Episode 72: Employment Challenges in Nonprofits - Bonus and Incentives in Fundraising Work

Welcome to another edition of “Around with Randall,” your weekly podcast making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett. 

It's another edition of “Around with Randall,” right here with Randall from Hallett Philanthropy. Always glad to have you join the podcast as we look at the third part of three regarding issues in employment in nonprofit work, and just as a reminder Hallett Philanthropy was incredibly proud to be a part of the publication from AHP Healthcare Philanthropy where the survey we did with nearly 1,500 different participants indicated trends and issues regarding philanthropy. Today's conversations around bonus structure, and one of the things that came out of the survey was a fact, kind of two-fold. Number one, a number of people indicating that a bonus structure would help their compensation situation as many felt like they weren't being paid fairly, particularly gift officers, and it was an issue that might cause them to leave. And number, two several more than one, particularly those in the Chief Development Officer, Chair, Vice President, Philanthropy Chief, Philanthropy Officer, indicated that their bonus structure might be much different than maybe the address of the executive team, which was concerning. And so today we want to handle, about four or five different aspects of bonuses, to help leaders understand what's allowed in best practices and how to do so, and for employees to know what's out there in terms of opportunities. 

Let's start from the very top. Sometimes I hear, “well you're a non-profit, you're not allowed to provide bonuses,” and I have… having spent a lot of time studying tax law in law school as well as practicing, kind of aspects of different tax issues related to states gifts and trusts during my practical years as a fundraiser is to inform them that the IRS actually clearly states that bonuses are allowed within nonprofits, that they are very understanding that this is a very common issue to be dealt with when talking about compensation packages. Overall, what the IRS says is that they kind of have what they call a 12-factor test. We're not going to get into details of that, that they use to make sure that compensation is appropriate, unlike the for-profit area where compensation can be whatever it is. There is, at least theoretically, a ceiling on compensation because the IRS says is that the money should be being put back into the community through the nonprofit if there's excess revenue, which would be net profit in a for-profit industry. Well that's really never been tested formally. I mean, there's a couple cases here or there but there are hospital system CEOS making six, ten, eight, twelve million dollars. So there's never been a hard limit put on it. So the first piece is, is bonuses are allowed. 

The second is how prevalent are they? So according to an article in the Nonprofit Times, a terrific publication that I read, trying to read at least twice a month as it comes out, different articles online at different times, is that if we take health care, for an example, particularly with executives, so that's going to be your top leaders, chief executive officer, financial officer, medical officer, philanthropy development officer, 85+ percent of executives have some type of incentive or bonus structure. If you're in trade associations, 80 percent or more have executives have a bonus structure. In foundations it's 30 to 40 percent of leaders or executives. Professional societies, more than 50 percent have incentives, so the idea that incentive and bonus structures don't actually exist is a fallacy. It just is not true. They're actually becoming more and more prevalent, and in fact, when we talked, when you read and you talk with hiring company, companies, that are doing executive search they're saying, they're seeing it more and more, and we'll talk about different kinds of bonuses here in a moment, so the IRS is legal. We know that it's executive levels, it's been predominant. What we're beginning to see is that it's beginning to, kind of filter down into gift officers and others as a way of creating incentive-based pay. 

For a reward of great work, now this is where we get into this issue that the Association for Fundraising Professionals, AFP, started in 1964 with its code of ethical standards, and then I believe the last major changes were maybe 2014 or so, but they have a specific section on compensation and in particular on bonuses and on finders fees, as they call them. And what they're saying, in general, and you can read the kind of five points on the one page code of ethical standards, you can Google and get anywhere, it's a PDF, and I actually recommend it because it's a good reminder of what we should be aiming for is that, really, what they're saying is is that your bonus structure can't be tied to a percentage of the dollars raised. And it can't create a issue when it comes to the honor the integrity of the gift-getting process, and maybe a little more specific but generally that's what they're saying. So unlike a sales person who maybe paid $25,000 base and ten percent of what they bring in fundraising has said that level of connection between dollars coming in and the ability to compensate someone through a bonus structure is not allowed. So that then creates attention and what we want to talk about is how do we get through that tension. Well, I would start organizationally that you need to think about, and if you're in a large organization they're already thinking about this, but if you're a smaller organization or maybe incentives and bonuses are just beginning to be discussed there are kind of four things that i would recommend very highly in terms of kind of general principles. 

The first is is that an incentive process should be agreed upon in writing, voted on by your board. They don't have to get into the details if you're a large organization, but there should be a voice. We support this by leadership. The executives, we support this. And it should be managed and run through your HR department. This is not something to try to figure out on your own. If it's done loosey-goosey without a lot of process and organization, I can pretty much guarantee you there's going to be problems. It has to be thought about, laid out in a total package, and understood. It needs to be. So the first one is that it's agreed upon, and it's part of the culture, and everyone knows that it's part of some compensation packages, some compensation levels for certain employees. 

Number two, you have to be transparent. You shouldn't be afraid to have to talk about this. Compensating someone for great work should be okay, and bonuses and incentives are a way to do so. 

Number three, it should be proportional. I think most people believe that compensation should be 60, 70, 80 percent, maybe 90 percent, minimum 60. I would encourage higher salary meaning every two weeks or every first and fifteenth or once a month we're making a payment for the work that an employee does, and that it's only a smaller part of the overall employment package that's incentive-based. And you might see in for-profit companies like huge stock opportunities. That is not what we're talking about. In a sentence I believe I recommend that the biggest part of anybody's compensation package by far, it needs to be salary. You can pay x dollars to do this work, based on this job description, with these goals. But if we succeed at high levels there can be a portion at the end for bonus structure. 

And lastly, is this has to be a defined process. How do you establish on an annual basis what those compensation levels are? What are the goals? What above the goals, or at the goals, are the appropriate compensation bonus structures? How much is that? This shouldn't be just guessed at, and it should be in writing, and signed, and I’ll talk about some of the things that I’ve done in my career to help employees be recognized from a compensation perspective for great work. 

So we've talked about that the IRS says it's okay. We've talked about that it's prevalence in our nonprofit worlds, probably more than most people realize, we've talked about four major principles to think about - that it's agreed on by everybody, that it's transparent, it's proportional, and that there's a process to it on an annual basis. 

So let's spend just a second talking about the kinds of bonuses. I’m going to leave performance bonuses to the end because I think that's what everybody thinks about, but there are some other bonuses I see happening more and more often. The first is is a signing bonus. So when you talk to some of the experts in executive search areas they're seeing as much as 25 percent of their searches are now including signing bonuses and that could be in some cases as much as $25,000 or $50,000 for signing, meaning when you sign the agreement that you're going to go there they're going to write you a check. It's an incentive-based, we want you to come on board. In some ways it might be able to get someone's salary, if you average it over a couple years to a little bit higher level without it showing up in the salary area. There are a lot of reasons it can be done. Sometimes you're moving from, let's say Nebraska to Los Angeles and Los Angeles a little more expensive ,and I need to buy a house. How are we going to do this? Let's do a signing bonus so that you have extra cash to put into that house. Almost all signing bonuses come with some type of stipulation that if you don't stay a certain amount of time you're going to pay that back, so just be aware that you don't get a signing bonus and six months later you leave, they'll force you to pay back that money. Two years, three years, is usually about what I see. Sometimes, every once in a while I see a one year. I’ve not seen more than three recently. So signing bonus is one way.

Another kind of bonus is a retention bonus, meaning if you stay for a certain amount of time we will write you a check. So it's kind of the opposite way. The signing bonus is, we're gonna pay up front. Retention is we're gonna pay on the back side. Maybe there's a great employee that's being sought after all the time by search firms. you can build in a retention bonus. If you stay for this many years we'll write you a check. Sometimes those checks can be six figures, depending on performance. Just be aware that that's an option if the organization maybe can't do something up front maybe they can do it on the back side. 

The one that we talk about most and that I want to spend the most amount of time with is the idea of performance bonus, meaning certain things happen and if they do happen there's compensation in an incentive program for that. I’ll take it and break it into two pieces just to make it easy. One is the team approach meaning that if the if the department, let's say we're dealing in nonprofit work, fundraising, the development office, the advancement office, the foundation meets these goals we'll talk about what those goals might be here in a moment, everyone will get a certain percentage of their salary - two percent, three percent bonus. There's a real advantage in that because what it does is it forces the team in some ways to come together to focus on those goals. All of a sudden infrastructure and data is really concerned about how they're part of the puzzle, fits into what gift officers are doing, and if there's not a seamless kind of process in terms of identification, in terms of the data that's required for gift officers to go out and make those calls, build those relationships, make those asks, what you can get is a situation or scenario that you end up with an opportunity to bring the group together to focus on what's really important. The downside of team goals is that if a couple people don't perform that could inhibit everybody from getting their goal, getting to the goal, and getting their bonus, which can cause acrimony internally. So team, and we'll talk again about the metrics here in a second. What could be done is a great opportunity. The other is the individual, and I see this more on Chief Philanthropy Officers, Major Gift Officers, planned giving, principal gift, annual giving things of that nature and really this is about incentivizing the right behavior. The types of things we know move people to gift opportunities, face-to-face visits and things of that nature ,so how do you set up metrics to do those two type of goals without breaking the code of ethical standards set up by AFP where it really just can't be tied to money and there are lots of ways of doing it. Let me say first, I employed both team and individual goals at the same time and I probably should have said that up front they don't have to mutually exclusive, you can do both so everybody feels like there's an opportunity for everyone to benefit. But the types of things that that I did first and foremost was to begin to lay out some very specific things and so while I couldn't compensate and you can't compensate based on, you know, how much money they bring in solely, it would be a part of the equation. 

So I set up a bonus structure incentive program when I was at the Nebraska Medical center with my gift officers where depending on how many years they had been there, because I wanted to be realistic so like in the first year it was they could get up to five percent of their salary, and then the in the second year it was nine percent of the salary, by the third year it was, excuse me, second year was seven, third year was nine, and then nine ongoing because I wanted to help build some long-term goals for people to stay and they had to raise a certain, you know times their salary to just qualify. And then I did things like with certain gift officers I need you to set up a planned giving program that had nothing to do with money, what that was was did you get the program set up, did we have some benchmarks, or we have this many solicitations over $10,000. I didn't put like five in this category, and so are we going to have a certain amount over this dollar figure, do we have the number of visits, face-to-face, do we have the number of new donors, so maybe an annual giving program is acquisition, how do we incentivize? Great thought process segmentation on getting new people. If you start layering all of these things in you can build out what I did on an annual basis and I’ll hold it up here to the screen was build out a strategic plan for each gift officer or each employee, and what that did was a part of that is lay out what those incentives were and then also what was the method of implementation what was the timeline during the year and what were the cost implications what did you need to be successful. And then I great support from the HR. Talk about process. You can hold - see it on the screen-  is putting together an incentive program that laid out what the goals were and they would sign it and if they didn't meet it they didn't get the bonus. If they did meet it they did get the bonus. We did not base it on how much money they raised. Certainly they needed to meet a threshold but once they did that it was about all of these other things that I needed. They wanted whatever it was to make the office, thus the organization, more successful. Particularly in philanthropy more money to support the great nurses and doctors maybe here to university the professors whomever in that work. So goals, visits, asks, planned giving societies, acquisition… you can pick a whole litany of things that can be used as a part of that incentive program and check marks to say look we got these things done. I would recommend highly you set goals that are numeric so they're pretty easy to understand, there's not a lot of miscommunication, well I tried awfully hard. I’m all for effort, but bonuses are about accomplishmentT

The last thing I want to talk about is how to pay this out, and most of the time it's paid out on an annual basis like as at fiscal year-end in a cash process, and I don't mean like by hundreds but through the payroll system. I think everybody can understand that I would just also throw out there that the IRS allows for what they call a 457 plan which is basically an enhanced retirement plan and it is important because it doesn't preclude the limitations of what like let's say a 401k has at $19,000 you put hundreds of thousands of dollars into this deferred comp plan called the 457 so just so you know it doesn't always have to be cash. Most people want that but sometimes organizations say we want to incentivize you to be here for longer so we're going to put it in a retirement pool that's going to benefit you later so just it's just something to consider.

In the end I think the greatest advice that I have when it comes to bonus and incentive is it's perfectly appropriate, I have no problem talking about it, but the question that needs to be asked for the organization, board, leaders, employees everyone can you defend it to the public and to the staff. And there's two types of trouble. One is the IRS, meaning there's some type of private annoyment or somebody can benefit beyond what's normal they have personal benefit by the money coming in that's not allowed by our standards anywhere but particularly in nonprofit work, so keep in mind that there are some IRS standards. But most places probably aren't getting very close to those. I think the one that's of more concern is, can you, it's the perceived trouble which feels painful is the public perception. I have, here in Omaha, recently, in the recent last four or five years there was an organization who had a bonus structure that the public couldn't get their arms around. I think that it wasn't very well told but at the end of the day it doesn't make any difference they couldn't defend it and it made the organization look really bad and the entire executive team turned over, the board had to be turned over. So if you're gonna have a bonus plan make sure it goes back to those things, if it's agreed upon by everybody, that it's transparent, it's proportional, and there's a process to it, but you can defend it so that your organization's not caught in a situation where it loses credibility. Credibility is our greatest currency in nonprofit work, that's the currency that allows us to go out and build relationships and generate revenue. In philanthropy, for our organization, bonus structure the last of the three pieces of employment in this series of podcasts. I hope it was helpful to give you something to think about either as a leader or as an employee, and maybe opportunities that could uh be beneficial for your overall compensation. 

Don't forget, if you want to email me that's podcast@hallettphilanthropy.com. Or if you think i'm crazy maybe not want to say that because I get too many emails but reeks r-e-e-k-s at hallettphilanthropy.com. Let me know your thoughts. We got a suggestion on a subject or have a disagreement, let me know. And don't forget about the blogs, just posted one on Prince with a music tribute that is kind of interesting about planned giving, something to think about. Go check out the blogs - 90-second reads or so on the website at hallettphilanthropy.com. Don't forget you are part of something really important. Our world is in a little bit of chaos right now. Nonprofit work is, can, and should be the savior of your community, for individuals, for the important aspects of your community for making sure people aren't missed overall, underrepresented, not heard. Non-profit work is critical to making your community a better place, and as someone who's a professional in it, I hope you feel that. I love what I do but I hope, more importantly, you feel the power of that, that you feel like you're making a difference every day. Don't forget my favorite saying, some people make things happen, some people watch things happen, then there are those who wondered what happened, and nonprofit work is about people making things happen for people who are wondering what happened, and i don't know a better way to spend a career. And I hope you feel a little bit that way every day when you get up in the morning. I thank you for your time here today and in every podcast that we do here on at Hallett Philanthropy, “Around with Randall.” We'll see you next time, and don't forget make it a great day.