Further on Contingent Compensation (Percentage Fees)
Summary:
Another compilation of an online debate on the ethics and practical implications of basing compensation for fundraising on a percentage of the funds raised.
Answer:
Chip M. Watkins (cwatkins@WC-B.COM) wrote in Cyber-Accountability (a service of http://www.charitychannel.com) on 8/22/02:
I understand why ethical codes frown on percentage compensation in the
context of high dollar donor giving. You don't want the fundraiser
to--consciously or otherwise--pressure the donor in order to earn a fatter
fee.
However, no one has identified an ethical rationale for banning percentage
compensation (in a properly drafted agreement) of direct mail houses--who
have no contact with the donor--or telemarketers, whose contact with the
donor is limited, and in a context where pressure is much more easily
resisted. The AFP Position Paper is founded on the premise that
percentage-based compensation inherently violates the proscription against
private inurement. Neither the IRS nor any court has so ruled, and the
initial set of proposed regulations under Sec. 4958 (intermediate sanctions)
would have recognized the value of percentage-based compensation to
nonprofit organizations.
Percentage contracts for direct mail houses and telemarketers in donor
acquisition programs are uniquely favorable to the charity because they
eliminate the charity's risk, and clearly align the economic interests of
both fundraiser and charity. This is like the difference between paying
your broker for each trade, and paying your broker a percentage of the value
of the assets under management.
When a mass market fundraiser works on a time and materials basis, or on a
per call basis, there is no economic incentive to maximize income to the
charity except to the extent necessary to ensure that the fundraiser's bills
are paid. When the compensation is a percentage of revenue--gross or
net--the fundraiser's incentive to maiximize its revenue works for the
charity, too.
Are there abuses? Sure. A fundraiser unethically sends out a
"high-pressure" or "guilt-inducing" piece in order to maximize revenue. The
ethical rules ought to proscribe that conduct, not the payment of
percentage-based compensation.
Geoffrey Peters (gpeters@CDR-CDMI.COM) added:
I've long felt that
the absolute prohibition on percentage commissions on fundraising was
throwing out the baby with the bathwater. There seem to me to be some clear
situations where they are not only favorable to the charity but desirable
from the point of all concerned including educated donors.
Richard S. Steinberg (rsteinbe@IUPUI.EDU) picked up on the issue:
I have written a paper, and have related work in progress, on the
economics of incentive contracts with fundraisers. The quote above
details one important factor in my work, but another factor works in the
opposite direction, so that as a positive, rather than an ethical,
proposition, it would often not be in the self-interest of the charity to
offer a percentage based contract with its fundraising contractee or
employees.
This other factor is that although the fundraiser may work
harder, he or she may have to because donors who were aware of this
arrangement would reduce their contributions. An incentive contract of
this sort, I show, raises the "price" of donating (the amount that must be
given in order for the charity to provide an additional dollar worth of
services), and there is some evidence that the size of donations goes down
when the price of donating goes up (using other types of prices, such as
the "tax price" of giving). If the price effect dominates the work effort
effect, the organization is better off offering a fixed compensation
package (either in total, or fixed amount per contact/mailing). I show
that regardless of the after-the-fact fundraising cost ratio, there is no
such price effect for fixed compensation packages. See Nonprofit
Management and Leadership, vol 1, no. 2. (The related work is in progress
with Al Slivinski. Someday, it would be nice to complete it.)
(Note: There is another extensive of these issues by Rich Steinberg and others in http://www.nonprofits.org/npofaq/11/24.html.)
Chip Watkins commented further:
I have even had state regulators tell me that they recognize the value
to charities, especially newer charities, of contracts that pay fundraisers
a percentage of the contributions. Though, presumably, this should not be
too high a percentage. I.e., it's OK if a time and materials contract
produces no net to the charity because the FR had no specific incentive to
peform well, but its not OK for the charity to pay 50% of the gross to a
fundraiser who nets it $1 million. What's wrong with this picture?
On donor disclosure: First, relatively few donors are ever aware of the
compensation arrangements between the charity and the FR. Second, if they
are aware, it is irrational of them to reduce their gift, because this often
hurts the charity as much or more than the FR. Instead, if they want to
help the charity, but don't like the compensation arrangements with respect
to a particular gift, they should re-negotiate them (this probably works for
large donors), or give outside the particular arrangement (for small
donors). Once they get the envelope from the FR, just copy the address onto
a plain envelope and mail it in. If an apparently unsolicited check comes
in over the transom, and cannot be quickly connected to the FR's program, it
will presumably not go into the base on whch the FR's compensation is
computed.
Allen R. Bromberger (abromber@MAIL.EARTHLINK.NET) joined the discussion:
When it hires a FR, a charity is buying the skill
and effort of the FR; it is not buying a guaranteed result. The charity
knows it is paying reasonable compensation for services rendered because it
bases the compensation on the time and effort of the FR (which is certain),
not the ultimate result (which is not). With a percentage-based system, the
FR can easily reap a "windfall" if the result is better than anyone
expected, even though the FR did nothing in particular to bring in the extra
donations. To me, that smells like unreasonable compensation, even if
neither the charity nor the FR intended it to be so. Your advice thus
protects the charity and reduces the risk that donations will be diverted to
the FR based on factors other than the services rendered.
Of course, there is still a risk that the campaign will do worse than
expected and the charity will bring in less than expected or even lose
money. That risk is properly placed on the charity, and should be taken into
consideration when the charity decides whether or not to do a campaign. The
risk should not be on the FR who is, after all, only a vendor providing
specified services for a specified price.
This position also reduces the risk of charities being talked into running
campaigns because they have "nothing to lose." The danger of that is that
the charity becomes a front for the FR, not the other way around as it
should be.
IMHO, if a charity does decide to base FR compensation on a percentage of
gross revenue, they should ALWAYS get a cap, or at least a diminishing
percentage beyond a certain projected level of gifts. That provides some
protection against the windfall problem yet still allows for some sharing of
the risk.
That said, I acknowledge that percentage-based compensation is not
prohibited by the IRS or anyone else I know of. This is more of an ethical,
"best practices" issue than a legal one. In that regard, professional
standards are quite clear that percentage-based compensation is suspect and
therefore disfavored.
Chip Watkins asked:
Would someone please explain to this dense person why percentage-based
compensation is unethical? And why the charity and FR cannot ethically
agree to shift the risk from the charity to the FR?
With relatively few exceptions, performance-based, result-oriented
compensation is permitted in every other private sector occupation. What
justifies the exception for fundraising?
Supported by Ira Kaminow (ikaminow@JUST-TZEDAKAH.ORG):
Excellent questions. I have never understood the problem with
performance-based compensation.
Jason Schwartz (mcfaite@yahoo.com) added these thoughts:
The question of percentage fees has been popping up a lot lately. I work with a number of small nonprofits, a few of which take a large risk by signing a contract to pay a fundraiser a flat fee before they have any idea of how effective the fundraising drive will be. Im not talking about grant-writers, but rather special event planners, telemarketers and direct mail campaigns.
It does seem rather curious that some folks demand that nonprofits keep a reasonable ratio of fundraising costs to income, while at the same time denying those groups the most effective method of controlling those costs through the use of percentage contracts. Wouldn't it be easier for small NPOs to be accountable for their fundraising costs if they could just say "However much we raise, it's going to cost us N% of the total?"
Flat fees can create enormous risk for the NPOs, as well as a barrier to such activity that adversely impacts smaller, less experienced and poorer groups more than their wealthier counterparts. Once an NPO has obligated itself to pay a fundraiser a flat fee, I would say that fundraiser's work is fairly much done. Why should they care about the effectiveness of their campaign?
I'm also a little unclear on how a percentage fundraiser would be more prone to "over-guilting" or a hard-sell. It seems to me that the nonprofit could control the message their potential donors are hearing, the same way they can control the message of a public awareness campaign being run by a freelance marketing firm.
So, what exactly is the philosophy that says an NPO is being more accountable by agreeing on a flat fee before knowing the outcome of the fundraising initiative than it is if it agrees to pay a percentage of the total income? (This is not a rhetorical question. Please enlighten me.)
Allen Bromberger responded to several of the earlier posts:
Percentage-based compensation is unethical because it increases the risk
that donations intended for the charity will be "diverted" to the the FR,
not because of any additional time or effort expended, but simply because
more money came in than anyone expected. IMHO, that comes dangerously close
to private inurement.
Percentage-based compensation has long been considered unethical by FR
professionals because they believe (like most professionals) that they
should be paid for services rendered, not for results, which typically
depend heavily on the reputation of the charity, the popularity of its cause
or other external forces.
Contrary to the implication in your post, fee-based compensation does in
fact take performance and results into account - in deciding the level of
fee the FR is to be paid. FR's that routinely get good results for clients
receive a higher rate of pay than those who don't. Nothing wrong with that.
I also think the fact that we are talking about charities - not "for-profit"
businesses - is not a trivial point. Donors intend their contributions to go
to the charity, not the FR. And since under Riley et al professional
solicitors cannot be compelled to disclose the basis of their compensation,
donors can't make their choices based on full disclosure, so how are they to
be protected from having their contributions diverted if not through
prophylactic rules?
Here's a question: how would a "fair" percentage be determined in a
performance-based compensation system? If a charity agrees to give the FR
90% of the gross, is that OK? No matter how much work they've done? No
matter how much money comes in? Should there be caps? How would they be
determined?
I think the burden has to be on the proponents of percentage-based fee
compensation to demonstrate that such a system would not routinely result in
private inurement when large sums are raised. Can you suggest guidelines
that adequately protect donors and charities from a diversion of funds that
was never intended by the charity or the donor? What guidelines would you
propose to assure us that the ultimate compensation won't be
disproportionate to the risk taken by the FR?
This is far from being a no-brainer. There are legitimate arguments on both
sides. It is not necessary to insinuate that those who take a contrary
position are somehow mentally deficient. We simply view the ethical
considerations differently. Address the points I raise above and perhaps
you'll persuade me and others that you are right.
And Chip Watkins responded in turn. First with some general observations:
My arugment here is both great and limited.
It is great because, more
than anything else, I am arguing for freedom--not high FR costs, or even
necessarily for percentage contracts. I think it is simply wrong for "the
industry" to declare that percentage contracts are always, at every time and
in every place, unethical. Why do you want to limit the freedom of charities to enter into contracts that they, in the exercise of their
informed judgment, reasonably believe to be in the best interests of the charity?
It is limited because I am not arguing that percentage contracts are always
right. I am simply arguing that there is at least one situation in which a
charity would, acting in its best interests, enter into a percentage
contract for FR services. Whether a percentage contract is "right" for a
charity is a decision for each charity to make for itself--not to have the
industry make the decision for it. Unfortunately, what seems to be
underlying this discussion is a paternalistic assumption that charities are
somehow duped by FRs into percentage contracts that make the FR wealthy at
the expense of the charity. While that certainly happens from time to time,
I suspect that in most cases, charities (like UCC) make a calculated and
coldly rational decision that this contract is best for the charity at this
time.
One good friend who is one the other side of this debate has accused me of
advocating a position fit only for a perfect world--in which case, I might
say, we'd all have to find other work. Not true. In fact, those who
prohibit percentage contracts are trying to create a perfect world through
unwarranted rules that will not accomplish their objective, and that may
well lead to the loss of charities that need percentage contracts, or that
can't start up without them. All things considered, in America, the parties
to a transaction are usually deemed to be better situated--though not
perfectly situated--than anyone else to decide what is in their own
respective best interests.
Other things being equal, it is generally better for a charity to have
relatively lower FR costs than higher FR costs, lower management costs, and
higher proportion of dollars going into services, consistent with the need
to provide sound management of the programs and to maintain and develop an
FR program that will produce the net $$$$ needed to support program and
mgmt. If you cut FR and mgmt to zero, you won't have any funds with which
to pay for your ineffective and inefficient programs. AND, of course, "other
things" are never "equal."
A well-managed charity that necessarily starts with relatively high mgmt
and FR costs should see those trend down after a while.
And then Watkins went on to respond directly to several of the points Bromberger made:
Bromberger: "Percentage-based compensation is unethical because it increases the risk that donations intended for the charity will be "diverted" to the the FR, not because of any additional time or effort expended, but simply because
more money came in than anyone expected. IMHO, that comes dangerously close
to private inurement."
Watkins: We're dealing with an open market, and (by law) written
contracts. Money that is contractually due to a FR is, by definition, not
"diverted", as if it were stolen or embezzled. If more money than anyone
expected came in, then the charity will have more and it seems reasonable
that the FR should be paid more if that's what was bargained for. The FR
earned it.You can only have private inurement if the FR is an insider. When
the charity is dealing at arms' length with an unrelated FR, there can be no
private inurement, and probably no excess benefit transaction.
Bromberger: "Percentage-based compensation has long been considered unethical by FR
professionals because they believe (like most professionals) that they
should be paid for services rendered, not for results, which typically
depend heavily on the reputation of the charity, the popularity of its cause
or other external forces."
Watkins: Not so. Many professionals are paid for results. Lawyers
get paid on contingency in perosnal injury cases. Sales professionals are
paid on commission. Those who represent taxpayers in disputes with the
taxing authorities may be paid a percentage of the refund. Authors receive
royalties as a percentage of sales.Uncle Sam and Aunt Virginia get paid a
percentage (also too high, IMHO) of my taxable income. ;-)
As to the charities, those that are more popular and have a long history of
fundraising probably don't need percentage contracts. Typically, it is
charities that have no reputation to trade on, or that are unpopular, that
depend on percentage fees. These charities depend to a greater extent than
most on the skill of the FR in writing copy and designing an appealing
package, and in selecting the right lists for prospecting. But, because
they don't have the resources of more popular, longer established charities,
they depend on percentage contracts to shift the risk to the FR. In their
circumstances, shifting the risk is more important than a fixed fee
contract, and they will gladly pay the percentage to the FR when a bumper
crop of contributions comes in.
Bromberger: "Contrary to the implication in your post, fee-based compensation does in
fact take performance and results into account - in deciding the level of
fee the FR is to be paid. FR's that routinely get good results for clients
receive a higher rate of pay than those who don't. Nothing wrong with that."
Watkins: True enough, in an indirect way. Markets work. But a fixed
fee market doesn't work for a charity that decides it can't afford the risk
that the contributions from its solicitations--not those of the FR's clients
in general--won't be more than the fixed fee, or will be only marginally
more than the fixed fee. A percentage fee is simply a different way of
rewarding the FR for results.
Bromberger: "I also think the fact that we are talking about charities - not 'for-profit'
businesses - is not a trivial point. Donors intend their contributions to go
to the charity, not the FR. And since under Riley et al professional
solicitors cannot be compelled to disclose the basis of their compensation,
donors can't make their choices based on full disclosure, so how are they to
be protected from having their contributions diverted if not through
prophylactic rules?"
Watkins: Again, let's not use "diverted," since it implies illegality
or a second guessing that the charity made a bad deal. And the donor's
contributions do go to the charity. The charity contracts for a valuable
service, and thereafter pays the FR according to the terms of the contract.
This doesn't vary between fixed fee and percentage contracts, and FR costs
are part of doing business, whether the FR is done in-house or by a
contractor. If the charity enters into a fixed fee contract for $25,000,
and the mailing only brings in $30,000, are you telling me that the donors
should be told that 83% of their contributions were paid to the FR? Suppose
the contract fee was paid up front? Now the charity can honestly report
that none of the contributions were paid to the FR. If the charity does all
its FR in-house, does it not have to report to the donor that some portion
of the donor's gift was used for FR costs? All the money went to the
charity!
Prophylactic rules are suspect, because they preclude the exercise of
informed judgment. Prophylactic rules were the chief characteristic of the
Pharisees who, at least according to Jesus, set up their own rules in place
of God's.
If you must have a prophylactic rule, here it is: "Boards of directors and
executives of charities must exercise their informed judgment to act at all
times in the best interest of the charity they serve."
Bromberger: "Here's a question: how would a "fair" percentage be determined in a
performance-based compensation system? If a charity agrees to give the FR
90% of the gross, is that OK? No matter how much work they've done? No
matter how much money comes in? Should there be caps? How would they be
determined?"
Watkins: A "fair" percentage would be that agreed upon by charity and
FR, both knowledgeable in the market, and neither compelled to act. No
different than the definition of fair market value in any other context.
Charity would evaluate the donor market and the likelihood that this FR will
be able to tap that market successfully, and with what degree of success,
given the current environment, etc.
Let's not assume that charities are dupes and rubes, or that any part of the
fees or structure need to be "determined" by anyone other than the charity
and FR. There's an open market for FR services, no lack of price
information available, and the competitive forces at work in the market will
influence the fees paid--in both amount and form. Knowledgeable charity
personnel will bid out FR work, and evaluate the bids based on the market
data. Knowledgeable FRs will bid for work on the same basis, and eventually
they'll strike deals that each sides believes are advantageous, based on
their respective evaluations of the market at the time.
Because this type of valuation depends on the facts of each case, I cannot
tell you whether 90% would be OK or not. If the charity is particularly
unpopular, and FR for its cause particularly difficult, and the charity is
prospecting, it may be. (In fact, most charities would be delighted to
break even (costs equal revenue, or 100% paid to FR) on prospecting, because
that means they've acquired a valuable asset--the list of new donors--for no
net cost.) Certainly I would expect that case to be at one end of the bell
curve. Just as I would a contract for 1%. In fact, those charities that
could get a 1% rate are probably using fixed fee contracts.
If the charity is so situated that it can get the services it wants and cap
the percentage fee, or reduce the percentage as more money comes in, they
should negotiate for that.
Bromberger: "I think the burden has to be on the proponents of percentage-based fee
compensation to demonstrate that such a system would not routinely result in
private inurement when large sums are raised. Can you suggest guidelines
that adequately protect donors and charities from a diversion of funds that
was never intended by the charity or the donor? What guidelines would you
propose to assure us that the ultimate compensation won't be
disproportionate to the risk taken by the FR?"
Watkins: Again, you're assuming "inurement" and "diversion" that I
assume can't happen when the charity has a written contract negotiated at
arms' length with an unrelated FR. I can't assure you that compensation
will or will not be disproportionate to the FR's risk. But what is so great
for the charity about a fixed fee contract where the "professional" is
unwilling to take ANY risk, except those internal to his own business? It
is not for you (or me) to sit back paternalistically and decide--more
accurately, second-guess with 20-20 hindsight--whether risk is
proportionate. That's a judgment for those in the trenches, negotiating the
deals, and raising and spending the money.
Dan Prives (deepriver@AVAGARA.COM) offered this observation about the standards of organizations that are active the field:
Though these arguments are interesting, I suggest that the
issue is who decides. Since there are a number of associations
and groups that have declared percentage compensation unethical,
it is largely irrelevant whether there are counter arguments.
In any given cable news show or general circulation newspaper,
there will always be a representative of a "name" organization
declaring the practice questionable. To my knowledge there is
no organization to state the counter argument, so it effectively
is not part of the public debate.
Of the groups that offer standards, the following oppose
percentage compensation for fund raising:
The following groups do not mention percentage compensation:
We might note that the groups who formally oppose percentage
compensation are all membership organizations. Their ethical
standard is a way to define their membership. The groups that
do external evaluation do not mention percentage compensation,
although it is possible that the BBB considers it, too, given
that they seek copies of fund raising contracts as part of their
evaluations.
Allen Bromberger responded directly to Chip Watkins' points:
There is no "right" nor "wrong" position here. Ethical guidelines can do no
more than describe consensual norms that people may want to consider when
they make decisions. Especially people who aren't sure what to do and want
to conform to commonly accepted norms where they exist. We all agree that
percentage-based contracts are not illegal and nothing in the law prevents a
charity and a FR from entering into a percentage-based compensation
agreement if they wish. So let's drop the stuff about "freedom" and
"preventing charities from entering into contracts that they believe to be
in their best interests." Those are red herrings.
Ironically, it is the FR profession itself, through NSFRE (or AFP as they
now call themselves) who have declared percentage-based compensation
arrangements to be unethical. It is not the government or anyone else
imposing this rule on the profession. Just as lawyers sometimes think that
provisions in the Code of Professional Conduct are not always "right", we
still have to live with them. If there are sanctions attached, we run the
risk of being sanctioned if we chose a different course of action than that
dictated by the ethical rules. In the case of the AFP rules, there are no
sanctions. If one deviates from them, one only takes a risk that others will
judge them in a negative light. C'est la vie. As you note, it is not a
perfect world. Boards are capable of assessing risk and making decisions.
But knowing that a practice is considered unethical has to be part of that
assessment. They got a problem with that, take it up with AFP.
A few rebuttal points:
With respect to whether percentage-based compensation is "normal" in many
professions, I still maintain that most professionals are not paid on a
percentage-fee basis. Though - as you correctly point out - some
professionals are paid that way, I still think the weight of authority is
against you on that point. Hourly or daily rate, yes. Project fee, yes. But
percentage of income, no. Not in general.
With respect to language: I tend to speak from the point of view of a donor,
not a charity or a FR, which is why I use value-laden words like "diversion"
and "inurement". I do not mean to imply evil (or illegal) intent on the part
of the FR or the charity; just that their decisions with regard to FR
compensation may have results that are contrary to what I think a donor
would desire. If that offends anyone I apologize. But I think the perception
that funds can be (and often are) "diverted" in percentage-based
arrangements is widespread, which is why such practices are viewed with
suspicion. And a cynic might think it is one of the reasons that FR's have
fought so heavily (and successfully) to avoid being forced to disclose to
donors how they get paid - or even that they get paid at all. Donors want
the money to go to the charity, not to the FR. That may be unrealistic, but
it is nonetheless true. And I think the sector ought to be damn careful
about ignoring donors' views on this, lest the goose stop laying its golden
eggs. I cheerfully concede, however, that I have no evidence to back up the
aforementioned statements. They are pure supposition.
With respect to your point about keeping FR and management costs low: I
don't know whether or not fee-based compensation or percentage-based
arrangements typically result in higher or lower fundraising and management
costs for charities, but I cannot simply accept your blanket assertion that
they keep costs lower. I suspect that you are right for certain kinds of
charities and certain kinds of fundraising, but I suspect the opposite is
true for others. I'd like to see some evidence on this before I could accept
it as a valid argument. If you can show that there are situations where
everyone, including the donors, are better off with percentage-based
arrangements, I'd support a request that AFP consider an exception to its
rule when those conditions are present. Who knows, maybe they'd accept an
amendment and we could all be happy.
And Chip Watkins replied:
The bottom line seems to be that percentage based contracts are deemed to
be unethical because donors wouldn't like them. That's a helluva way to
decide what's ethical and what's not.
In any case, I will agree that it's probably true enough in the high-dollar
zone. But the typical direct mail recipient will never know, and probably
never ask.
Your discussion suggests that charities and FRs conspire to keep the donors
in the dark about the fact that fundraising costs money. If so, then the
whole relationship is build on an unethical foundation, to which all would
do well to pay a great deal more attention than to percentage based
contracts. In particular, charities should take the lead in educating
donors about both their charitable programs, and about who's running the
show and how much it costs to put the show on, including the cost of
fundraising. If all the watchdogs, standard setters, industry associations,
et al. put together a good series of PSAs to counter Money Magazine et al.,
that would be a real service to the sector.
Thomas H. Talbott (talbott@IX.NETCOM.COM)
joined the discussion:
For what it's worth, I believe that the percentage fee question is primarily
one of practicality and economics rather than legality or professional
ethics as some suggest.
Underlying the prohibition against it taken by AFP and other groups is the
practical consideration that it seldom works. Either the fundraising effort
proves more successful than anticipated (in which case the nonprofit incurs
dollar costs higher than might be considered reasonable) or it fails to meet
objectives (in which case the fund raiser cannot absorb the time and out of
pocket cost for long.)
A possible exception is the broad range of situations in which the nonprofit
enters into an agreement to lend its name to some commercial activity and
receives a typically small percentage of the results achieved. While some
might question the advisablility of many of these "fee-based" arrangements
from a nonprofit's perspective, few would challenge them on other grounds.
The "professional ethics" question is essentially avoided as the nonprofit
often views whatever it receives as "found money" and those on the
commercial side view it as "cause related marketing" justified either on the
basis that it enhances their commercial image or simply because it makes a
buck.
Mark Weinberg (paladin@WJLAW.COM)
observed:
Contingent fees are accepted by the
courts and legal profession because the good of allowing those without
other resources to be represented outweighs the negatives presented by the
inherent conflict of interest between the lawyer and his or her
client. Without percentage compensation, some smaller, new charities would
never be able to get their message out, so I believe it is acceptable in
appropriate cases, despite what NSFRE and others may say.
Thomas Talbott replied:
Your point on the problem faced by small (and particularly new)
nonprofits is certainly valid and applies equally to areas well beyond
fundraising. The "solution", I suggest, often rests with the organization's
founding directors and with those outside consultants willing to work with
the organization pro bono because they see merit in the vision and the
mission and are willing and able to help transform what may only be a "good
idea" into a successful nonprofit with the viability to survive.
If you will permit me a personal observation, my experience of over 30
years strongly indicates that consultants willing to work on a "contingency
fee" are frequently either new to the area themselves or are near the bottom
of the barrel. Nonprofits which engage them to save a buck may therefore
risk both valuable time and perhaps their future in the hope that a
fundamentally flawed arrangement will work out as planned.
And Mark Weinberg answered:
The fundraisers with whom I've worked
who utilize the percentage compensation approach, both for direct mail and
personal solicitation, are among the most prominent, successful and
experienced fund raisers anywhere. Indeed, it has been my experience that
the "holier than tho" organizations that impose an absolute prohibition
upon percentage rewards are the "Johnny-come-latelies" to this industry;
truth be told, it was that very dogmatic, inflexible rule that caused me to
drop active membership in one of those organizations, even though I have
never personally accepted percentage compensation for anything having to do
with fund raising.
Ira Kaminow rejoined the discussion:
I agree that the issue of percentage based fees comes down to an economic
question, not an ethical one.
Consider this economic advantage of shifting the risk of fundraising costs
from the NPO to the fund raiser (FR). The FR presumably has many clients
and can therefore spread the risk of failure among a relatively large number
of events. The individual NPO may have only one major event a year; if it
bombs, the NPO is in the hole not only because revenues are below budget,
but also because it must pay the FR a full fee.
As a simple example, suppose the success of a class of fund raising events
depends on the weather. If it happens to rain on the day of the event, no
one shows up and no funds are raised. If it's sunny the event is a bang-up
success. The FR runs many events a year and can offset rainy busts against
sunny hits. Not so for the NPO (especialy a small one) which cannot spread
the risk over many events. Therefore the weather is a bigger gamble for the
NPO than the FR.
In other words the FR can act as an insurer, spreading some of the risk of
failure over many events and many NPOs.
Michael Wyland (Michael_Wyland@CHARITYCHANNEL.COM)
responded:
That's true. Of course, indirectly, it makes the donors to one charity the
supporters of another, without their knowledge. The FR, also, to a limited
extent, becomes the arbiter of who's supporting whom.
And Ira Kaminow replied in turn:
What you say is generally true of all insurance. For example, life insurance
makes policyholders who survive the policy year supporters of the
beneficiaries of those who don't, and it makes life insurance companies
arbiter of who's supporting whom.
In regard to the "without their knowledge" part, I strongly favor the
fullest disclosure feasible. I would indicate in fundraising materials the
percentage of the funds collected that will go to the fundraiser, under a
percentage fee schedule. I think that could give each donor a more accurate
sense of how much of the money (s)he actually donates will go to fundraising
costs, which seems to be important to some donors in making giving
decisions. The amount each donor pays toward fundraising costs is more
muddled with a fixed fee. I see that kind of transparency as another
advantage of percentage-based fees. But I would not advocate that fixed
fees actually be prohibited entirely. (That last sentence was meant to be a
joke.)
Rich Cowles [rcowles@CRCMN.ORG] added a summary note::
It seems that the underlying difference between the two sides of the
percentage vs. fee argument is point-of-view. The percentage proponents look
at the situation from the charity's standpoint; the fee proponents look at
it from the donor's viewpoint.
I think of ethical principles such as AFP's as recognizing the uniquely
altruistic motivation of donors. These principles protect and preserve the
voluntary aspect of giving.
Fundraising is different from typical selling where the seller tries to
convince the public to buy. Leading or manipulative methods are fair game.
Ethical fundraising makes the case for supporting the charity, but leaves
the decision to the donor. No arm-twisting or manipulation -- a line, I
believe, that FRs may be tempted to cross when guided by percentage
contracts.
Posted 8/27/02 -- PB
