may be preferred by, among others, fiscally conservative non-profits seeking a guaranteed net result, especially since such predetermined results are more and more frequently being mandated by regulatory agencies. Some non-profits also believe that risk sharing is a better method for aligning interests and improving performance. However, prior to accepting a fee based either in whole or in part on a percentage of gross or net fund raising proceeds, a member will offer a client the choice of a unit-based fee. Such an option is useful to the client when evaluating prospective fees, since it allows the client to better and more objectively understand tradeoffs or benefits involved in sharing the risk with the member."
Ralph Reese, President of ATFA and the Vice President of Reese Brothers, Inc. the largest telephone fund raiser in the U.S., explained his position on percentage-based compensation: "We're not endorsing commissions. In fact, we don't endorse any practice. What we advocate is the charitable organization should have full knowledge of their goals, objectives and activities, then make a decision based on its own best interest. The charity must keep in mind its own needs, its situation, and its obligations to its donors. If a client says I want to pay you with a commission, we say, no we can't take a commission unless you're aware that you can pay by the hour, by the unit, by the contact, or in some other fashion. We tell them here are the consequences associated with a given payment method. If they make a full-knowing choice to pay on a commission basis, then it's acceptable. But we won't accept a commission contract without the client understanding the full range of payment options."
Is percentage-based compensation unethical?
It depends on who you're talking to. NSFRE and the other professional fund raising organizations have analyzed the issue of percentage-based compensation and have established comprehensive written policies and standards prohibiting the practice. A 1992 NSFRE Position Paper stated, "To be ethical, philanthropic fund raising must be mission-led, institutionally based, volunteer-driven and professionally supported in an environment free of improper motive, unreasonable reward, or personal inurement." The same document explained: "NSFRE holds that percentage compensation may encourage abuse, imperil the integrity of the voluntary sector, and undermine the philanthropic values upon which it is based." Consequently, if you belong to NSFRE or any of the other professional organizations, and wish to say within their ethical guidelines, you must abide by their rules and regulations. Penalties for not adhering to these rules and regulations could be grounds for censure, suspension from membership, or permanent expulsion.
However, being compensated by a percentage of dollars raised is not illegal in the U.S., it's practiced and advocated by legitimate organizations, and its use is increasing. As in any form of compensation program, paying by a percentage of dollars raised must be carefully considered. Doug Tieman offered the following guidelines to help an organization decide if this is a compensation method they should adopt. "If I were going to advise an organization about establishing this type of program I would suggest the following: 1. You must hire the right people who are motivated by this type of compensation. 2. You've got to have the right kind of organization that can clearly and precisely document what the fund raiser does. 3. You've got to make sure there is Human Resource consistency so this is not a special deal that will alienate the other staff members. 4. You want to make sure if you establish it you can publicly talk about it and defend the program. 5. The board must support the program. 6. It must be consistent with the overall organizational mission. If you can't do all those things, don't do it."
The American Telephone Fundraisers Association has also taken a close look at percentage-based compensation. This organization understands that every charitable organization is unique and can't be bound by rigid policies. ATFA has established flexible policies and standards that allows the charitable organization to make payment decisions based on numerous options and outcomes without the insinuation of unethical behavior.
Fund raising professionals who don't belong to a professional fund raising organization -- and don't plan to, must decide how they want to be compensated. They have the ethical and legal right to charge their clients in any manner they choose and be compensated in any manner they choose, so long as they stay within the guidelines of the law.