PROFESSIONALCOMPENSATION APositionPaper Preparedbythe AFPEthicsCommittee AdoptedMarch,1992 RevisedOctober2001

SUMMARY Forpurposesofthispaper: Percentagebasedcompensationforcontributionsisdefinedasanycompensationthatis basedonapercentage(sometimesreferredtoasacommission)ofcontributionsraised. Afindersfeeisafeepaidforbringingadonortoanotforprofitorganizationforthe purposeofcharitablesolicitation. Abonusisaformofcompensationbasedonperformance(butnotonapercentageof contributionsraised)thatispaidasanincentivetoperformanceinadditiontoasalaryor fee. TheAssociationofFundraisingProfessionals(AFP)believesthatindividualsservingacharityfor compensationmustaccepttheprinciplethatcharitablepurpose,notselfgain,isparamount.If thisprincipleisviolatedandpercentagebasedcompensationisaccepted: charitablemissioncanbecomesecondarytoselfgain donortrustcanbeunalterablydamaged thereisincentiveforselfdealingtoprevailoverdonorsbestinterests. Inaddition,percentagebasedcompensation,howeveradministered,canproducerewardwithout merit. AFPholdsthatpercentagebasedcompensationcanencourageabuses,imperilstheintegrityofthe voluntarysector,andunderminestheveryphilanthropicvaluesonwhichthevoluntarysectoris based.AFPstandsfirmwithitsStandardswhichprohibitsmembersfromworkingfor percentagebasedcompensationoracceptingfindersfees.

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INTRODUCTION Charitableorganizationsareintegraltothefabricofsociety.Theirprogramsandservicesreach theareasofsocialneedandculturalenrichmentthatforprofitenterprisescannotaddress. Charitiesrely,inpart,onvoluntarydonationstomeettheirbudgets.Donortrustisofparamount importance.Toearnandkeepthattrust,everyaspectofcharitableactivitymustbeabsolutely ethical.Nowhereisethicalbehaviormoreessential,norbyitsabsencemoredamaging,thanin philanthropicfundraising. Tobeethical,philanthropicfundraisingmustbemissionled,institutionallybased, volunteerdrivenandprofessionallysupportedinanenvironmentfreeofimproper motive,unreasonablerewardorpersonalinurement. THECHARITABLESECTOR Thenotforprofitsectordiffersfromprofitmakingbusinessinatleastfourways. 1. LawandRegulation Charitiesmustoperateastaxexempt,taxdeductibleentities.Theyareaccordedthis treatmentunderlawonlyaslongastheyfulfillthesocialmissionforwhichtheywere established.Charitablepurposerequiresthatallincomeofacharitybeusedinthefulfillment andfurtheranceoftheorganizationalmission.Ifacharitysincomeisgreaterthanits expenses,thelawrequiresthatthesurplusremainwiththecharity.Surpluscannotbe divertedtoprivatebenefit. IntermediateSanctions.(Note:Thissectionappliestothoseprofessionalspracticinginthe U.S.) In1996,newU.S.federalregulationswerepassedthatimpactcompensationin nonprofitorganizations.Knownasintermediatesanctions,becausetheyprovidetheIRS withanopportunitytoimposepenaltiesotherthanremovalof501(c)(3)status,the regulationsarecontainedinsection4958oftheInternalRevenueCode.TheygivetheIRS powertoimposefinesforexcessivecompensationofnonprofitexecutives.Intermediate Sanctionsguidelinesforsettingexecutivecompensationtoavoidexcessbenefitincludethe following: 1. thearrangementmustbeapprovedbymembersoftheorganizationsboardoraboard appointedcommittee,noneofwhomhaveaconflictofinterest 2. theboardorcommitteemusthaveobtainedandrelieduponappropriatedataastothe comparabilityofthecompensationorfairmarketvalueoftheconsiderationand 3. theboardorcommitteemustdocumentthebasisforitsdeterminationadequatelyand contemporaneously.

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2. Governance Acharityderivesitsauthorityfromavolunteergoverningbody,usuallycalledaboardof directorsorboardoftrustees.Theboardisthecharityslegalauthorityboardmembersare chargedbylawtoholdintrusttheassetsofthecharitablecorporation.Boardmembersserve voluntarilyandwithoutcompensationprovidinggovernance,policydevelopment,financial securityandstewardship. 3. VoluntarySupport Charitableorganizationsrelyondonationsvoluntarilygiven.Thereisnocomparable exchangeinthebusinessworld.Inacommercialtransaction,tangiblevaluepassesfromone partydirectlytotheotherforastatedprice. Inatransactionbetweenacharityandadonor, thevaluethatpassesfromonetotheotheristhepromisethattheserviceforwhichthedonor implicitlycontractedwill,infact,bedeliveredbythecharity. Theservicerecipientissociety,acommunityorapartyunknown(andfrequentlyunidentified) tothedonor.Thedonorsbeliefthatthecharitywillusethecontributionpurposefully, effectivelyandefficientlyforthecharitablemissionisthefoundationofthephilanthropic exchange. 4. Motivation Themotivatingfactorincommercialbehaviorisprimarilypersonalgain.Becausecommerce isprofitoriented,employeecompensationintheformofcommissionorotherpercentage incomerelatedtooutputandproductivityisappropriate.Workersseekandaccept commercialemploymentinreturnforpersonalprofit. Themotivatingfactorincharitablebehaviorissocialbenefit.Whatmaybepropermotivation incommerceisinappropriateinthenotforprofitsector.Thereisaninherentconflictof interestbetweencharitiesfoundedwithoutintentofprofitorprivatebenefit,andemployees whosecompensationandprimarymotivationarebasedonpersonalfinancialgain. AFPSPOSITION AFPbelievesthatindividualsservingacharityforcompensationmustfirstaccepttheprinciple thatcharitablepurpose,notselfgain,isparamount.Itisourviewthatif,bydefinition,private financialbenefitcannotinuretothecharity,itshouldnotinuretotheworker. Bylaw,compensationbasedonskill,effortandtimeexpended,remuneratedbysalaryorfee,does notconstitutepersonalinurement.Conversely,AFPbelievesthatacommissionorpercentage basedcompensationorafindersfeebreachesthenoinurementprincipleandis,therefore,a violationof itsStandardsforsixspecificreasons.
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1. Iftheselfinurementprincipleisviolated,themissionandlongterminterestsofthecharity maybecomesecondarytotheworkerspersonalinterestandselfgain.Thedonors(and publics)interestandneedsmaynolongerbeforemost. 2. Donorattitudescanbeunalterablydamagedinreactiontounduepressureandtheawareness thatacommissionwillbepaidtoafundraiserfromhisorhergift,thuscompromisingthetrust onwhichcharityrelies. 3. Percentagebasedcompensationorcommissionscanfosterinappropriateconductby individualswhoseselfinterestisorientedtoimmediateresults,irrespectiveofthedonorsbest interests. 4. Fundraisingisanongoingprocessofdonoridentificationandcultivation.Individualsdevelop anaffinityforanorganizationalmissionandwishtofurtheritthroughcontributions.Amajor tenetforsuccessisthatanorganizationisstrengthenedwhenvolunteersareactivelyinvolved inthisprocess.Theroleofaprofessionalfundraisershouldincludebuildinganincreasingly committed,enthusiasticandcapablegroupofvolunteerswhoaffectthefundraisingprocess withoutcompensation.Tyingstaffcompensationtoapercentageofcontributionsraisedmay discouragethisactivity. 5. Percentagebasedcompensationcanproviderewardwithoutmerit.Contributionsthat materializeatagivenmomentareoftentheculminationoftheeffortsofmanypeople, includingvolunteers,overlongperiodsoftime.Thepersonwhosecompensationrestsona percentageofcontributionsraisedwouldwishtoincludesuchgiftsforthepurposesof calculationhis/hercompensation.Forexample: a. Charitiesreceiveunexpectedorunsolicitedgifts,oftenbequests,sometimesfrom previously unknownbenefactors.Suchwindfallgiftscanprovideanunrealisticallyhigh baseineffect,anunearnedbaseonwhichpercentagebasedcompensationmaybe calculated. b. Promisesofpaymentofcontributionsinthefuture,intheformofwrittenpledges,annuity andinsurancecontracts,andothersuchfinancialagreements,canelicitunpaidgiftvaluesa fundraisermayexpecttobeincludedinthebaseforhis/hercompensationcalculation. 6. Donorsinterestsmaynotremainparamount.Thereareavarietyofcharitablegiving instruments,includingdeferredgivingarrangements,fromwhichprospectivecontributorsmay choose.Thefundraiserwhocompensationisbasedonapercentageofcharitable contributionsraisedmayinfluencedonorchoicesoastogeneratethegreatestcurrentresult ratherthanpreservethedonorsassetsforthebestlongtermbenefittohimorher,andtothe charity.

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THEAFPCODE AFPrequiresitsmemberstoadheretoaCodeofEthicalPrinciplesandStandardsthathavebeen developedtopreserveandprotectdonorrightsandtheintegrityofthephilanthropicprocess. AFPholdsthatpercentagebasedcompensationandfindersfeesmayencourageabuse,imperilthe integrityofthevoluntarysector,andunderminethephilanthropicvaluesuponwhichitisbased. Accordingly,AFPsStandardsincludethefollowingstatements: Compensation 21. Membersshallnotacceptcompensation orenterintoacontractthatis basedonapercentageof contributionsnorshalltheyacceptfindersfees orcontingentfees.Businessmembersmustrefrainfromreceiving compensationfromthirdpartiesderivedfromproductsorservicesfora clientwithoutdisclosingthirdpartycompensationtotheclient(for example,volumerebatesfromvendorstobusinessmembers). Membersmayacceptperformancebasedcompensation,suchasbonuses, providedsuchbonusesareinaccordwithprevailingpracticeswithinthe membersownorganizationsandarenotbasedonapercentageof contributions. Membersshallnotpayfindersfees,commissionsorpercentage compensationbasedoncontributions,andshalltakecaretodiscourage theirorganizationsfrommakingsuchpayments.

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Approved,March1992byAFPBoardofDirectors. RevisedFebruary,2001byEthicsCommittee. ApprovedJuly,2001byAFPBoardofDirectors. ApprovedOctober,2001byDelegateAssembly.

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