Is Percentage-Based Compensation Unethical?

November 2, 2009

Teacher unions aren’t the only ones who have a problem with linking compensation to performance.  The Association of Fundraising Professionals (AFP), the interest group representing the people who raise money for non-profit organizations, has declared that it is unethical. 

As the AFP’s standards of ethics puts it: “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.”  According to the AFP, paying fund-raisers a percentage of what they bring in is not just a bad idea, it is wrong.

I have been a member of three non-profit organization boards and at each one the board was told that it could not pay a fundraiser a percentage of money brought in.  Instead, we were told that we were ethically bound to pay a fundraiser a flat fee and hope that the person would raise significantly more than the flat fee.  I must also add that at each one of these organizations the fund-raiser we hired barely covered his/her flat fee and the non-profit came away with virtually nothing. 

I have never understood why percentage-based compensation for non-profit fund-raisers is unethical.  I understand that it is in the AFP and their members’ interest to declare that it is unethical.  Doing so almost always stifles discussion on boards about what is the best way to compensate fund-raisers.  It also shifts all risk to the organization from the fund-raiser and assures them a profit.

The AFP has gone as far as proposing that Congress pass a law forbidding non-profits from using percentage-based funding for fund-raisers.  The argument about why this is such an awful practice that it needs to be outlawed is flimsy at best.  First, the AFP claims: “Percentage-based compensation sets up a conflict of interest. A consultant’s desire for personal gain shouldn’t trump the broader social interests of the organization.”  But it is not clear why paying fund-raisers a percentage of what they bring-in sets up a conflict of interest.  If anything, paying fund-raisers a percentage aligns the interests of fund-raisers and organizations by providing the fund-raiser with an incentive to raise more money, which is exactly what most organizations also want. 

If percentage-based compensation creates a conflict of interest, why should that be any more of a problem for fund-raisers in the non-profit sector than among sales-people in the for-profit sector?  As the AFP concedes: “Percentage-based compensation methods are generally legal. They are also common practice in the commercial sector.” 

Every objection that the AFP raises to percentage-based compensation could apply equally well to the profit-seeking sector.  And each of these problems can be successfully managed.  If they cannot, people in the profit-seeking sector would avoid percentage-based compensation as unproductive, but almost no one would denounce it as unethical.

Here are the objections that the AFP has that they say makes percentage-based compensation in the non-profit world unethical:

What if a consultant were to receive compensation based on an unsolicited gift or on an annual contribution that commenced before and continues after the consultant leaves? Such reward without merit would create resentment among organization staff and donors. Since many contributions are the result of teamwork among organization staff and consultants, no one person should be able to cart off the rewards of that effort. Consultants motivated by personal gain could unduly pressure a donor to make a contribution, without consideration of the donor’s wishes or timetable. And if the practice became widely known, the organization’s reputation and credibility could suffer irreparable harm.

Sales also come to businesses “that commenced before and continues after the [salesperson] leaves.”  Businesses that use percentage-based compensation devise ways of assigning responsibility for sales (some of which may be  arbitray) or they exclude certain sales.  These problems are not unique to non-profits and have been addressed in the profit-seeking sector.

It is also true that “many [sales] are the result of teamwork among organization staff and consultants, no one person should be able to cart off the rewards of that effort.”  Again, these are problems that also exist in the businessworld and solutions have been developed.

Lastly, it is also true that “[salespeople] motivated by personal gain could unduly pressure a [customer] to make a [purchase], without consideration of the [customer]’s wishes or timetable.”  This is also not a unique or intractable problem in the businessworld.

In the end, the declaration that percentage-based compensation for fund-raisers just feels like self-interested bullying.  Non-profits may choose not to pay fund-raisers on a percentage basis, but they should feel free to consider whatever way would best serve the organization without being told that they are behaving “unethically” without any valid reason.

I’m thinking about starting a new organization, “People United for Jay P. Greene.”  One of our first actions is likely to be to declare it unethical not to give Jay P. Greene a million dollars.  We’d have about as much reason for saying so as the AFP has for its “ethics.”