Ethical Standard Deep Dive: Standard 22
Throughout the month of October, members of the AFP Ethics Committee will be addressing each of the standards in our Code of Ethics. AFP’s General Counsel and Ethics Committee Staffer Jason Lee explores Standard 22 which addresses one of the most popular ethical topics: compensation and bonuses.
Standard 22: Members shall be permitted to accept performance-based compensation, such as bonuses, only if such bonuses are in accord with prevailing practices within the members' own organizations and are not based on a percentage of contributions.
Jason: It is a common misconception that the AFP Code of Ethics prohibits any and all types of bonuses or incentive compensation. That belief occasionally is raised by the audience when I’m presenting ethics workshops at our various chapters. That is not the case at all, as there should be ways of incentivizing strong fundraising efforts, rewarding professionals when they far exceed the goals mutually set with the organization.
The key, of course, is separating the concept of incentive from self-gain, as the latter undermines donor trust and the mission of the organization. Those potential negative impacts are why the Code prohibits percentage-based (or commission-based) compensation, as explained previously in our discussion around Standard 21.
There are, however, ways of providing bonuses that are ethical, that do comply with the AFP Code of Ethics. It is worth noting that the organization must have a policy and practice that awards bonuses/performance-based compensation approved by the organization’s governing body based upon by mutually agreed upon goals.
A simple permissible bonus structure is using a percentage of the base compensation/flat fee. In that scenario, if a fundraiser has a $20,000 flat fee, a bonus could be drafted such that they receive 10 percent of the flat fee ($2,000) for exceeding targets [those numbers are instructional only].
Another potential ethical bonus structure is based on non-financial indicators (e.g., number of new donors acquired, number of gifts upgraded, etc.). If those targets are met/exceeded, the fundraising professional could receive a flat fee bonus.
Finally, a weight and rate system could be used where incentive compensation is created by proportionally weighting various elements such as the annual fund, special events, major gifts, etc. The actual bonus could be based upon a percentage of salary/flat fee or based upon an incentive pool such as a 3-year rolling average of funds raised, funds raised in excess of goal, or a rolling average of the selected fundraising goals.
Fundraising takes time and energy and should be rewarded when those efforts exceed expectations. The key is ensuring that incentive compensation is done in an ethical manner that places on strong emphasis on the mission of the organization and strengthens donor trust.
(For more information on AFP’s prohibition on percentage-based compensation, finder’s fees and bonuses, read our position page on compensation).
- Members' freedom to accept performance-based compensation is based on the fact that AFP recognizes that such can be an ethical way to reward practitioners who exceed the scope of effort covered by their established salary or contracted fee.
- Members may accept performance-based compensation under the following conditions:
- the member's organization has a policy and practice that awards performance-based compensation; and
- the policy has the approval of the organization's governing body; and
- the policy and practice include, but are not limited to, the member's area of responsibility (e.g., are a norm within the organization); and
- the criteria are restricted to mutually agreed-upon, pre-established overall goals; and
- the criteria for determining the eligibility for, and amount of, such compensation shall exclude any consideration of a percentage of contributions. This should be interpreted as an absolute prohibition of any reference to, or use of, a percentage of income to determine compensation, either in effect or actuality.
- Members understand the provisions of the IRS “Intermediate Sanctions” regulations in the U.S., or their equivalent in other countries, that apply to executive compensation.
Examples of Ethical Behavior
- Including in the bonus plan's criteria nonfinancial indicators such as quality improvement, attaining anti-discrimination goals, management of human resources or achievement of overall unit goals.
- Including in the criteria financial indicators such as cost effectiveness, budget savings, meeting or exceeding dollar goals and increasing the amount of the average contribution.
- Including in the criteria consideration of nonfinancial indicators of productivity, such as an increase in the number of contributors, an increase in the number of volunteers, an increase in the number of contribution renewals and an increase in the number of prospects.
Example of Unethical Behavior
- Accepting a bonus plan that includes in its criteria a percentage of the funds raised.
- Accepting performance-based compensation developed and approved after the fact (e.g., after the end of the fiscal period).