The Nonprofit FAQ

Can Fundraisers be Paid a Percent of the Amount Raised?

On August 2, 1998, Tony Poderis ([email protected]) wrote to NONPROFIT: Few topics generate more heated discussion in non-profit organizations than whether development professionals (staff or consultants) should be paid a percentage of the money raised, receive commission-based compensation, or be paid a performance bonus. Perhaps because it is a practice of giving financial rewards to development professionals contingent upon the achievement of fixed money goals, we can simply refer to it as "contingent-pay." Whatever you want to call it, two things are becoming more and more apparent. 1. The practice is increasing. 2. The practice is troubling the development profession. I have witnessed stern admonitions regarding contingent-pay practices from scores of development professionals and through policy statements from the profession's governing bodies. Despite those admonitions, many development professionals are not only continuing to work for contingent-pay, but are accelerating their acceptance of such compensation practices. If the issue is of interest or concern to you or an organization with which you are associated, my position paper on this subject might be of interest to you. The article is titled: "The Argument Against Paying Development Professionals Based Upon The Amount Of Funds Raised For Non-Profit Organizations." It is available on: http://www.raise-funds.com/forum.html In March, 1996 a series of interesting, and sometimes controversial, posts were added to Fundlist discussing the various arguments, pro and con, to the ethical prohibition against non-profit organizations paying fund raisers a percentage of funds raised and the ethical prohibition against fund raisers accepting such payments. This collection of the posts was compiled by William Krueger (who is also a participant in the discussion). Transitional and introductory paragraphs written by him (like this one) are in italics. The discussion initially began with a post noting that a non-profit said that they had hired a company to write and submit proposals and that the non-profit would pay a percentage of any grant that was funded ... and nothing if the grant was not funded. This provoked a series of messages in general. Al Field ([email protected]) wrote: It is a good question whether such fees should be for a flat dollar amount or a percentage of the award. I personally feel more comfortable with a flat fee, but percentage charges would not be common if a meaningful segment of the nonprofit community did not prefer this arrangement. Judith Lindenau ([email protected]) wrote: Nothing gets my dander up more than the 'holier than the rest of the world' attitude. And now, more than ever, we have to be smart and innovative managers. Maybe, just maybe, there are some lessons to be learned from the business world... Jeanne McWhorter, MSW, ([email protected]) wrote: I have been told no self-respecting grant writer would do the percentage bit but that seems a bit convoluted to me. If you are not willing to take a chance (especially with a new NP which has no money, like mine) then what does that say about your confidence in your ability? To me, someone willing to accept a reasonable percentage paid only if the grant is received is the more confident one. I realize I will probably draw a lot of flack for this but t he bottom line is that when you are first starting, you can't pay a fee if you don't get the grant because you aren't even eating yourself. A series of discussions revolved the whole idea of comparing fund raisers to other professions ... and the professions that were chosen to compare fund raisers to seemed to vary depending upon the position of the writer. Hugh Giblin ([email protected]) wrote: I wonder (ethically speaking) what the difference is between a grantwriter doing a proposal on a contingency basis and an attorney doing a personal injury case on the same basis?" Judith Lindenau, CAE ([email protected]) wrote: As someone who works with people who make their living through commission schedules, I find this a silly discussion. First, as someone implied, commission payments are not a sign of moral degeneration...not only do real estate people and attorneys use them, so does your computer salesman and many others. As a matter of fact, some would argue that commissions are the fairest way of getting paid for your skills that there is--and as a result, the ONLY way for women (for instance) and other minorities to receive rewards equal to their talents in a given field. Ina Frank ([email protected]) commented: One very commonly-accepted analogy: Let's say you have a progressive disease. That disease will create major illness or even death if you do not receive absolutely successful treatment. Let's further say t hat there is no guarantee that *any* treatment available today will work, but there's an off-chance that one or another courses of therapy might. Or, perhaps, a combination of several. You go to the finest doctors you can. They devote considerable time and resources and, of course, bring their years of training and expertise to your treatment. They prescribe (and you actually take) one or more medications. But maybe the one medicine or combination of medicines that will guarantee your successful recovery is simply not available today to treat your specific condition. Are you saying that the physicians should not be paid because of a situation that is clearly beyond their control? William Krueger ([email protected]) responded: Granted, the doctor should be paid... and I am sure that every doctor and fund raiser wants to be paid ... whether they succeed or not. But that isn't really the point, the questions asked really boiled down to how a charity is hurt by percentage based fund raising. Would you, as a patient, have turned down a doctor who said you only had to pay him if he cured you? God forbid we start comparing ourselves to lawyers and Realtors, but isn't that a better example? A Realtor spends hundreds of dollars of advertising a house, but it doesn't sell in six months. You fire the Realtor and hire one that sells your house ... who gets paid? And for that matter, in this case, who is a better Realtor? Hearing both stories, who would you want as a Realtor? A strict interpretation of the ethic debated leads to a question - can you fire a fund raiser for not raising enough money? If so, then what is "enough" - isn't that an unstated amount and thereby a percentage? Also, what of the "ethical" fund raiser who won't take a percentage but is overly optimistic - either through ineptitude or naiveteò - and indicates more can be raised than is possible. The charity pays the fund raiser for months to accomplish something that can't be accomplished ... is that in the best interests of the charity ... and its donors? Ina Frank continued: Since I started the physician:grantwriter analogy, and a few respondents have countered by comparing instead to lawyers and Realtors, let's put at least this much to rest:- By and large, lawyers and Realtors who work on contingency and commission, respectively, have *already* established their practices, set up and paid for day-to-day operations and are, in a sense, fulfilling their missions. I sensed that most of the NP organizations who expressed concern about not having up-front money for grantwriters are either startups or smaller and not yet fiscally stable. Nothing intrinsically wrong with being either, at early stages. Further: Clients who agree to a contingency arrangement with a lawyer have been damaged in some way and, presumably, are seeking only to recover actual and other kinds of damages. Not at all like our organization that hasn't even gotten up and running, yet. It is my understanding directly from Personal Injury lawyers that they do try to get a fixed retainer up front whenever possible, even in contingency cases...thereby guaranteeing them some compensation for their expertise and effort expended. Sometimes, even on relatively simple cases that likely will settle before going to court for less than $50,000, these retainers are still as much as $5000 or $10,000. As for Realtors, our bizarre system generally allows them *only* to make money on sales, without independently rewarding their efforts and expertise at all. Frankly, I've always believed that to be most unfair. And, in an even stranger twist re commissions: Although the agents do want sales to go through, if I am a prospective *buyer* I should always have the nagging suspicion that 4% of, say, $250,000 is $10,000 while 4% of $275,000 gives the agent another $1000 in his/her pocket. (And this person is working for *me*??? Riiiight) But let's also not decide that because a fund deve lopment professional (and a grantwriter is a specialized one of those) believes in doing good for others, they should forfeit the right to do well, or at least adequately, for themselves and their families. William Krueger then wrote: No doubt left that flat fee basis for compensation of any professional is better for that professional .... yet how does the consumer (either the person in the case of the lawyer or Realtor, or the organizati on in the case of the fund raiser) get hurt, or run the risk of getting hurt, by a percentage based compensation? Which brought up a lot of conversation about why the prohibition existed. PERSONAL INTEREST OF THE FUNDRAISERS Denice Rothman ([email protected]): I believe that grant writing is much more than just looking for money. A lot, and I do mean a lot, of time and thought goes into putting together a strong proposal, including our extensive experience sitting on federal grant review panels, which from our perspective is what we are being compensated for. Our company has a very strong community service philosophy and we try to charge fees that are affordable, even by small organizations. Ina Frank ([email protected]) added: One scenario needs mention, fershure: Let's say a crackerjack grantwriter seeking funds for a worthy organization or program does extraordinary research, develops an appropriate proposal that follows all the rules of the funder, does an outstanding job of capturing the interest, heart & black bureaucratic soul of the grantmaker, and pitches the program honestly and to the nth degree. Let's further say that he/she devotes a couple of weeks to this task...what with interviewing the organization leadership, Executive Director, Development Director, clients or what have you... and then proceeds to draft, refine, and draft some more before submitting. And then let's say that, because we know how really top notch many of our grantwriters are, there are five -- or perhaps just two -- really qualified, top proposals for just one pot of money. Are we to say that because we were #2 and not #1 that the grantwriter does not get a nickel? William Krueger ([email protected]) responded: An attorney works for years on a case, does a great job, spends thousands of dollars etc. etc. etc. and then some harebrained Los Angeles jury sides against him/her and his/her client and gives $0 to his/her client (and the lawyer). Nobody loses sleep for the lawyer do we? How about the hundreds we spend selling a client and then the client chooses some other company, shouldn't we get that money back as well? Risk is a part of doing business, unless, apparently you are fund raiser. Denice Rothman added: One of the services the consulting firm I work provides is grant writing and I have done this free lance in the past. We do not work on a percentage, but rather establish a fee for the service we provide - writing the grant - and we clarify with our clients that there is no guarantee that it will be funded - that is just not in our control. Much of the time we are successful, but there are those times when we are not. However, we have still provided a service, and the risk involved is not the element that drives how much we are paid, it is the value we place on our work and the amount our clients agree to pay for the scope of work completed. I believe this is in line with the NSFRE philosophy. William Krueger responded to Denice Rothman's message: I agree with you on an intellectual level and observe the ethical standards of NSFRE, et al .... but, the reason as stated in your message is that you don't charge on a percentage basis because you want to stay in business. And that's my point ... is the only reason this ethical standard is actually in existence is to protect fund raiser's cash flow? Basically, consulting firms (of which I own one that DOES NOT charge a percentage) are saying "sure we'll do the work and you pay us" therefore all the risk rests with the charity not those of us who hold ourselves out as experts. This is fine, but to tell our clients or charities that it is in their best interests to pay us whether we succeed or not is a little unsettling to the organizations. How is this ethical standard against percentage based compensation in the best interest of the charities? From which the discussion moved into determining how the percentage based prohibition is in the best interest of the organization. BEST INTERESTS OF THE NON-PROFITS Judith Lindenau ([email protected]) indicated: In this case the nonprofit would have to come up with the money independent of the grant - a flat fee established for the work that is completed seems to be the fairest approach for all parties involved. William Krueger ([email protected]) wrote: And wouldn't the idea of paying for the proposal whether it is funded or not qualify as a risky, if not poor, management decision? Ina Frank ([email protected]) responded: Not at all. The organization's best management decision in this scenario is to engage and pay for competent, professional expertise. This is far, far greater than a fill-in-the-blank or boilerplate proposal. With limited pots of money available and countless organizations needing funds and applying, there is *never* a 100% guarantee of success. To which, William Krueger responded: Your assumption is that 1) the percentage based proposal was from "incompetent, unprofessional" counsel - yet the grant, in the original example, was actually funded. So I'm not so sure that we could argue, in this case, that "professional, fee based counsel" could be anymore competent ... or successful. And again, neither the organization, nor the funder, would have been "hurt" had the grant been funded or not. We also are assuming that it was a "boilerplate, fill in the blanks" type of proposal. I have my doubts that these type of "one size fits all" proposals ever get funded .... so I believe a certain amount of "personalization" work had to be done. And the financial risk, in this case, was totally on the shoulder of the grant writer, not the finances of a charity, therefore in the best interest of the charity. Other than NSFRE, etc. saying it is unethical, can someone provide solid, concrete, real life examples of how hiring a professional fund raiser and paying a reasonable - and I emphasize "reasonable" - percentage is *not* in the organization's - and I emphasize "organization's" - best interest? To which Ina Frank responded: We're again missing the point. Of course it's in the organization's best interest to get the most qualified professional available -- just as it would be in your best interest to get the most qualified doctor to treat your specific condition. The only issue is how that professional or doctor should be paid. If your symptoms are only reduced by 10%, do you only pay the doctor a percentage of that 10%? Certainly not. You (or your insurance company or what have you) would pay a specific amount designated for that specific treatment. Same rules must apply to fund development professionals. Which prompted this response from William Krueger : Sure, if we stick to the Dr. as a fund raiser analogy. But we assume that a "professional and competent" fund raiser would only work for a straight fee or salary. Yet, in the original grant writer example we are discussing, they appear to be competent and professional (and successful) .... except they charge on a percentage basis (an arbitrary standard set by NSFRE). Does Ms. Frank's statement still hold true if we assume a fund raiser can be competent, successful and professional ... and still taking a percentage? Wouldn't a charity be best off hiring a competent, successful and professional fund raiser .... who takes a reasonable percentage ? My point, and unfortunately, some of our potential clients point, is really simple. THE ETHIC EXISTS TO PROTECT THE FUND RAISER NOT THE CHARITY. Which is probably good, but then we need to simply say it that way. We want to be thought of as Drs ... not lawyers, insurance agents or Realtors. But do small, start-up non-profits have special dispensation for paying a percentage based compensation for grant writers? Channing Hillway ([email protected]) said: I remember that debate of last year only too well. I have grown in my understanding of the grant proposal writing process since then. Those enthusiastic about having grants for their organizations written on speculation -- commission -- tend to be those who are unlikely to get the grants for rather fundamental reasons. They will not spend time or money on their own for what they recognize as, most probably, a losing proposition. They already have someone, usually in-house, writing the grants likely to be funded. It's okay, on the other hand, if somebody is willing to do the work for free in the hope of working a miracle. Any thoughts that they might, as a gesture of thanks, provide some compensation to the person doing the work, beyond paying for a few lunches and buying some gas, should be abandoned. They don't have the money. NSFRE's position makes profound sense and keeps everyone honest. It should be reaffirmed in these rather uncertain times. Which may have been rebutted by Jeann McWhorter ([email protected]): This is totally untrue for Diversity University as there are many grants out there that we not only qualify for but are certain we'd have an excellent chance of receiving once we get our 501. We have been included in two grant proposals already which were done through other schools. We were awarded the Annenberg grant and made the first cut on the FIPSE, a notoriously difficult grant to get. Our soul reason to consider using a grant writer whose fee would come from the grant is that don't have any money for ourselves yet, much less a grant writer. It's that simple. Most of us have devoted several years as volunteers to this endeavor and had only 1 of them paid. I, for one, am self supporti ng and spending 16 hours a day working on DU so I believe I have a right to be compensated for this before a grant writer. William Krueger ([email protected]) also responded to Channing Hillway: If a non-profit doesn't think a grant has a snowball's chance of being funded and the fund raiser evaluates the situation and says, "sure, I'll take a chance on it and if it is funded you pay me x%", who gets hurt? Under this scenario (no percentage fund raising) a charity could be taken advantage of more easily by an unscrupulous fund raiser. The fund raiser could say "I can't ethically take a percentage, but if you pay me a flat fee I'll write a great proposal. No promises (because the fund raiser knows it won't be funded), but I'll try" Under which scenario is the non-profit at greater risk? Ina Frank ([email protected]) commented as well: Responding to all who have said that their organizations are just getting started and have no money: Perhaps you should step back, take a deep breath and seriously consider how committed your volunteer leaders are to you and your mission if they haven't done some very serious fundraising and contributing to you themselves at the outset. The latter to the best of their ability, of course. And while they may not have financial resources, they can and should have the leadership capabilities and direction (from either leaders or a qualified pro) to go get some. Now *that's* what a potential institutional funder will look at, and quite justifiably so. Good intentions are fine, and must absolutely be there. But they're not enough. Nohow. Put somewhat crassly: If you're not willing to really do what you need to do to develop *and implement* a comprehensive Fundraising Plan -- in which grantseeking is but one part -- why should *I*, the grantmaker, care about your mission more than you do? To me, that's just logic. And there's the rub. No fancy terminology, no 5 or 7 golden rules to memorize. Just plain facts. Ah, but you really, really care a lot about your mission? Then you'll figure out a way to make it work. *Then* you can come to me...after you've developed some solid credibility and fiscal responsibility. Then I'll consider your request. And by then, you should have the resources to pay a professional fee. Sure it's hard to get to that point -- but your mission *is* worth it, isn't it? And what will the donors (remember them?) think about percentage compensation? Denise Rothman ([email protected]) talked about donors this way: What I can say, however, is that many grantors do not allow their funds to be used to pay the grant writer after the fact. In this case the nonprofit would have to come up with the money independent of the grant - a flat fee established for the work that is completed seems to be the fairest approach for all parties involved. William Krueger ([email protected]) responded to Denise Rothman: Sure, if you're the fund raiser it's "fair". But under the limitations expressed in these comments, the charity has too pay either way. At least with a percentage based system, an unsuccessful proposal doesn't cost the charity anything. From Lisa Ashley, New Client Director of ETS ([email protected]) (the company that wrote the original successful grant on a percentage basis that started this whole discussion): Our funders have no problem with a percentage going to ETS. It is built into the project budget. For instance in the category amount allocated for fundraising. Our clients do not pay staff grantwriters, they use our organization. Ina Frank ([email protected]) continued: If a fund development professional's compensation is tied to the amount of money they raise (or grants they garner) savvy donors will ask the pertinent question and be entitled to know that arrangement. And -- virtually without exception -- they will *not* want to give more so the pro can make more. Your organization then suffers doubly: You have lost an increased gift *and* the credibility you are trying to establish with that donor. On the other hand, most savvy donors understand full well the need to pay appropriately for qualified, competent folks to help raise funds, just as they want capable managers for "their" NPO. If they're business people, of course they understand. If they're doctors -- and realize what you're doing -- I shudder to think what will happen when they make the connection (and I've personally seen them do that) between how you're paying your pro and how they, themselves, might fare in the face of success-based compensation in dealing with human illness. Honest. To which William Krueger ([email protected]) responded: You're absolutely right ....except, what of the case of the small non-profit that, following ethics, hires a fund raiser, paying $30,000 a year and spending another $20,000 in f.r costs, and yet raises only $100,000. Is the donor going to be happy knowing that 50% of their gift went to overhead and not to mission. I don't do percentage based fund raising, but I still face the question daily. Most accept the answer ... and the rest don't. So why is there a prohibition against percentage based fund raising compensation? While there are many possible answers, a general theme did come through that seemed to be accepted ... at least to some degree. William Krueger ([email protected]) summed up: The central issue, in my little mind anyway, has been throughout this debate why this ethical prohibition exists. Every single message supporting the prohibition of percentage based proposals focused on the fund raiser ... not the organization. It was my understanding, and my hope, that there was a deeper reason for this prohibition other than to protect us as fund raisers. Would a group of fund raisers form an association and then actually create an ethical standard that does NOTHING but protect the fund raisers own best interests? Sounds like something the lawyers would do....I repeat the original question I asked ..."How does percentage based compensation hurt either a charity, the donor, the community or any individual or group - other than the individual fund raiser that doesn't raise enough money to make a decent living?" Ina Frank makes a good point that is, IMHO, closest to the real reason for the prohibition when she talks about the commitment and involvement of the board in the fund raising process. It would seem the biggest damage done by percentage compensation is the idea that a charity can "hire" someone to raise the money. Don't leaders who agree to serve on a board have a higher responsibility than to just write checks to fund raisers? Isn't that part of their overall commitment. We all know that an involved, committed board is the key to successful fund raising ... and few charities can survive on grants alone. Yet, percentage based grant writing is sooooooo eaaasssyyy, right???? No risk. No effort. No embarrassment. There is also no involvement ... and, I would argue, no commitment to the process (and pain) of growing an organization. The fact is, you can't just hire someone to raise the money for you. Those that try fail .... always. Those that have committed staff and volunteers raise more money, faster than those that try to "farm it out". Quite frankly, I have found board members work harder when they have some risk (like having to pay the consultant whether they (the board) raise $$$ or not). Certainly, gets the staff and board more involved than if there was no risk. This is perhaps less true with a "grant proposal" than other fund raising, but an important fact none the less. This still doesn't mean that I think, like NSFRE, et al, that there is ABSOLUTELY NO case for percentage based compensation. Unless it hurts a charity, donor, etc., there may well be, IMHO, some role for it and it certainly is not as inheritantly evil as some would have us believe. And in the case of a start-up group like the one that started this whole discussion, I really don't see any harm to anyone anywhere ... provided the group is, as a whole, working on developing a comprehensive and effective fund raising effort. If they are simply relying on those grants to last forever, I suspect some fund raising company is going to get a call in a few years or months saying, "We didn't get the grant we were expecting. Can you raise us the $xx,xxx we need to stay in business? Oh yea, we need it by the first of next month." And that's when another a good charity goes out of business. And a group doesn't need to have a lot of money to get started. Buy a book on how to write a case statement, bind it up at a local print shop, put a personal letter with it, and then have the board and leaders set-up appointments with friends, vendors, colleagues and others that have some money. Then ask ... I won't do it because it isn't in our clients (or admittedly our own) best interests, but I think we should have a little compassion for those that find it necessary to use it. I would strongly encourage those organizations who choose percentage based compensation to NOT view it as the be all and end all. A well balanced approach, taking into account the realities of the particular situation, will lead to more fund raising success than anything else. POSSIBLE ALTERNATIVE SOLUTIONS Judith Lindenau, CAE ([email protected]) wrote: The most fair way of paying a good grant writer (or an attorney...or a lot of other professionals who are necessary to our jobs as organization managers) is to put them on retainer for a flat fee, and then pay them based on their efforts. That latter might be an hourly reimbursement as in the case of attorneys, or a contingency fee of some sort based on performance. Of course, some professionals would like it the other way: they get paid regardless. But if in fact we as managers are truely fiscally responsible, then I think we need to be in better control of the results of our efforts. MISCELLANEOUS Putnam Barber ([email protected]) suggested that there might be some discussion of NSFRE's position on the question at its website, announced in the latest edition of the Chronicle of Philanthropy: http://www.nsfre.org. Reformatted, with additions, August 26, 1998 -- PB