Is there anything illegal about our 501(c)(3) organization giving a Christmas bonus, or an incentive for a fundraiser that she initiated, to the Executive Director if she is already receiving a salary?
There is nothing illegal about giving bonuses to the staff of charitable organizations so long as they are not based on the “profit” or surplus of the organization. The IRS takes the position that if incentives are based on profits, there is an incentive to cut services, which it does not consider charitable. If you give an incentive for a fundraiser, you probably don’t want it to be commission-based because the professional fundraising community thinks that is unethical.
In either case, you should be sure that the total compensation is not unreasonable so that there is no “excess benefit” for the E.D. You want to be sure to follow the safe harbor rules to assure that you have a rebuttable presumption that the total compensation is reasonable. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)
Comments
It's a way of protecting donors from giving beyond their means because of pressure from a fundraiser. If a fundraising representative has a personal stake in the amount the donor may give, they're more likely to put undue pressure on that donor to give a greater amount than they may be comfortable with.
That's my understanding anyway, but it sure makes hiring high-performance fundraisers a conundrum!
The other issue with paying fundraisers with a stake in the funds raised is that it creates all kinds of litigation opportunities down the road over who gets credit for gifts pledged during Year X but paid in years X, Y, and Z. It requires a lot of hassling around when to recognize a gift as having been made and creates problems when development person A leaves and B replaces them -- who gets the "cut" on the gift that A landed but didn't occur until A was gone?
It also warps the incentive of the fundraisers in terms of structuring the gifts to occur in the relevant measurement period -- the funder who knows they plan on leaving or who is under a limited duration contract may leave a lot of money on the table by pushing donors to make gifts now (during the commission period) rather than working to create a much larger gift structure over time.
In the end, commission sales are a good fit for for-profit businesses, but donor development is not a sales situation, and you want development folks to be working to maximize the payoff to the organization over the long haul, even if it means less immediate cash this year. —J.G.
Here’s a question for one of your issues: why the heck does the professional fundraising community think paying fundraisers on the basis of the amount raised is unethical? This has never made ANY sense to me.