Sep
10
2010

Percentage or Commission-Based Compensation

Often times a charity cannot afford to hire a professional fundraiser.  In addition, many fundraisers desire to be paid a commission based on a percentage of the revenues that they raise.  Therefore, offering a commission for fundraising services is often perceived as a “win-win” situation.  Before entering into any arrangement, however, a charity must consider certain limitations on so-called percentage or commission-based compensation under the federal income tax laws, including the private inurement, private benefit, and excess benefit / intermediate sanctions rules.  To avoid application of these rules, the commission, as well as the fundraiser’s total compensation (including the commission and any other compensation) must be reasonable.  For example, commissions must be paid for services actually rendered and commensurate with the services rendered.  The IRS has also suggested that a ceiling or cap on the maximum amount of compensation is an important factor to ensure that commission-based compensation is reasonable.  Commission-based compensation based on the achievement of charitable objectives or established to serve a business purpose of the charity is preferable to compensation merely paid based on gross revenues.  It is also worth noting, although state laws limiting fundraising commissions have been struck down, professional fundraising associations generally limit or even prohibit commissions based on revenues for their members on the basis that such commissions are harmful to relationships between the donor and the charity and detrimental to the financial health of the charity.  In conclusion, before paying a fundraiser percentage or commission-based compensation, the charity must consider these laws and should consider consulting an experienced advisor to help them work through these issues.

2 comments

  • This is an important issue, but I want to mention one additional thing. No reputable fundraiser will ask for a percentage of the contribution as payment. It is an ethical slippery slope, and is in violation of the Association of Fundraising Professionals’ Code of Ethics (item 21, found at http://www.afpnet.org/Ethics/EnforcementDetail.cfm?ItemNumber=3261; AFP is the leading organization for fundraisers). AFP’s website lists three primary reasons why percentage-based fundraising is a bad idea:

    1. Support for a nonprofit organization in any form is a voluntary action for the public benefit.
    2. The seeking or acceptance of charity revenues should not result in the personal benefit of any employees, contractor, or representatives of a charitable organization.
    3. Donor attitudes can be unalterably damaged in reaction to undue pressure and the awareness that a commission will be paid to a fundraiser from his or her gift, thus compromising the trust on which charity relies.

    To find out even more, AFP has helpfully created a position paper on this issue as well: http://www.afpnet.org/files/ContentDocuments/Professional_Compensation_Position_Paper_102001.pdf.

    My point? Proceed with caution, not only for IRS reasons but for ethical reasons and for the good name of your nonprofit.

  • Jack Benson says:

    With commission based fundraising, the benefits to a Not-For-Profit can enormous. Especially for a NFP with limited resources. Besides, lawyers have been doing it for years, taking 30-40 percent on contingency. Like lawyers, if the fundraiser doesn’t produce, they get nothing. If they both only make a phone call to produce big results, it’s a windfall. Other times, it may take more work than the contingency/commission covers. But over time, it balances out. What’s the difference?

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