Incentive Pay for Fundraisers: The Debate

There's tension and long-running debate in the nonprofit sector whether fundraising professionals should be paid for performance – e.g. receive a percentage of the funds raised as compensation. Most nonprofit ethics codes say "no" to percentage-based compensation, however others in the sector say that sometimes percentage-based compensation may be necessary.

Association of Fundraising Professionals Code of Ethics

The Association of Fundraising Professionals (AFP) Code of Ethics provides fundraisers may not be paid: (1) finder's fees, (2) a percentage of funds raised, or (3) contingent fees. The ACA Code allows bonuses provided the bonuses are paid "in accord with prevailing practices within the members' own organizations and are not based on a percentage of contributions." For example, if your organization has a bonus policy that applies to all staff, you may also provide a bonus to your fundraising staff.

An Opposing View of Incentive Pay for Fundraisers

While the AFP position on incentive pay is the most widely accepted, some nonprofit thought leaders suggest that incentive compensation can, and should, be accepted. For example, Ken Goldstein, The Nonprofit Consultant Blog, suggests that there are circumstances where small nonprofits or start-ups that cannot otherwise afford to hire fundraisers may use incentive pay. He argues that fundraising ethics rules that prohibit contingency based compensation can create obstacles for small nonprofits and suggests that provided set caps are used with contingency fees, incentive-based compensation may be used.

Pressure to Keep Fundraising Costs Low

There is tremendous pressure on nonprofit groups to keep fundraising costs as low as possible. How many times have you seen, and maybe even been impressed, when a charity states that 100% of donations go to the cause? The charity standards of the Better Business Bureau Wise Giving Alliance provide that no more than 35% of funds raised should be spent on fundraising. In a Chronicle of Philanthropy study, many nonprofits reported that their accountants advised them to list zero on the fundraising section of the IRS Form 990. In The Nonprofit Starvation Cycle, authors Ann Goggins Gregory & Don Howard state that nonprofit organizations must get real and honest about the cost of raising money, educating their donors that fundraising costs, along with rent, phone bills and other operating costs, are essential to getting results.

IRS rules

IRS rules do not prohibit incentive, commission or percentage-based fundraising compensation. IRS rules provide only that compensation must be "reasonable". This means that based on the facts and circumstances, compensation must be similar to what other organizations pay for similar services. As far as fundraisers are concerned, this means that you can pay bonuses, but the amount paid must be reasonable. For example, you would not pay a bonus of $100,000 to a fundraiser who earns $50,000. Tripling their pay would likely seem excessive to the IRS. For this reason, you should always cap contingent or percentage-based compensation to make sure it remains reasonable.

In sum, nonprofits need clearly defined policies for incentive pay. The National Council of Nonprofits offers excellent resources for compensation and ethical fundraising. An additional resource for you includes this article about commission-based pay.

For more information about fundraising, please take a look at our recent article about hiring the best fundraiser.