The Nonprofit FAQ

Further on Contingent Compensation (Percentage Fees)
Chip M. Watkins wrote in Cyber-Accountability (a service of CharityChannel.com) on 8/22/02:

I understand why ethical codes frown on percentage compensation in the context of high dollar donor giving. You don't want the fundraiser to--consciously or otherwise--pressure the donor in order to earn a fatter fee.

However, no one has identified an ethical rationale for banning percentage compensation (in a properly drafted agreement) of direct mail houses--who have no contact with the donor--or telemarketers, whose contact with the donor is limited, and in a context where pressure is much more easily resisted. The AFP Position Paper is founded on the premise that percentage-based compensation inherently violates the proscription against private inurement. Neither the IRS nor any court has so ruled, and the initial set of proposed regulations under Sec. 4958 (intermediate sanctions) would have recognized the value of percentage-based compensation to nonprofit organizations.

Percentage contracts for direct mail houses and telemarketers in donor acquisition programs are uniquely favorable to the charity because they eliminate the charity's risk, and clearly align the economic interests of both fundraiser and charity. This is like the difference between paying your broker for each trade, and paying your broker a percentage of the value of the assets under management.

When a mass market fundraiser works on a time and materials basis, or on a per call basis, there is no economic incentive to maximize income to the charity except to the extent necessary to ensure that the fundraiser's bills are paid. When the compensation is a percentage of revenue--gross or net--the fundraiser's incentive to maiximize its revenue works for the charity, too.

Are there abuses? Sure. A fundraiser unethically sends out a "high-pressure" or "guilt-inducing" piece in order to maximize revenue. The ethical rules ought to proscribe that conduct, not the payment of percentage-based compensation.

Geoffrey Peters added:

I've long felt that the absolute prohibition on percentage commissions on fundraising was throwing out the baby with the bathwater. There seem to me to be some clear situations where they are not only favorable to the charity but desirable from the point of all concerned including educated donors.

Richard S. Steinberg picked up on the issue:

I have written a paper, and have related work in progress, on the economics of incentive contracts with fundraisers. The quote above details one important factor in my work, but another factor works in the opposite direction, so that as a positive, rather than an ethical, proposition, it would often not be in the self-interest of the charity to offer a percentage based contract with its fundraising contractee or employees.

This other factor is that although the fundraiser may work harder, he or she may have to because donors who were aware of this arrangement would reduce their contributions. An incentive contract of this sort, I show, raises the "price" of donating (the amount that must be given in order for the charity to provide an additional dollar worth of services), and there is some evidence that the size of donations goes down when the price of donating goes up (using other types of prices, such as the "tax price" of giving). If the price effect dominates the work effort effect, the organization is better off offering a fixed compensation package (either in total, or fixed amount per contact/mailing). I show that regardless of the after-the-fact fundraising cost ratio, there is no such price effect for fixed compensation packages. See Nonprofit Management and Leadership, vol 1, no. 2. (The related work is in progress with Al Slivinski. Someday, it would be nice to complete it.)

(Note: There is another extensive of these issues by Rich Steinberg and others in http://www.nonprofits.org/npofaq/11/24.html. - Ed.)

Chip Watkins commented further:

I have even had state regulators tell me that they recognize the value to charities, especially newer charities, of contracts that pay fundraisers a percentage of the contributions. Though, presumably, this should not be too high a percentage. I.e., it's OK if a time and materials contract produces no net to the charity because the FR had no specific incentive to peform well, but its not OK for the charity to pay 50% of the gross to a fundraiser who nets it $1 million. What's wrong with this picture?

On donor disclosure: First, relatively few donors are ever aware of the compensation arrangements between the charity and the FR. Second, if they are aware, it is irrational of them to reduce their gift, because this often hurts the charity as much or more than the FR. Instead, if they want to help the charity, but don't like the compensation arrangements with respect to a particular gift, they should re-negotiate them (this probably works for large donors), or give outside the particular arrangement (for small donors). Once they get the envelope from the FR, just copy the address onto a plain envelope and mail it in. If an apparently unsolicited check comes in over the transom, and cannot be quickly connected to the FR's program, it will presumably not go into the base on whch the FR's compensation is computed.

Allen R. Bromberger joined the discussion:

When it hires a FR, a charity is buying the skill and effort of the FR; it is not buying a guaranteed result. The charity knows it is paying reasonable compensation for services rendered because it bases the compensation on the time and effort of the FR (which is certain), not the ultimate result (which is not). With a percentage-based system, the FR can easily reap a "windfall" if the result is better than anyone expected, even though the FR did nothing in particular to bring in the extra donations. To me, that smells like unreasonable compensation, even if neither the charity nor the FR intended it to be so. Your advice thus protects the charity and reduces the risk that donations will be diverted to the FR based on factors other than the services rendered.

Of course, there is still a risk that the campaign will do worse than expected and the charity will bring in less than expected or even lose money. That risk is properly placed on the charity, and should be taken into consideration when the charity decides whether or not to do a campaign. The risk should not be on the FR who is, after all, only a vendor providing specified services for a specified price.

This position also reduces the risk of charities being talked into running campaigns because they have "nothing to lose." The danger of that is that the charity becomes a front for the FR, not the other way around as it should be.

IMHO, if a charity does decide to base FR compensation on a percentage of gross revenue, they should ALWAYS get a cap, or at least a diminishing percentage beyond a certain projected level of gifts. That provides some protection against the windfall problem yet still allows for some sharing of the risk.

That said, I acknowledge that percentage-based compensation is not prohibited by the IRS or anyone else I know of. This is more of an ethical, "best practices" issue than a legal one. In that regard, professional standards are quite clear that percentage-based compensation is suspect and therefore disfavored.

Chip Watkins asked:

Would someone please explain to this dense person why percentage-based compensation is unethical? And why the charity and FR cannot ethically agree to shift the risk from the charity to the FR?

With relatively few exceptions, performance-based, result-oriented compensation is permitted in every other private sector occupation. What justifies the exception for fundraising?

Supported by Ira Kaminow:

Excellent questions. I have never understood the problem with performance-based compensation.

Jason Schwartz added these thoughts:

The question of percentage fees has been popping up a lot lately. I work with a number of small nonprofits, a few of which take a large risk by signing a contract to pay a fundraiser a flat fee before they have any idea of how effective the fundraising drive will be. I m not talking about grant-writers, but rather special event planners, telemarketers and direct mail campaigns.

It does seem rather curious that some folks demand that nonprofits keep a reasonable ratio of fundraising costs to income, while at the same time denying those groups the most effective method of controlling those costs through the use of percentage contracts. Wouldn't it be easier for small NPOs to be accountable for their fundraising costs if they could just say "However much we raise, it's going to cost us N% of the total?"

Flat fees can create enormous risk for the NPOs, as well as a barrier to such activity that adversely impacts smaller, less experienced and poorer groups more than their wealthier counterparts. Once an NPO has obligated itself to pay a fundraiser a flat fee, I would say that fundraiser's work is fairly much done. Why should they care about the effectiveness of their campaign?

I'm also a little unclear on how a percentage fundraiser would be more prone to "over-guilting" or a hard-sell. It seems to me that the nonprofit could control the message their potential donors are hearing, the same way they can control the message of a public awareness campaign being run by a freelance marketing firm.

So, what exactly is the philosophy that says an NPO is being more accountable by agreeing on a flat fee before knowing the outcome of the fundraising initiative than it is if it agrees to pay a percentage of the total income? (This is not a rhetorical question. Please enlighten me.)

Allen Bromberger responded to several of the earlier posts:

Percentage-based compensation is unethical because it increases the risk that donations intended for the charity will be "diverted" to the the FR, not because of any additional time or effort expended, but simply because more money came in than anyone expected. IMHO, that comes dangerously close to private inurement.

Percentage-based compensation has long been considered unethical by FR professionals because they believe (like most professionals) that they should be paid for services rendered, not for results, which typically depend heavily on the reputation of the charity, the popularity of its cause or other external forces.

Contrary to the implication in your post, fee-based compensation does in fact take performance and results into account - in deciding the level of fee the FR is to be paid. FR's that routinely get good results for clients receive a higher rate of pay than those who don't. Nothing wrong with that.

I also think the fact that we are talking about charities - not "for-profit" businesses - is not a trivial point. Donors intend their contributions to go to the charity, not the FR. And since under Riley et al professional solicitors cannot be compelled to disclose the basis of their compensation, donors can't make their choices based on full disclosure, so how are they to be protected from having their contributions diverted if not through prophylactic rules?

Here's a question: how would a "fair" percentage be determined in a performance-based compensation system? If a charity agrees to give the FR 90% of the gross, is that OK? No matter how much work they've done? No matter how much money comes in? Should there be caps? How would they be determined?

I think the burden has to be on the proponents of percentage-based fee compensation to demonstrate that such a system would not routinely result in private inurement when large sums are raised. Can you suggest guidelines that adequately protect donors and charities from a diversion of funds that was never intended by the charity or the donor? What guidelines would you propose to assure us that the ultimate compensation won't be disproportionate to the risk taken by the FR?

This is far from being a no-brainer. There are legitimate arguments on both sides. It is not necessary to insinuate that those who take a contrary position are somehow mentally deficient. We simply view the ethical considerations differently. Address the points I raise above and perhaps you'll persuade me and others that you are right.

And Chip Watkins responded in turn. First with some general observations:

My arugment here is both great and limited.

It is great because, more than anything else, I am arguing for freedom--not high FR costs, or even necessarily for percentage contracts. I think it is simply wrong for "the industry" to declare that percentage contracts are always, at every time and in every place, unethical. Why do you want to limit the freedom of charities to enter into contracts that they, in the exercise of their informed judgment, reasonably believe to be in the best interests of the charity?

It is limited because I am not arguing that percentage contracts are always right. I am simply arguing that there is at least one situation in which a charity would, acting in its best interests, enter into a percentage contract for FR services. Whether a percentage contract is "right" for a charity is a decision for each charity to make for itself--not to have the industry make the decision for it. Unfortunately, what seems to be underlying this discussion is a paternalistic assumption that charities are somehow duped by FRs into percentage contracts that make the FR wealthy at the expense of the charity. While that certainly happens from time to time, I suspect that in most cases, charities (like UCC) make a calculated and coldly rational decision that this contract is best for the charity at this time.

One good friend who is one the other side of this debate has accused me of advocating a position fit only for a perfect world--in which case, I might say, we'd all have to find other work. Not true. In fact, those who prohibit percentage contracts are trying to create a perfect world through unwarranted rules that will not accomplish their objective, and that may well lead to the loss of charities that need percentage contracts, or that can't start up without them. All things considered, in America, the parties to a transaction are usually deemed to be better situated--though not perfectly situated--than anyone else to decide what is in their own respective best interests.

Other things being equal, it is generally better for a charity to have relatively lower FR costs than higher FR costs, lower management costs, and higher proportion of dollars going into services, consistent with the need to provide sound management of the programs and to maintain and develop an FR program that will produce the net $$$$ needed to support program and mgmt. If you cut FR and mgmt to zero, you won't have any funds with which to pay for your ineffective and inefficient programs. AND, of course, "other things" are never "equal."

A well-managed charity that necessarily starts with relatively high mgmt and FR costs should see those trend down after a while.

And then Watkins went on to respond directly to several of the points Bromberger made:

Bromberger: "Percentage-based compensation is unethical because it increases the risk that donations intended for the charity will be "diverted" to the the FR, not because of any additional time or effort expended, but simply because more money came in than anyone expected. IMHO, that comes dangerously close to private inurement."

Watkins: We're dealing with an open market, and (by law) written contracts. Money that is contractually due to a FR is, by definition, not "diverted", as if it were stolen or embezzled. If more money than anyone expected came in, then the charity will have more and it seems reasonable that the FR should be paid more if that's what was bargained for. The FR earned it.You can only have private inurement if the FR is an insider. When the charity is dealing at arms' length with an unrelated FR, there can be no private inurement, and probably no excess benefit transaction.

Bromberger: "Percentage-based compensation has long been considered unethical by FR professionals because they believe (like most professionals) that they should be paid for services rendered, not for results, which typically depend heavily on the reputation of the charity, the popularity of its cause or other external forces."

Watkins: Not so. Many professionals are paid for results. Lawyers get paid on contingency in perosnal injury cases. Sales professionals are paid on commission. Those who represent taxpayers in disputes with the taxing authorities may be paid a percentage of the refund. Authors receive royalties as a percentage of sales.Uncle Sam and Aunt Virginia get paid a percentage (also too high, IMHO) of my taxable income. ;-)

As to the charities, those that are more popular and have a long history of fundraising probably don't need percentage contracts. Typically, it is charities that have no reputation to trade on, or that are unpopular, that depend on percentage fees. These charities depend to a greater extent than most on the skill of the FR in writing copy and designing an appealing package, and in selecting the right lists for prospecting. But, because they don't have the resources of more popular, longer established charities, they depend on percentage contracts to shift the risk to the FR. In their circumstances, shifting the risk is more important than a fixed fee contract, and they will gladly pay the percentage to the FR when a bumper crop of contributions comes in.

Bromberger: "Contrary to the implication in your post, fee-based compensation does in fact take performance and results into account - in deciding the level of fee the FR is to be paid. FR's that routinely get good results for clients receive a higher rate of pay than those who don't. Nothing wrong with that."

Watkins: True enough, in an indirect way. Markets work. But a fixed fee market doesn't work for a charity that decides it can't afford the risk that the contributions from its solicitations--not those of the FR's clients in general--won't be more than the fixed fee, or will be only marginally more than the fixed fee. A percentage fee is simply a different way of rewarding the FR for results.

Bromberger: "I also think the fact that we are talking about charities - not 'for-profit' businesses - is not a trivial point. Donors intend their contributions to go to the charity, not the FR. And since under Riley et al professional solicitors cannot be compelled to disclose the basis of their compensation, donors can't make their choices based on full disclosure, so how are they to be protected from having their contributions diverted if not through prophylactic rules?"

Watkins: Again, let's not use "diverted," since it implies illegality or a second guessing that the charity made a bad deal. And the donor's contributions do go to the charity. The charity contracts for a valuable service, and thereafter pays the FR according to the terms of the contract. This doesn't vary between fixed fee and percentage contracts, and FR costs are part of doing business, whether the FR is done in-house or by a contractor. If the charity enters into a fixed fee contract for $25,000, and the mailing only brings in $30,000, are you telling me that the donors should be told that 83% of their contributions were paid to the FR? Suppose the contract fee was paid up front? Now the charity can honestly report that none of the contributions were paid to the FR. If the charity does all its FR in-house, does it not have to report to the donor that some portion of the donor's gift was used for FR costs? All the money went to the charity!

Prophylactic rules are suspect, because they preclude the exercise of informed judgment. Prophylactic rules were the chief characteristic of the Pharisees who, at least according to Jesus, set up their own rules in place of God's.

If you must have a prophylactic rule, here it is: "Boards of directors and executives of charities must exercise their informed judgment to act at all times in the best interest of the charity they serve."

Bromberger: "Here's a question: how would a "fair" percentage be determined in a performance-based compensation system? If a charity agrees to give the FR 90% of the gross, is that OK? No matter how much work they've done? No matter how much money comes in? Should there be caps? How would they be determined?"

Watkins: A "fair" percentage would be that agreed upon by charity and FR, both knowledgeable in the market, and neither compelled to act. No different than the definition of fair market value in any other context. Charity would evaluate the donor market and the likelihood that this FR will be able to tap that market successfully, and with what degree of success, given the current environment, etc.

Let's not assume that charities are dupes and rubes, or that any part of the fees or structure need to be "determined" by anyone other than the charity and FR. There's an open market for FR services, no lack of price information available, and the competitive forces at work in the market will influence the fees paid--in both amount and form. Knowledgeable charity personnel will bid out FR work, and evaluate the bids based on the market data. Knowledgeable FRs will bid for work on the same basis, and eventually they'll strike deals that each sides believes are advantageous, based on their respective evaluations of the market at the time.

Because this type of valuation depends on the facts of each case, I cannot tell you whether 90% would be OK or not. If the charity is particularly unpopular, and FR for its cause particularly difficult, and the charity is prospecting, it may be. (In fact, most charities would be delighted to break even (costs equal revenue, or 100% paid to FR) on prospecting, because that means they've acquired a valuable asset--the list of new donors--for no net cost.) Certainly I would expect that case to be at one end of the bell curve. Just as I would a contract for 1%. In fact, those charities that could get a 1% rate are probably using fixed fee contracts.

If the charity is so situated that it can get the services it wants and cap the percentage fee, or reduce the percentage as more money comes in, they should negotiate for that.

Bromberger: "I think the burden has to be on the proponents of percentage-based fee compensation to demonstrate that such a system would not routinely result in private inurement when large sums are raised. Can you suggest guidelines that adequately protect donors and charities from a diversion of funds that was never intended by the charity or the donor? What guidelines would you propose to assure us that the ultimate compensation won't be disproportionate to the risk taken by the FR?"

Watkins: Again, you're assuming "inurement" and "diversion" that I assume can't happen when the charity has a written contract negotiated at arms' length with an unrelated FR. I can't assure you that compensation will or will not be disproportionate to the FR's risk. But what is so great for the charity about a fixed fee contract where the "professional" is unwilling to take ANY risk, except those internal to his own business? It is not for you (or me) to sit back paternalistically and decide--more accurately, second-guess with 20-20 hindsight--whether risk is proportionate. That's a judgment for those in the trenches, negotiating the deals, and raising and spending the money.

Dan Prives offered this observation about the standards of organizations that are active the field:

Though these arguments are interesting, I suggest that the issue is who decides. Since there are a number of associations and groups that have declared percentage compensation unethical, it is largely irrelevant whether there are counter arguments.

In any given cable news show or general circulation newspaper, there will always be a representative of a "name" organization declaring the practice questionable. To my knowledge there is no organization to state the counter argument, so it effectively is not part of the public debate.

Of the groups that offer standards, the following oppose percentage compensation for fund raising:

The following groups do not mention percentage compensation:

We might note that the groups who formally oppose percentage compensation are all membership organizations. Their ethical standard is a way to define their membership. The groups that do external evaluation do not mention percentage compensation, although it is possible that the BBB considers it, too, given that they seek copies of fund raising contracts as part of their evaluations.

Allen Bromberger responded directly to Chip Watkins' points:

There is no "right" nor "wrong" position here. Ethical guidelines can do no more than describe consensual norms that people may want to consider when they make decisions. Especially people who aren't sure what to do and want to conform to commonly accepted norms where they exist. We all agree that percentage-based contracts are not illegal and nothing in the law prevents a charity and a FR from entering into a percentage-based compensation agreement if they wish. So let's drop the stuff about "freedom" and "preventing charities from entering into contracts that they believe to be in their best interests." Those are red herrings.

Ironically, it is the FR profession itself, through NSFRE (or AFP as they now call themselves) who have declared percentage-based compensation arrangements to be unethical. It is not the government or anyone else imposing this rule on the profession. Just as lawyers sometimes think that provisions in the Code of Professional Conduct are not always "right", we still have to live with them. If there are sanctions attached, we run the risk of being sanctioned if we chose a different course of action than that dictated by the ethical rules. In the case of the AFP rules, there are no sanctions. If one deviates from them, one only takes a risk that others will judge them in a negative light. C'est la vie. As you note, it is not a perfect world. Boards are capable of assessing risk and making decisions. But knowing that a practice is considered unethical has to be part of that assessment. They got a problem with that, take it up with AFP.

A few rebuttal points:

With respect to whether percentage-based compensation is "normal" in many professions, I still maintain that most professionals are not paid on a percentage-fee basis. Though - as you correctly point out - some professionals are paid that way, I still think the weight of authority is against you on that point. Hourly or daily rate, yes. Project fee, yes. But percentage of income, no. Not in general.

With respect to language: I tend to speak from the point of view of a donor, not a charity or a FR, which is why I use value-laden words like "diversion" and "inurement". I do not mean to imply evil (or illegal) intent on the part of the FR or the charity; just that their decisions with regard to FR compensation may have results that are contrary to what I think a donor would desire. If that offends anyone I apologize. But I think the perception that funds can be (and often are) "diverted" in percentage-based arrangements is widespread, which is why such practices are viewed with suspicion. And a cynic might think it is one of the reasons that FR's have fought so heavily (and successfully) to avoid being forced to disclose to donors how they get paid - or even that they get paid at all. Donors want the money to go to the charity, not to the FR. That may be unrealistic, but it is nonetheless true. And I think the sector ought to be damn careful about ignoring donors' views on this, lest the goose stop laying its golden eggs. I cheerfully concede, however, that I have no evidence to back up the aforementioned statements. They are pure supposition.

With respect to your point about keeping FR and management costs low: I don't know whether or not fee-based compensation or percentage-based arrangements typically result in higher or lower fundraising and management costs for charities, but I cannot simply accept your blanket assertion that they keep costs lower. I suspect that you are right for certain kinds of charities and certain kinds of fundraising, but I suspect the opposite is true for others. I'd like to see some evidence on this before I could accept it as a valid argument. If you can show that there are situations where everyone, including the donors, are better off with percentage-based arrangements, I'd support a request that AFP consider an exception to its rule when those conditions are present. Who knows, maybe they'd accept an amendment and we could all be happy.

And Chip Watkins replied:

The bottom line seems to be that percentage based contracts are deemed to be unethical because donors wouldn't like them. That's a helluva way to decide what's ethical and what's not.

In any case, I will agree that it's probably true enough in the high-dollar zone. But the typical direct mail recipient will never know, and probably never ask.

Your discussion suggests that charities and FRs conspire to keep the donors in the dark about the fact that fundraising costs money. If so, then the whole relationship is build on an unethical foundation, to which all would do well to pay a great deal more attention than to percentage based contracts. In particular, charities should take the lead in educating donors about both their charitable programs, and about who's running the show and how much it costs to put the show on, including the cost of fundraising. If all the watchdogs, standard setters, industry associations, et al. put together a good series of PSAs to counter Money Magazine et al., that would be a real service to the sector.

Thomas H. Talbott joined the discussion:

For what it's worth, I believe that the percentage fee question is primarily one of practicality and economics rather than legality or professional ethics as some suggest.

Underlying the prohibition against it taken by AFP and other groups is the practical consideration that it seldom works. Either the fundraising effort proves more successful than anticipated (in which case the nonprofit incurs dollar costs higher than might be considered reasonable) or it fails to meet objectives (in which case the fund raiser cannot absorb the time and out of pocket cost for long.)

A possible exception is the broad range of situations in which the nonprofit enters into an agreement to lend its name to some commercial activity and receives a typically small percentage of the results achieved. While some might question the advisablility of many of these "fee-based" arrangements from a nonprofit's perspective, few would challenge them on other grounds.

The "professional ethics" question is essentially avoided as the nonprofit often views whatever it receives as "found money" and those on the commercial side view it as "cause related marketing" justified either on the basis that it enhances their commercial image or simply because it makes a buck.

Mark Weinberg observed:

Contingent fees are accepted by the courts and legal profession because the good of allowing those without other resources to be represented outweighs the negatives presented by the inherent conflict of interest between the lawyer and his or her client. Without percentage compensation, some smaller, new charities would never be able to get their message out, so I believe it is acceptable in appropriate cases, despite what NSFRE and others may say.

Thomas Talbott replied:

Your point on the problem faced by small (and particularly new) nonprofits is certainly valid and applies equally to areas well beyond fundraising. The "solution", I suggest, often rests with the organization's founding directors and with those outside consultants willing to work with the organization pro bono because they see merit in the vision and the mission and are willing and able to help transform what may only be a "good idea" into a successful nonprofit with the viability to survive.

If you will permit me a personal observation, my experience of over 30 years strongly indicates that consultants willing to work on a "contingency fee" are frequently either new to the area themselves or are near the bottom of the barrel. Nonprofits which engage them to save a buck may therefore risk both valuable time and perhaps their future in the hope that a fundamentally flawed arrangement will work out as planned.

And Mark Weinberg answered:

The fundraisers with whom I've worked who utilize the percentage compensation approach, both for direct mail and personal solicitation, are among the most prominent, successful and experienced fund raisers anywhere. Indeed, it has been my experience that the "holier than tho" organizations that impose an absolute prohibition upon percentage rewards are the "Johnny-come-latelies" to this industry; truth be told, it was that very dogmatic, inflexible rule that caused me to drop active membership in one of those organizations, even though I have never personally accepted percentage compensation for anything having to do with fund raising.

Ira Kaminow rejoined the discussion:

I agree that the issue of percentage based fees comes down to an economic question, not an ethical one.

Consider this economic advantage of shifting the risk of fundraising costs from the NPO to the fund raiser (FR). The FR presumably has many clients and can therefore spread the risk of failure among a relatively large number of events. The individual NPO may have only one major event a year; if it bombs, the NPO is in the hole not only because revenues are below budget, but also because it must pay the FR a full fee.

As a simple example, suppose the success of a class of fund raising events depends on the weather. If it happens to rain on the day of the event, no one shows up and no funds are raised. If it's sunny the event is a bang-up success. The FR runs many events a year and can offset rainy busts against sunny hits. Not so for the NPO (especialy a small one) which cannot spread the risk over many events. Therefore the weather is a bigger gamble for the NPO than the FR.

In other words the FR can act as an insurer, spreading some of the risk of failure over many events and many NPOs.

Michael Wyland responded:

That's true. Of course, indirectly, it makes the donors to one charity the supporters of another, without their knowledge. The FR, also, to a limited extent, becomes the arbiter of who's supporting whom.

And Ira Kaminow replied in turn:

What you say is generally true of all insurance. For example, life insurance makes policyholders who survive the policy year supporters of the beneficiaries of those who don't, and it makes life insurance companies arbiter of who's supporting whom.

In regard to the "without their knowledge" part, I strongly favor the fullest disclosure feasible. I would indicate in fundraising materials the percentage of the funds collected that will go to the fundraiser, under a percentage fee schedule. I think that could give each donor a more accurate sense of how much of the money (s)he actually donates will go to fundraising costs, which seems to be important to some donors in making giving decisions. The amount each donor pays toward fundraising costs is more muddled with a fixed fee. I see that kind of transparency as another advantage of percentage-based fees. But I would not advocate that fixed fees actually be prohibited entirely. (That last sentence was meant to be a joke.)

Rich Cowles added a summary note::

It seems that the underlying difference between the two sides of the percentage vs. fee argument is point-of-view. The percentage proponents look at the situation from the charity's standpoint; the fee proponents look at it from the donor's viewpoint.

I think of ethical principles such as AFP's as recognizing the uniquely altruistic motivation of donors. These principles protect and preserve the voluntary aspect of giving.

Fundraising is different from typical selling where the seller tries to convince the public to buy. Leading or manipulative methods are fair game.

Ethical fundraising makes the case for supporting the charity, but leaves the decision to the donor. No arm-twisting or manipulation -- a line, I believe, that FRs may be tempted to cross when guided by percentage contracts.



Posted 8/27/02 -- PB