Is fundraising by commission allowed, or a good thing, for Canadian registered charities

December 03, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Canadian Charity Law, Avoiding 'Charity' Scams

On Thursday at AFP there was a debate between Ken Mayhew, Dan Pallotta and myself on a number of issues surrounding compensation.  Ken Mayhew and myself opposed commission based fundraising and Dan Pallotta supported it.  There are a number of concerns with commission based fundraising, principal among them that it encourages aggressive short term behaviour by fundraisers that may undermine the reputation of their charity and the charitable sector.  It can also alienate donors.  It can also create unfair windfalls for some fundraising staff compared to others and create morale problems for the other staff in an organization - for example those on the front lines delivering the charitable services who may be paid far less.  It can also result in fundraisers earning very little, far less than a living wage.

It can create fights between fundraising staff, as often a number of the staff may be involved in stewarding the donor over a number of years and there may be disagreements as to who was responsible or how many people responsible.  It will reduce sharing of information and cooperation amongst fundraisers as some fundraisers may be more competitive and not want another fundraiser in an organization to steal their lead and get the commission.  There are dozens of ways to motivate employees at a charity - you don’t have to move to the most aggressive form of compensation.  Try hiring people who care about the mission, pay them a good salary, stop making unrealistic demands on them, treat fundraisers with respect (they are part of the executive team - not just involved with revenue generation issues), get rid of managers or fundraisers who are bullies or create a toxic work environment, boards and executives should not make unethical requests of fundraisers, and provide them good continuing education options and professional development to name just a few. 

The legal position in Canada as expressed in the Fundraising Guidance is that such arrangements may be prohibited if the commission fundraising fall under

“c) Conduct that results in more than an incidental or proportionate private benefit to individuals or corporations

Fundraising activities that result in more than an incidental or proportionate private benefit are prohibited and may result in revocation of registered charity status.  Although charities cannot be established to confer private benefits, some private benefit may arise in the course of pursuing charitable purposes. Any private benefit to individuals or corporations is only acceptable as an incidental and proportionate by-product of the activity undertaken to fulfill a charitable purpose. 

Private benefit is generally incidental and proportionate where the amount or percentage of gain to individuals or corporations is not excessive relative to the benefit to the public. As well, private benefit must be necessary to be considered incidental. Please refer to “Factors Negating Charitable Registration – Existence of a Private Benefit” in Guide RC4143, Registered Charities: Community Economic Development Programs.

Example 1

Registered charities sometimes enter into fundraising contracts that provide commissions or a percentage of the proceeds from solicitations. Where these arrangements result in a third party enjoying a benefit exceeding fair market value for the work it does, the private benefit will not be incidental.

Footnote 5 The courts have held that purposes or activities that result in a private benefit that is more than incidental to the public benefit of an endeavour, which would otherwise be charitable, make it not charitable. See Re Compton [1945] Ch. 123; Hadaway v. Hadaway [1955] 1 W.L.R. 16; IRC v. Oldham Training and Enterprise Council [1996] BTC 539.”


As well even if a commission fundraising arrangement does not result in excessive private benefit CRA is still concerned. 

The CRA’s Fundraising Guidance notes that commission based fundraising is an “indicator of concern” for CRA:

“f) Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations
If a charity provides remuneration for fundraising on the basis of results rather than effort, then there may be a disproportionate or excessive private benefit included in the remuneration that makes it unacceptable.

Where the fundraising arrangement includes commission-based remuneration or other compensation based on the number or amount of donations raised, the charity should satisfy itself that such provisions would not result in disproportionate or excessive private benefit. It is possible that contracts providing for such fees can result in a windfall profit for the fundraiser, particularly when the compensation is set at a high percentage and there are limited or no additional provisions governing how the work is undertaken.

Profits related to effort (for example, devotion of time and resources) rather than fundraising success are less likely to give rise to disproportionate or excessive private benefit. For example, payments which compensate fundraisers based on calls completed or contacts made—regardless of whether a donation is received—or on a periodic (for example, hourly or weekly) basis, at a fair market value for the work entailed, are not generally considered to result in disproportionate or excessive private benefit.”

If you look at best practices they advise:

“b) Appropriate procurement processes
A registered charity should undertake a reasonable process, in light of its resources and the size of the contract, to identify and select a supplier to provide the required goods or services at a cost reflecting no more than the fair market value. This may include:

•researching fundraising methods and procurement options that could meet the charity’s needs (see point a), above);
•contacting organizations with a profile similar to the charity’s to determine reasonable and appropriate costs and terms for the type and amount of fundraising to be undertaken;
•soliciting bids from three or more potential suppliers;
•issuing a request for proposal;
•holding a competitive bidding and tendering process;
•carefully reviewing all terms of contracts to ensure they are reasonable;
•including provisions to terminate a contract if the third party acting on behalf of the charity does not act in compliance with the provisions of this guidance; and
•limiting the length of contracts, particularly when signing an initial contract.

Important considerations

•A charity should always ensure any benefit paid to a non-arm’s length party is reasonable consideration for the goods or services provided.
•Services should not be contracted out to non-charitable entities if they could be delivered as effectively and efficiently using the charity’s own resources.
•The amount of fundraising activity undertaken under the contract or by the charity should never constitute a collateral purpose.
•A charity should fully document procurement, negotiation, and approval of contracts.


c) Good staffing processes
Where fundraising activity is carried on as a staff function, the charity should make adequate effort to ensure that compensation paid does not result in employees receiving excessive benefits. The salary and/or benefits for any fundraising position should never exceed the fair market value for the services provided.

Determining fair market value may involve:

•contacting organizations with a profile similar to the charity’s to determine reasonable compensation for the type and amount of fundraising to be undertaken;
•basing the compensation on a salary survey; and
•setting compensation that is appropriate based on the remuneration received by other employees of the charity in light of the respective responsibilities and requirements of the positions.
A charity should establish accountability processes for the supervision and evaluation of in-house fundraising personnel. A charity should avoid performance evaluation based solely or excessively on fundraising performance or results achieved (for example, bonuses or incentives exclusively tied to the number or amount of donations).”


Under the 4 part test for allocation if more than 10% of an activity is fundraising and less than 50% is fundraising a charity generally has to allocate all of the expense of the event/activity to fundraising if “commission-based remuneration or compensation derived from the number or amount of donations?”

I would also point out the Association of Fundraising Professionals (AFP) CODE OF ETHICAL PRINCIPLES AND STANDARDS under Standard No. 21 states that:

“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. Business members must refrain from receiving compensation from third parties derived from products or services for a client without
disclosing that third-party compensation to the client (for example, volume rebates from vendors to business members).*  __________________________________
* Refer to AFP’s Percentage-Based Compensation Position Paper available in the Ethics section of the AFP website
(http://www.afpnet.org)


Guidelines

a. Members accept compensation based upon experience, expertise, and the time requirements of the engagement.

b. Percentage compensation is any payment based on the monetary value of contributions; a finder’s fee is a fee paid for bringing a donor or contribution to
a nonprofit organization, whether or not the fee is based on a percentage of funds raised.

c. Members, if declining an offer of compensation based upon a percentage of the funds raised, will provide information in support of this standard, such as the AFP Position Paper on Professional Compensation.

d. Members recognize that fundraising is a continuing practice in which present funds received may be the results of efforts of others in previous years, and, likewise, current fundraising activities may result in future funds.

e. Members must not seek, pay, or accept, percentage-based compensation or commissions for obtaining philanthropic funds.

f. Members help organizations recognize that costs involved in fundraising include staff compensation and that donors do accept organizational costs for such activities.

g. Members who offer services as proposal writers must not receive compensation calculated on a percentage of funds sought or raised (e.g., a member who drafts a grant proposal cannot receive a percentage of that grant if it is awarded).

h. Members disclose fully any fees deriving from a third party vendor as a result of the referral of a client if there is a discount for the business member because of the charity aspect of the transaction.

i A vendor must not profit from a relationship with a charity without disclosing that fact to the charity. If subcontractors to a vendor have provided a discount because of the charity involved then that discount must be transparent between the charity and the vendor

Examples of Ethical Practice:

1. Refusing to accept any part of one’s compensation as a percentage of funds raised or expected to be raised.
2. Recognizing the difference between percentage-based compensation and a bonus plan, accepting only the latter should it be
part of an organization’s regular practices. (See Standard No. 22)
3. Promoting the principles upon which the guidelines for this standard are based.
4. Urging your organization to avoid paying a third party — such as an attorney, financial planner, face-to-face fundraisers
(street solicitors) or provider of such services as direct mail and telemarketing — a fee for service that is a percentage of the
value of the related contribution or trust.
5 If working as a proposal writer, agreeing in advance to a fixed fee (including any bonus schedule) for services provided, not
contingent on a percentage of the grant awarded.
6. Disclosing payment(s) from a third party which is directly related to a transaction(s) with a client.


Examples of UNETHICAL Practice:

1. Accepting percentage-based compensation because an organization lacks sufficient budget, with the expectation that such will be converted to salary or fee when funds are available.
2. Disguising compensation as salary, fee or bonus when it is, in truth, a percentage of funds raised.
3. Accepting a compensation package in which a part is salary or fee and the balance is to be made up of a percentage of the funds to be raised.
4. As a business member, failing to disclose to a client’s compensation received from a third party through the provision of services to that client if the discount was made because a charity was involved.”

Further the Association of Fundraising Professionals (AF+P) CODE OF ETHICAL PRINCIPLES AND STANDARDS under Standard No. 24 states that:

“Members shall not pay finder’s fees, commissions or percentage compensation based on contributions, and shall take care to discourage their organizations from making such payments.

Guidelines

a. Members recognize that there are three primary principles underlying this standard:
(1) Philanthropic giving is a voluntary action for the public benefit.
(2) The seeking or acceptance of philanthropic contributions should not provide personal gain to anyone.
(3) Donors and potential donors must be protected from pressure or coercion.

b. Commission or percentage compensation is any payment based on the dollar value of contributions.

c A finder’s fee is a fee paid to an individual for introducing an individual donor to a nonprofit organization.

d A finders fee should not be paid to an individual on the basis of the size of a donation secured.

e It is acceptable to negotiate a fee for service based on the work carried out by an individual, where that fee has no relation to the subsequent size of a gift, or the outcome of the solicitation efforts.

f. Bona fide transaction fees are not subject to this standard. Transaction fee(s) include fees for credit card processing, stock transfers, electronic funds transfers, lock boxes, and processing Internet transactions.


Examples of ETHICAL Practice:

1. Refusing a contribution if it involves the payment of a finder’s fee or could be perceived as such. Explaining clearly the reasons for such refusal, and encouraging the parties involved to find a way to make the donation without the payment of a finders fee.

2. Helping a donor, estate planner, or counselor understand that a contribution or bequest is to be given to benefit the organization receiving the contribution, or a cause embodied therein, and not to benefit individuals.

3. Promoting the philanthropic or public benefit aspect of giving.

4. Establishing clearly in advance any fees payable for donor solicitation efforts, and ensuring that such fees are not based on a percentage of contributions.


Examples of UNETHICAL Practice:

1. Paying a finder’s fee based on percentage contributions to an individual for identifying a donor or recipient organization.

2. Establishing a remuneration plan which pays a percentage of donations made.

3. Suggesting to someone that he or she might ask for a fee for making a match.

4. Paying a percentage finder’s fee for the purpose of securing a donation.

5. Paying a percentage finder’s fee for obtaining a corporate sponsorship.

 

For the full AFP Code of Ethics see: http://www.afpnet.org/files/ContentDocuments/CodeofEthicsLong.pdf


In the UK, the Institute of Fundraising notes:

“5.0 Fees
• Consultants OUGHT to state the actual basis of remuneration in any proposal or contract.
• Consultants OUGHT to be clear about how expenses will be paid (whether separately or covered by the Consultant).

BEST PRACTICE FOR FUNDRAISING CONSULTANTS
http://www.institute-of-fundraising.org.uk/OneStopCMS/Core/CrawlerResourceServer.aspx?resource=80DA3949-7276-40CD-9E91-19FA093E545A&mode=link&guid=774d91020c1e4bddbe5f60186ecb5f46

• Consultants OUGHT NOT to be remunerated by commission?only methods (see the Payment of Fundraisers Code of Fundraising Practice).
• Consultants SHOULD use time?based fees or some other form of remuneration that is not commission based, such as a fixed fee.

A time?based fee rewards an individual for the time that is spent on a project by that individual.

Reasons for time?based fees include:

o fees reflect the professional time involved;
o many donors will react adversely to commission only fees;
o commission-based fees lead to disputes about who (or what combination of people) was responsible for obtaining the gift and how to treat gift aid
and payments over a period of time;
o commission?based fees can lead to bad practice (for example hard?sell) which can damage the fundraising and the reputation of the charity; and
o in the case of large gifts, a commission?based fee may lead to an unacceptably high level of remuneration and, in the case of a small gift, to
an unacceptably low level of remuneration.”

 

I would also point out the International Statement of Ethical Principles in Fundraising released December 7, 2006
http://www.afpnet.org/Ethics/IntlArticleDetail.cfm?ItemNumber=3681

“5. Payments and compensation. 

•Fundraisers provide their services either as a volunteer, or on a salaried basis or for pre-determined fees.  Fundraisers should not accept commissions or compensation based upon a percentage of the funds raised.
•Fundraisers will not accept any gratuity when making decisions on behalf of the organisation.
•Fundraisers will not seek or accept any personal payments, in cash or in kind, from a supplier of goods or services in recompense for business placed with that supplier.
•Criteria that will qualify a fundraiser for performance-based remuneration must be agreed upon beforehand and should not be based on a percentage of the funds raised.”

 

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

mark@blumbergs.ca
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