Q: We know that it is considered unethical to pay fundraisers on commission. However, one could argue that donations and sponsorships are two different animals, based on how they are each treated by the IRS. Our question, therefore, is what are the ethical issues, if any, we would face as a nonprofit with 501(c) 3 status if we wanted to compensate a salesperson or sales team via commission for obtaining sponsorships for our annual convention or other annual meeting or event?
We would, of course, report this on the appropriate schedule for the IRS as a contractor expense.
A: Interesting question! I turned to two experts with differing viewpoints to answer it. The first was Jason Lee, JD, and General Counsel for the Association for Fundraising Professionals (AFP), who also consulted the chair of the organization’s Ethics Committee. The other was Laren Ukman, MBA, JD, and the CEO of IEG Consulting. IEG has specialized in sponsorships and cause-related marketing for nearly 30 years. Besides consulting, the firm conducts research on sponsorship and puts on the largest sponsorship conference in the world.
AFP’s position is clear – it’s not ethical. Period. Jason provided me with the applicable standards from the AFP Code of Ethical Principles and Standards, revised 2009, as well as valuable supplementary material. The first relevant standard (#21) reads, “Members shall not accept compensation or enter into a contract that is based on a percentage of contributions; nor shall members accept finder’s fees or contingent fees.” Before you say, “But that’s about contributions…” the FAQ sheet on fundraising ethics specifies that this includes “sponsorship, advertising and similar revenues.”
You cannot even offer to pay a base salary and then pay commission on sales that exceed the base. “Accepting a compensation package in which a part is salary or fee and the balance is to be made up of a percentage of the funds to be raised”is one of the stated examples of unethical behavior provided to illustrate Standard 21.
Need more documentation that states you cannot pay commission? Standard 24 prohibits AFP members from paying commissions and asks that they discourage their organizations from paying them as well. In the AFP Guidelines to the Code of Ethical Principals and Standards, “Paying a percentage finder’s fee for obtaining a corporate sponsorship” sums up the unethical behaviors associated with this standard.
The reasons for these standards is spelled out in AFP’s “Position Paper: Percentage-Based Compensation,” which reminds us that the motivation behind such compensation is personal benefit, whereas those working in the nonprofit arena should be motivated by social benefit. The position paper states that when they are not:
- charitable mission can become secondary to self-gain;
- donor trust can be unalterably damaged; and
- there is incentive for self-dealing to prevail over donors’ best interests.
However, it’s not all bad news. While percentage-based compensation is considered an ethical no-no, Standard 22 does permit incentive compensation. Incentive compensation differs from percentage-based compensation in that it is based on achieving goals that were previously agreed upon. In addition, these goals must meet all of the following criteria:
- the member’s organization has a policy and practice that awards performance-based compensation;
- the policy has the approval of the organization’s governing body;
- the policy and practice include, but are not limited to, the member’s area of responsibility (e.g., are a norm within the organization);
- the criteria are restricted to mutually agreed-upon, pre-established overall goals; and
- the criteria for determining the eligibility for, and amount of, such compensation shall exclude any consideration of a percentage of contributions. This should be interpreted as an absolute prohibition of any reference to, or use of, a percentage of income to determine compensation, either in effect or actuality.
If you are a member of AFP, you are required annually to pledge to follow its guidelines. But, it must be said that there are others who look at the issue differently, and thus offer different guidelines. Next month you will hear from Laren Ukman who is one of those. Be sure to catch what she has to say.