The Ethics of Consulting Fees
Nonprofit organizations often hire professional consultants to assist in the development and execution of fundraising campaigns. Most fundraising consultants are specialists in one area, such as researching prospects, conducting studies, planning events, directing capital campaigns, performing program audits, developing constituencies, or serving as counsel. It might seem reasonable that such consultants could charge whatever they see fit for their services. But according to Robert Pierpont, CFRE, chairman of the Florida-based fundraising consulting firm Pierpont & Wilkerson, Ltd., consultants must adhere to the same code of ethics as other fundraising professionals.
That means a nonprofit organization can expect to pay a consultant on the basis of his or her experience and complexity of the assignment, but not a percentage of total funds raised--a distinction that reflects one of the fundamental differences between nonprofit fundraising and commercial solicitation. In an article for Management Issues (December 1995), Pierpont crystallizes the distinction: "An act of philanthropy is not truly an economic exchange and, consequently, a fundraising executive is not a broker."
Compensation vs. Mission
Percentage-based compensation, including commissions, refers to payment that is calculated as a percentage of charitable funds raised. Says Pierpont, "For consultants, percentage-based compensation is the issue of concern right now."
On AFP's website, the subject is at the top of the list of questions about ethics. Standard 16 of the AFP Code of Ethical Principles and Standards of Professional Practice explicitly rules out performance-based compensation measured as a flat percentage of charitable funds raised. In the current AFP position paper on compensation, the AFP Ethics Committee declared that "percentage-based compensation encourages abuses, imperils the integrity of the voluntary sector, and undermines the very philanthropic values on which it is based." There's not much ambiguity there, and AFP's clear position statement has influenced many nonprofits to adopt similar standards.
Why are percentage-based compensation and commissions a bad thing for fundraising consultants? Percentage-based compensation methods are generally legal. They are also common practice in the commercial sector. However, nonprofits are governed by a set of laws and regulations that differs from those for private industry, says Pierpont.
Nonprofits rely on volunteers for governance and support, and they aim to serve a broad social constituency. Percentage-based compensation sets up a conflict of interest. A consultant's desire for personal gain shouldn't trump the broader social interests of the organization. "Good consultants help the organization develop relationships with clients," says Pierpont, who has more than 43 years of philanthropic consulting experience. He was chair of the AFP Ethics Committee during a period when the ethical standard forbidding percentage-based compensation and commissions was under severe attack.
What if a consultant were to receive compensation based on an unsolicited gift or on an annual contribution that commenced before and continues after the consultant leaves? Such reward without merit would create resentment among organization staff and donors. Since many contributions are the result of teamwork among organization staff and consultants, no one person should be able to cart off the rewards of that effort. Consultants motivated by personal gain could unduly pressure a donor to make a contribution, without consideration of the donor's wishes or timetable. And if the practice became widely known, the organization's reputation and credibility could suffer irreparable harm.
So what are the ethical ways to compensate a consultant? AFP recommends salaries or fees based on expertise, experience, and the project's requirements. "You should expect to pay for the level of experience of the consultant," says Pierpont. Commissions that are based on something other than fundraising (e.g., number of donors, number of donors who increased their gift, reaching a stated goal of a number of planned gifts) are also permitted, as are payments based on reaching milestones along the project's timeline. Standard 17 of the AFP Code permits performance-based compensation, such as bonuses, if such compensation is an accepted practice at the organization.
When considering the best way to pay a consultant, keep in mind this directive from the AFP's position paper on percentage-based compensation: "To be ethical, philanthropic fundraising must be mission-led, institutionally based, volunteer-driven, and professionally supported in an environment free of improper motive, unreasonable reward, or personal inurement."
a good fit works both ways
When a consultant's skills and experience match an organization's style and a project's scope, the result can be long-term success for all involved. The presence of a consultant keeps a project on schedule, according to Pierpont. "There's nothing like hearing 'The consultant's coming to town!' to get things moving," he says. Furthermore, a consultant can act as a repository for institutional memory when a long-term client experiences staff turnover. Consultants encourage team playing, and they don't strive to be the stars of a fundraising campaign.
Reliance on a consultant does not have to lead to dependency, however. "Good consultants will help an organization develop the internal skills it needs to eventually operate without the consultants," says Pierpont. Such built-in obsolescence helps both the organization and the consultant keep their priorities in perspective. When deciding whether or not to hire a consultant, Pierpont says, the organization should consider the long-term cost-effectiveness of both outsourcing and in-house options. Some activities are going to be cheaper to keep in-house, and others are going to be cheaper if they are handled by an experienced outsider.
The best consultants let the organization shine through their efforts. People often fear that consultants will walk away with the client relationships when a project ends. However, client lists are not perks. (See Standard 13 in the sidebar.) "Working with organizations means helping them work with and develop their constituents," says Pierpont. "It's about relationship building." Trust is, or should be, part of what you pay for when you hire a consul-tant. Beware of consultants who offer cookie-cutter solutions. They are interested only in gaining a maximum return on a minimum investment, not in developing long-term, mutually beneficial relationships.
Looking at the future of consultancy in the nonprofit sector, Pierpont predicts a gradual increase in the outsourcing of administrative functions such as the management of publications and mailrooms. "Just like you see in industry," he says. Nonprofit organizations are likely to continue to turn to consultants for special-event coordination and targeted fundraising campaigns. As long as the organization's mission is honored, consultants will continue to be essential players in the nonprofit field. "In my opinion," says Pierpont, "consulting in its best form strengthens the organization in the long term."
Standards of Professional Practice Consultant Compensation
Robert Pierpont is past chair of AFP's Ethics Committee. The current Code of Ethical Principles and Standards of Professional Practice contains the following standards related to ethical compensation of consultants and organization staff:
Standard No. 13: Members shall adhere to the principle that all donor and prospect information created by, or on behalf of, an organization is the property of that organization and shall not be transferred or utilized except on behalf of that organization.
Standard No. 16: Members shall not accept compensation that is based on a percentage of charitable contributions; nor shall they accept finder's fees.
Standard No. 17: Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accord with prevailing practices within the members' own organizations and are not based on a percentage of charitable contributions raised.
Standard No. 18: Members shall not pay finder's fees, or commissions or percentage compensation based on charitable contributions, and shall take care to discourage their organizations from making such payments.