November 3, 2016; ValueWalk
When for-profit companies want to increase their revenues through sales, they incentivize salespersons with lofty commissions—the more sales they make for the company, the more money they get to take home. A successful model in the for-profit industry, it might make sense that development professionals, the nonprofit equivalent of salespersons who, essentially, sell the mission of an organization, would also respond well to incentives.
New collaborative research out of the University of Pennsylvania’s Wharton School investigates this idea. In the report, “When Payment Undermines the Pitch: On the Persuasiveness of Pure Motives in Fund-raising,” Deborah Small, Alixandra Barasch, and Jonathan Berman examine “whether incentives crowd out pure motives and render individuals unable to convey sincerity.”
Could a model that works so well in the for-profit industry work in the nonprofit sector? For starters, many argue that incentivizing fundraisers is inherently unethical. By the nature of most philanthropic transactions, donors do not receive anything tangible in return other than a tax deduction.. These gifts are given in good faith; thus, the best interests of the donors and the mission of the nonprofit need to be honored. In fact, the Association of Fundraising Professionals released a position paper entitled “Percentage-Based Compensation,” in which they argue that if commissions are offered, “charitable mission can become secondary to self-gain; donor trust can become unalterably damaged; there is incentive for self-dealing to prevail over donors’ best interests.”
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Even if you can look past the ethical reasons for not incentivizing fundraising professionals with monetary rewards, the for-profit sales model also suffers from logistical issues in the nonprofit setting. In the case of a capital campaign, does a development staff person receive his or her would-be commission based on the total pledged amount? When is the compensation received, if the pledge is made over a number of years? What if the pledge falls through and fewer funds are received than were promised? How would this incentive model work with planned giving? How would development staff be rewarded for pledged bequests, which can also be changed by the donor at any point in the future? In the case of planned giving, which should be a delicate process involving the donor’s own financial advisors, might incentivized development staff be tempted to hasten the transaction? Much of philanthropy is conducted via in-kind gifts such as real property and in the case of humanitarian organizations, food and pharmaceuticals. In these cases, how are development staffs compensated when no cash is involved? Examples abound of how philanthropy defies the creation of straightforward formulas for paying development staff beyond a salary and possibly a well-defined structure for board-approved bonuses.
The Wharton researchers give us another reason to move away from commission-based fundraising: Incentivized fundraisers are not as persuasive as their counterparts whose pay is not contingent upon funds raised. In their experiments, participants recorded videos to raise money for a breast cancer awareness event. In each variation of the experiment, a subset of the participants were told they would get an incentive—one dollar, three dollars, or ten dollars to keep, or a donation match for the charity. In all cases, the potential donors did not know that participants were being incentivized. After the experiments, both participants and donors were asked to complete a survey that would “gauge their feelings on the sincerity of the persuaders’ pitch.” In all of these experiments, donors gave less when being persuaded by incentivized participants. According to the surveys, although the donors did not know participants were being incentivized, they perceived as less sincere the participants who received incentives. The donation match, however, did not have an impact on donations.
Regarding the results, Small says, “The people who are incentivized are not working less hard; it’s that they are communicating less effectively.” After these experiments, it was concluded that “the best advocates for a cause are those whose motives are pure—untainted by self-interest.” There are many reasons why it has long been the practice of the nonprofit sector to not incentivize development staff with financial rewards, not least being the IRS rule against net earnings inuring to the benefit of any individuals. Today, we also have ethics, logistics, and research data indicating that development professionals’ pay being contingent upon funds raised actually reduces the chances for fundraising success, let alone the likely negative impact this practice would have on increasing donor retention. —Sheela Nimishakavi