Last month I received and answered the following question from the perspective of the Association of Fundraising Professionals (AFP). I promised to provide a different perspective this month.
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: The response based on the ethical principles and standards of the Association of Fundraising Professionalsprobably surprised no one. Most, if not all, of the professional fundraising organizations have similar policies. However, it is not the only viewpoint – especially when we are concerned with sponsorships that come out of the corporations’ marketing budgets (vs. their philanthropic budgets). Today you’ll hear, in her own words, from Laren Ukman, MBA, JD, and the CEO of IEG Consulting. As I mentioned last month, 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.
I’m not sure why there is so much debate around the question of whether a nonprofit should compensate a sponsorship seller based on a percentage of funds raised. Clearly it is not a question of “can,” as there is nothing illegal about such an arrangement. Assuming payment is not excessive and the arrangement is “arm’s length,” nothing in this structure would violate IRS regulations.
The “should” debate has focused on the fear of conflict that may arise between the sponsorship seller’s own interest and the best interests of the organization and/or prospective sponsor. Does this arrangement provide an incentive for the seller to close a deal that is undervalued or that may be incongruous with the nonprofit’s mission?
Nonsense. The same potential conflict exists in the for-profit world, where the vast majority of sponsorships are sold by employees or third-party agencies who receive a commission. Commissions are the primary motivation of a good seller. Backstop measures are put in place to manage any conflicts. First, the rightsholder (the nonprofit in this case) generally has final say over any sale. It can dictate a minimum fee, companies and or categories that are off limits, and even how a sponsor can promote its affiliation. Rightsholders protect themselves by knowing who they are working with. They do due diligence and check references. Someone who is motivated by incentives (and most good sellers are) is not inherently conflicted. Anyone who would try to close a deal that benefitted themselves more than the rightsholder or the sponsor would not last very long professionally.
In a world where companies recognize that consumers and customers want values, not just value, and that brands need to serve society, nonprofits are still not receiving their fair share of corporate sponsorship dollars. Marketing budgets are often much bigger than contributions budgets, so nonprofits would fare well to hire (whether as an outside agency or employee) people who understand how to create and sell marketing partnerships—a different skill set than traditional fundraising.
The issue seems more problematic for nonprofits when dealing with in-house staff as opposed to outside agencies. A good solution for employees is to make just a portion of compensation percentage based. For example, if it is determined that fair compensation for the sponsorship role is $X, pay as a base 80 percent of that and pay the other 20 percent as a bonus for achieving the mutually agreed upon sponsorship goal. But also allow the seller to earn a commission on everything over goal. This structure is more akin to an incentive than a commission and should minimize any potential conflicts, especially if the safeguards mentioned above are in place. The American Speech-Language-Hearing Association did just that and its sponsorship revenue increased seven-fold in three years.
Although it is not the norm – according to IEG’s 2012 Salary Survey only 15 percent of nonprofits utilize commission-based compensation structure for sponsorship sellers – it is something many nonprofits would do well to rethink.
I can’t tell you what to do or not to do. Consider both sides, speak with your legal advisor, and then proceed as you feel appropriate for your organization. If you decide that you are interested in pursuing the idea of using a paid solicitor, let me suggest a few steps to take before making your final decision. Every state is different. I suggest you begin by contacting the department that handles nonprofit issues in your state to ask if there are any specific requirements and/or prohibitions around the solicitation of sponsorships on a commission basis of which you must be aware. I would double check if anyone soliciting sponsorships for you must be registered in the state as solicitors, for which a bond is usually required. I’d also contact a couple companies that specialize in obtaining sponsorships on a commission basis and ask them how they answer this question about ethics. Finally, I would call several of their references to see if you can learn from them of any potential pitfalls before deciding whether to move forward.