I was recently asked to write a proposal to the Board of Directors (BOD) of our organisation regarding the use of external commission-based fundraisers. I have removed any reference to the organisation, calling in “NPC” and the names related to the AUDITORS and LAWYERS. You may find it interesting to note that on an operational and ethical basis, the BOD unanimously agreed that External Fundraising would not be included in the financial policy.

Please note that the Legislation mentioned is based on South Africa Law.

Anyway…here it is…

 

———————–

 

Executive Director Findings in Response to Request to Explore the Possibility of External Fundraising at the organisation

 

Executive Summary

  • This proposal seeks explore the merits of external fundraising with commission-based remuneration (Based on obtaining auditor and attorney approval).
  • Legally, contractually, operationally and financially it seems possible to allow for commission-based remuneration within certain limits and boundaries.
  • Ethically, there are challenges which have to be navigated and considered.
  • Regardless – Full Approval for such a policy will not rest with the BOD but would require confirmation from AUDITORS and LAWYERS.
  • Ethical considerations can potentially be navigated in theory through stringent, centralised policies which remove authority from fundraisers and put control of acceptance of proposals firmly in the hands of the non-profit, which will be guided by an approved policy document.
  • However, in practice adherence and benefit to the non-profit (and beneficiaries) will ultimately come down to the ethics of the individuals and it would be hard to put a policy in place which could not be circumvented.
  • The over-arching principle which must be applied throughout is that of:
    • Pro Bonum Publicum – Always for the Public Good – making sure that the organisation, our beneficiaries, and purpose of our existence are always put before individual fundraisers.

 

Background

  • From time-to-time NPC has had external fundraisers approach the organisation in order to make introductions and/or do fundraising.
  • Due to a lack of official policy / structures and the lack of clarity around fundraising remuneration (specifically commissions) – Fundraising remuneration in any form was cancelled by the Executive Director in January 2015.
  • It was recently requested that exploratory research be undertaken so as to revisit the potential of external fundraising with a view to see if it would be an acceptable addition to the revamped NPC Financial Policy.

 

Research Sources

Without spending a disproportionate amount of time on it, my research has led me to see that the matter is not as simple as first thought and should be considered carefully. I have read/watched the following in order to help ascertain a well-rounded perspective:

  • Fund-raising Act 107 of 1978 (Amended 1980, 1981, 2nd 1981, 1983, 1991, 1994) and the Amendment included in the Non-profit Organisations Act 71 of 1997
  • SA Institute of Fundraising:
    • Code of Professional Ethics
    • International Code of Ethics
    • Codes for NGO’s in South Africa
    • Codes of Good Practise
  • International Statement of Ethical Principles in Fundraising;
  • American Fundraising Professionals (AFP)
    • Position Paper: Percentage-Based Compensation
  • Legal Position of Commission-based Fundraising (Ricardo Wyngaard – Attorney at law specialising in non-profits – 2010)
  • Arguments Against Commissioned Based Fundraising (David Cuthbert – A look at Ethics, Incentive and Consequences)
  • FICA Rules to Fundraising
  • TED Talk – Dan Pallotta – The way we think about charity is dead wrong (Video)

 

Considerations

 

Legislative:

  • In short, legislation in SA allows for “Reasonable Remuneration” but this term in not specifically defined. Arguments can be made for allowing commission-based remuneration within this context and it should be noted that legislation does not specifically exclude commission-based remuneration.
  • Apart from the wide span of interpretations relating to the above, it should also be noted that NPC is a PBO, and therefore has additional rules and requirements. However again commission-based remuneration is not excluded within the Income Tax Act (More below).
  • Legally, it seems quite possible to construct a systemised method of commission-based remuneration.

 

Donor Expectations / Contractual:

  • Donor contracts generally prohibit fundraising fees based commissions.
  • If such a clause exists then paying commission clearly prohibited as it would violate the contract.
  • An interesting complication in South Africa, is that, since the advent of the BBBEE codes, donations are often given in respect of obtaining SED points (i.e. legitimate services). Therefore, many companies no longer include donor contracts but simply pay the money for compliance. This, in effect, “greys” contractual considerations and makes it far easier to pay commissions based on these donations.
  • Contractually, it would be possible to pay commissions on accepted proposals but whether the organisation can afford it is another issue.
  • However, on “Applications for Donations”, you would not be able to pay commissions but would rather look at remuneration in other forms (salaries / wages for time).
  • Ironically, from a donor contract perspective, FEED Africa would be the most suited programme for commission-based fundraising as this offers the greatest degree of services (ESD) while still meeting the objectives of our founding documents.

Tax & Industry Norms:

  • Being a PBO, NPC has to fall in line with Section 30 of the Income tax Act. Basically this states that that one cannot earn excessive remuneration from a Public Benefit Organisation (PBO) and that remuneration of a person should always fall in line with industry standards.
  • I’m not sure whether the above complicates or simplifies the matter. Industry standards for fundraising seem hard to ascertain within Non-Profits in South Africa. The best I could find was international averages based on the size of the operating budget of an organisation. With the current budget, this suggests that on an average, the highest paid person in NPC should never exceed an amount of +- R1.7 million per annum under the current operating budget.
  • It is interesting to note that not even the highest paid employee at NPC receives half of the above figure.
  • A secondary / supplementary fundraiser in effect should never be able to earn this (R1.7 million) and would generally look closer to a maximum of R1 Million (On current operating expenditure but not taking into account this change based on amounts fundraised).
  • It may be worth noting that if the above principle were applied (with some educated guess using a sliding scale), a fundraiser would have to raise approximately R14 million in order to earn this (7.14%).
  • Interestingly in South Africa there seems to be far less standardisation around the above issue. Based on some of the other big non-profits commission-based fundraising can take many forms and be of a greater or lesser amount. (e.g. WWF, CAF, STARFISH, FOODBANK)
  • In terms of compliance – A Fundraiser must either pay their tax at source (i.e. NPC deducts and hands over to SARS) or has to provide regular proof of tax payments.
  • In terms of Tax – commission-based fundraising has to be monitored carefully with strict policies so as to be compliant with SARS. NPC would be at risk if fundraisers did not pay their taxes and therefore it would probably be safer to tax at source, although seemingly this is not a formal, legal requirement.

 

Ethics:

  • Naturally ethics is the toughest consideration. The debate generally revolves around navigating:
    • Personal Financial Benefit vs Organisation Health & Impact;
  • The primary concern is that fundraisers based on commission will generally have their own well-being at heart. Examples include:
    • Going for easier, lower amounts (when higher amounts could have been achieved);
    • Making promises which affect reputation and put undue pressure on operations;
    • Staff resentment due to working hard for a donor where fundraiser gets paid for clinching deal.
  • Donors may also question how much of their money (%) is going towards the intended beneficiaries.
  • Personally, I find that I fall into the trap of having a negative reaction to normalised compensation within the non-profit sector but when logic is applied realise that a large part of this reaction is based on a fallacious societal expectation: That non-profit employees should earn less because they care about their cause and this fills the remuneration gap.
  • On the one hand, the sector is told to be as efficient and compliant as possible – often more so than normal businesses and often requiring more work. Yet, by expectation, employees can look forward to lower salaries, even though their levels of production can be higher within this context.
  • Modern theories relating to Social Enterprises are largely doing away with the notion that you cannot make money while doing good work. Interestingly, laws and policies seem to be lagging in this regard.
  • Ethically (and logically), when considered, I do not see an intrinsic problem with remuneration that is normalised by commissions. However, it should be capped.
  • This leads me to suggest that there is no difference in principle between capped commission-based remuneration and Bonuses for reaching KPIs and targets.
  • It remains difficult to see a set of policies, even well managed, that do not allow for individual ethics to manipulate such as system and therefore ensure that the needs of the organisation and beneficiaries are always put ahead of fundraisers’ and individual needs.
  • In relation to applying “for-profit” salaries to non-profit companies and as an aside, additional consequence – Paying higher salaries at non-profits would allow non-profits to attract a better calibre of employee, who would have otherwise gone into the for-profit sector thereby increasing the general pool of talent within the sector as well as the impact of non- profits in general.
  • In short – ethically, commission-based fundraising would not be as much of an issue if:
    • The rules relating to how fundraiser’s approached donors was very stringent, centralised at NPC and ethically always put beneficiaries and the organisation ahead of the fundraiser.
    • The ability to make negotiation calls were removed from a Fundraisers authority. I.e. A fundraiser could not deviate from their given mandate and all proposals, regardless, had to be accepted by the organisation in line with their policies not with what the fundraiser wanted. That would form part of the fundraisers assumed risk and cost / benefit.
    • A fundraisers focus was on introductions and allowed the non-profit to do the bulk of negotiating with donors (i.e. Fundraisers were intermediaries, not representatives). In effect they would present possibilities and the donor would ultimately put out the invitation to treat first.
    • Earnings were limited in terms of the overall operational expenditure of the organisation and reviewed on an annual basis.
  • In practice however, it is unlikely that such a system would be easily implemented.
  • Further, after all of the above requirements, it is possible that the opportunity cost becomes too great for a fundraiser and that they may choose to fundraise for other organisations. – Interestingly, if they do fundraise for NPC, it would mean there would be an element of “Caring for the Cause” which changes the dynamic and in many ways is poetic in terms of the ethical concerns.
  • It should also be considered that NPC provides a genuine service to companies in terms of compliance. With the introduction and importance of the BBBEE codes and compliance playing an ever increasing role in the sector, ethically it is important to consider what additional services NPC provides and what fundraisers would be fundraising for. If the objective was purely ESD, Skills or SED, then it leans (while not quite reaching) towards a normalised business service. It just so happens that this service also benefits the public good. However, it would be impossible to determine what the intentions of a donor are and further it would not change NPC’s approach with regard to any project or beneficiary. It seems BBBEE legislation presents a nice addition but does not make up the core of what the organisation’s purpose is.

 

Operational:

  • The programmes and operations at NPC have largely been modelled on the idea of economic profit as opposed to accounting surplus. This is largely unique within the sector and will always allow for more leniency within certain areas of operations as well as elevating opportunity cost within the mind’s eye of the organisation. The primary function of NPC is not to create accounting surplus but rather allow for a sustained growth of the organisation and greater impact.
  • This encourages managers to constantly seek better decisions for their projects and effectively increases NPCs benefit to the ground. The additional freedom of budget choice and “play” also encourages innovation. Something which can definitely be seen in the number of novelties within current projects and programmes.
  • Current budget structures allow managers to think of alternatives, a policy integrated / supported by operations.
  • One of the questions about commission-based remuneration was whether it would (operationally) hamper the performance of managers and/or a project.
  • I have summarised my findings/thoughts as follows using 10% commission as an easy, arithmetic example:
    • NPC could only afford 10% commission to external fundraisers as we approach our operational capacity. Should we reach our capacity, any additional projects with a 10% reduction in budget, would be to the detriment of the organisation;
    • As capacity is approached, we would have to grow to maintain operational efficiency, and that growth would be reliant on the external fundraiser continuing to raise the same funds as previous;
    • Therefore a policy would have to be explored to mitigate risk in terms of growth vs capacity vs external fundraiser longevity. I think it would be complicated to navigate this nexus;
    • As a thought experiment, and as an example, if we were to change policy to allow for internal commissions;
    • I do not think the organisation could afford 10%, unless staff are at full capacity. Therefore I think it would be far safer to restrict commissions for internal fundraising to 2.5%-5% to would allow for more leeway within budgets and operations but this would still require certain economies of scale and in practice would unlikely work;
    • It may also be worth considering an additional percentage of commissions split between teams rather than individuals but again we come back to a KPI-type structure and it would be far simpler to award bonuses to teams performing well.
  • In terms of operations, the type of donations would also be significant and an additional project would have to be proportionally beneficial to the donation.
    • For example: A fundraiser bringing in R1 million for 1 project would not be equivalent to R1 million for 30 projects (at R33.3k a project). This is because there is a reversal of economies of scale in terms of all reporting and management requirements. Therefore a suggestion of external fundraisers only being allowed minimum amounts should be applied;
    • This could also be extended further whereby fundraising parameters are set and a fundraiser could have a set number of projects of a certain value in a given time period eg. 3 x 30k projects, 3 x 100k projects in any given 3 month period;
    • However, the above begins to get complicated and is in itself a potential operational burden.
    • One interesting point is that the above does not include the benefit of future / continued relationships and subsequent amounts. I do not think fundraising commissions should ever include this.
  • Monitoring tax would be an operational burden if not managed properly.

 

Conclusion

Commissions for external (and potentially internal) fundraising would be possible legally and contractually but would have to be handled with extreme care within these these spheres. Even if approved, by the BOD, Werksmans and Grant Thornton it would still have to be continually checked against all legislation and tax requirements on an annual basis to ensure compliance. In essence however there are no intrinsic objections one could pursue within these two spheres.

Operationally, external fundraisers naturally put additional pressure on the resources of an organisation. Whether this would be to the benefit or detriment of the organisation will be determined by strict, highly structured and well-maintained policies. Although policies should benefit all parties, it should benefit the organisation to a greater degree, with an agreement always leaning in favour (and always being in the control of) NPC. Working under almost “unfair” conditions would mean that a component of genuine “belief in the cause” is included in the external fundraisers motivations. It will also aid in attracting the right type of person to this position as, within a free market, the personal opportunity cost of someone who does not care would lead them to rather fundraise elsewhere. This approach will lead to a degree of sustainability, but as mentioned policies are only as strong as the people implementing / adhereing to them and operations may always conflict with ethics. It is necessary to note that the organisation should always be in control of what a fundraiser does and not the other way around.

Whilst beyond the scope of this research, for interest one of my ideas was to apply economic theory to the above. Initial thoughts related to external fundraisers increasing the Average Total Cost of projects (and operations) which, under equilibrium conditions could lead to an Economic Loss. There would be an interesting academic project in looking at the whether the benefit of an increase in Total Revenue would compensate the organisation proportionally. However, this does not include the risk of a sudden decrease in Total Revenue due to a fundraiser leaving / suddenly stopping which, if the organisation had grown to accommodate the increase in revenue would affect sustainability and have additional legal and contractual issues due to the new hires.

Ethically it is clear that the primary arguments against commission-based fundraising are “the conflict of personal gain vs organisational health” and the measure of control afforded to an external fundraiser to the detriment the organisation. Whilst it is possible to mitigate some of these risks through strong policies and guidelines, unfortunately, I do not think it is possible to remove risk completely. The question then becomes one of weighing up the benefits and disadvantages to the organisation and in effect its beneficiaries. If NPC was able to perform at the same level and still had full control over acceptance of all project proposals without reputation risk for declining project then, in theory, external fundraisers based on commission would be acceptable. However, in practice it would still come down to individual agreements and ethics and this would be very hard to monitor from an organisational perspective.

Overall, I feel that more work needs to be done in order to determine whether the inclusion of external fundraisers would benefit or detriment the organisation. My initial impression is that there may not be a way to navigate and accurately solve the issues surrounding individual incentive vs organisational / operational health in the long run. I also question the opportunity cost of time and resources required in investing in such a lengthy process. There is definitely no short term solution.

I would also take into consideration the current health and trajectory of NPC in this assessment. Currently there seems no need to employ external fundraisers on a commission basis. Furthermore if, in the future, the current fundraising model is overloaded, then potentially there would be room to rather hire someone on a permanent basis with KPIs that match the requirements.  I hope this information was sufficient for the initial exploratory research required into the subject.

-GreenExec1


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