Compensation Of Gift Planning And Financial Services Professionals

Compensation Of Gift Planning And Financial Services Professionals

Article posted in Ethics on 14 March 2001| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011


In this article, Frank Minton describes some of the current practices regarding compensation of financial services professionals and their affiliated companies, and staff members of charities, and seeks to apply the "Model Standards of Practice for the Charitable Gift Planner" adopted by the National Committee on Planned Giving and the American Council on Gift Annuities to these practices.

by Frank Minton

Financial institutions and financial service professionals have discovered planned giving. Some mutual fund companies have started charity funds, both to retain the investments of their philanthropic clients and to garner new money for investments. Other mutual fund and brokerage companies have entered into relationships with charities whereby charities agree to invest with them the contributions received from clients referred by representatives of the companies. Financial advisors regularly initiate charitable gifts, particularly charitable remainder trusts. In many instances, the donor serves as trustee of these trusts and retains a trust administration company to handle trust accounting and tax filing.

Meanwhile, charitable institutions have intensified their efforts to secure more planned gifts and build endowments. Recognizing that financial professionals have access to wealth and are in a position to refer gifts, charities are trying to forge productive relationships with these professionals and the companies with which they are affiliated, but in so doing they have to deal with compensation issues. Charities are also concerned about retaining staff and stimulating productivity, and to accomplish these objectives, some are experimenting with incentive compensation plans.

Some of the current compensation arrangements between charities and financial institutions, and between charities and financial services professionals did not exist when the Model Standards of Practice for the Charitable Gift Planner (Model Standards) were adopted by the National Committee on Planned Giving (NCPG) and the American Council on Gift Annuities (ACGA) on May 7, 1991. (See Exhibit A.) Likewise, certain employee incentive plans being explored today were not in use in 1991. Just as the United States Constitution has to be reinterpreted in terms of sociological and technological issues that didn't exist in the late 18th century, so it is necessary to apply the Model Standards to new developments in gift planning.

This article describes some of the current practices regarding compensation and seeks to apply the Model Standards to them. The first and longest section concerns compensation of financial services professionals and their affiliated companies. The second section deals with compensation of staff members of charities. A final, very brief section raises the question of when compensation of any type-salary, fees, or commissions, is "reasonable and appropriate."

Ways must be found to pay professionals who engage in gift planning. Charities regularly recruit estate planning and financial services professionals to its planned giving advisory committees, and they reach out to these professionals in the hope that they will facilitate gifts. Indeed, these professionals are generating billions of dollars of planned gifts every year, and can play a tremendous role in channeling to charities a portion of the intergenerational wealth transfer. However, it is unrealistic to expect these professionals to make referrals and cooperate with charities unless they receive some form of payment for their services. The challenge is to find forms of compensation that are fair and ethical, and that do not have regulatory repercussions that can endanger the entire field of gift planning. A similar challenge is for charities to find ways to compensate staff that reward effort while adhering to high ethical standards and maintaining the credibility of the institution.

Compensation Of Financial Services Professionals

Finder's fee paid by a charity. When the Model Standards were adopted in 1991, payment of finder's fees was increasing in frequency. Typically, a promoter would promise to have his or her client name a particular charity as beneficiary of a charitable remainder trust in exchange for the charity's paying a finder's fee equal to a certain percentage of the gift. The trust was marketed more as a tax shelter than a gift vehicle, which explains why selection of the charitable recipient was often of little concern to the donor.

Payment of finder's fees caused the following concerns:

  • The amount paid by a charity (often 5% to 7% of the face value of the gift) could be out of proportion to the services rendered.

  • Payment of a finder's fee from charitable remainder trust assets could disqualify the trust or, at least, reduce the charitable deduction.

  • Payment of a finder's fee from a charity's general funds might result in the charity's losing money, especially when the income beneficiaries are relatively young.

  • Payment of a finder's fee could subject the trust to regulation by the Securities and Exchange Commission (SEC).

  • The future of charitable remainder trusts could be threatened if they were viewed primarily as business transactions.

For all of these reasons, the Model Standards state that the payment of finder's fees is never appropriate.

Commission paid by a charity. The Model Standards declare that commissions paid "as a condition for delivery of a gift" are inappropriate. However, there was never any intention to oppose commissions such as the following, which are paid by a charity in connection with the disposition or investment of a contributed asset.

  • Commission paid to a stockbroker through whom a charity sells donated securities or purchases other securities for investment.

  • Commission paid to a real estate broker whom a charity engages to sell donated property.

  • Commission paid to a life insurance agent through whom a charity reinsures a gift annuity.

Notwithstanding the Model Standards, there are certain organizations that do pay commissions computed as a percentage of the gift.

Commissions on sales of gift annuities. For example, a national foundation recruits insurance agents and financial planners to sell gift annuities on a commission basis. The agent or planner enters into an agreement with the foundation, which is comparable to the sales agreements executed between insurance companies and brokers, whereby the individual is authorized to solicit gift annuities among clients and will be paid a commission on every completed contract.

In one advertisement, which appeared in Trusts and Estates, those who sold gift annuities were promised a commission of up to 8% of the value of assets contributed, though this commission has apparently now been reduced to 6%. Another organization that pays commissions on gift annuity sales gives representatives an option of a larger one-time commission or a smaller up-front commission plus modest annual commissions as long as the gift annuity remains in force.

Officers of one foundation marketing gift annuities in this manner contend that it is cheaper to pay commissions to professionals who actually close gift annuities than to hire staff to market them. Also, they believe that commissions provide an incentive for professionals to bring up the subject of gift annuities with clients. They apply to the charitable arena the general argument that commissions stimulate productivity and reward effort.

Both NCPG and ACGA have adopted resolutions opposing commission sales of gift annuities. These organizations feared that the execution of sales agreements and payment of commissions could cause state insurance departments to impose licensing requirements on charities that are identical to those imposed on insurance companies that sell commercial annuities. In fact, the chair of the annuities division of the National Association of Insurance Commissioners, upon being informed about commission sales of gift annuities, commented, "The more these organizations start looking like commercial insurance operations, the more we are likely to consider a move to have them regulated."

Another problem with commission sales of gift annuities is that the practice may violate the Philanthropy Protection Act of 1995. This Act exempted gift annuity and charitable remainder trust funds from SEC regulation provided no commissions were paid to solicitors of these gifts. If the exemption is lost, gift annuity reserves maintained by a charity could be regulated as a security.

Commissions on gifts to donor advised funds and pooled income funds. Example: A mutual fund company has recently created a charitable gift fund to which contributions can be made to establish an advised fund or to acquire shares in a pooled income fund. The mutual fund company has also retained a for-profit firm to handle administration of its gift program. There are some 100,000 financial consultants who already sell the company's mutual funds. These persons are encouraged to mention the advised fund and pooled income fund options to their charitably minded clients. For their efforts, they receive ongoing fees so long as the assets remain in the advised fund or pooled income fund. These fees are not called commissions, but rather are regarded as "service fees" paid to the financial consultants for servicing their clients' charitable accounts. They are paid by the charitable gift fund through the for-profit administrative firm. In the case of a current gift for an advised fund, the sales representative receives a 1% up-front fee plus a 1% annual fee on assets that remain in the advised fund. In the case of a contribution to one of the pooled income funds, the sales professional has a choice of 1% initially plus 1% annually, or 4% initially and 25 basis points annually.

All contributions to the charitable gift fund are liquidated, and the proceeds are invested in one or more mutual funds of the parent company. A donor can choose whether to have a contribution for a donor advised fund invested in a growth fund, growth and income fund, income fund, gift preservation fund, or in some combination of these. Likewise, a donor can direct a contribution to a high-yield pooled income fund, an income pooled fund that includes some equities, or a growth and income pooled fund that is invested mostly in equities. Possibly anticipating federal legislation mandating a minimum annual payout for donor advised funds, the charitable gift fund grants at least 5% of its assets each year. Sales representatives are advised that the sale of gift fund and pooled income fund units should be treated as securities, and that the sale of gift fund units is subject to the charitable solicitations statutes of certain states. However, only the gift fund is registered in those states. The sales representatives themselves are not registered as securities dealers.

One question is whether a charity established by an investment company is involved in a conflict of interest if it invests only in funds of that investment company. Even though the charity's board is technically independent, it is unlikely to move shares from the investment company even if its performance should be below industry standards. Another question is whether the charity's board is violating its fiduciary duty if it pays fees above what other charities are paying. The board might respond by pointing out that these fees include marketing costs as well as administrative and investment-management fees, and that when the fundraising expenses of traditional community foundations are added to its administrative and money-management fees, the total costs, expressed as a percentage of the gift, are perhaps no less than what the charitable gift fund is paying.

Still another question concerns the applicability of federal securities laws when commissions or other fees are paid to fundraisers. If commissions are paid, a pooled income fund would not be covered by the exceptions in the Philanthropy Protection Act of 1995, and, consequently, it would be subject to regulation by the SEC. Also, individuals who receive commissions for soliciting gifts to the pooled income fund would not qualify for an exemption from classification as broker dealers. However, as noted, these fees are not called commissions. Even if they were, the Philanthropy Protection Act may not be an issue since the financial consultants hold a securities license and the assets are invested in registered securities.

Commissions paid by a financial institution. Arrangement between a charity and a mutual fund company. For example, a major mutual fund company enters into an agreement with a charity whereby any financial advisor or broker, who is authorized to sell its mutual funds, will be the agent of record and receive a commission, if the charity invests any contributions arranged by the financial advisor or broker in one or more of the company's mutual funds.

Suppose that a broker suggests to a philanthropically inclined client that he contribute $100,000 of highly appreciated ABC stock to establish an advised fund at a certain community foundation. The foundation sells the stock and then invests the proceeds in equity and fixed-income mutual funds offered by the investment company. The asset allocation among the mutual funds mirrors the asset allocation of the charity's other funds that are invested by money managers selected by the board. The broker who refers the gift gets an initial commission of 25-100 basis points (depending on the charity's total investment in the company's mutual funds), plus an annual "trailer fee" equal to 25 basis points so long as the advised fund continues to be invested in the company's mutual funds. Total charges assessed against the mutual funds are in line with the charges of other no-load mutual funds.

Unlike the previous example, the charity does not directly pay any commissions to sales professionals who initiate gifts. Thus, the charity is technically not in violation of the Model Standards. Neither does it lose the exemption from federal securities registration laws afforded by the Philanthropy Protection Act of 1995. The charity simply elects to invest donated funds so that the professional who facilitated the donation is rewarded. In principle, this is similar to a charity's giving the initial listing to the real estate broker who caused the property to be given to the charity.

The first question is whether a charity, by entering into such an arrangement with a mutual fund company, can properly exercise its fiduciary responsibility. Arguably, it can, for it is under no obligation to sell the donated assets through a particular broker, nor to invest the sales proceeds in any of the company's mutual funds, nor, once it is invested in these funds, to keep them there. If the funds do not perform well, the charity can move them, not just to other funds offered by the company, but outside to any financial institution or asset manager. Of course, if it does move the funds, the referring broker will no longer receive commissions and will be less likely to refer business in the future. Thus, though not required to do so, the charity may be inclined to leave assets in the mutual funds, even when the investment results compare unfavorably with those of other financial mangers, in order to keep on good terms with brokers and financial advisors who are in a position to bring gifts to the table. Still, a charity with no nexus to a mutual fund company is far more likely to move assets out of that company than is a charity that has been established by the mutual fund company in order to increase investments in that company.

The second question is whether a charity is willing to accept the administrative complexity of such an arrangement. It will probably sell securities through more brokers, it will definitely have to monitor the performance of more funds, and it will expend more effort in maintaining the proper asset allocation. Matters get even more complicated when the gift is made for a charitable remainder trust or a gift annuity. Chances are that the charity is now outsourcing the management of charitable remainder trusts and gift annuities to a financial institution, which handles both investing and administration. However, when a broker refers a client who contributes to a charitable remainder trust, and the charity, in its capacity as trustee, elects to invest the contribution in mutual funds from which the broker will receive a commission, the charity will have to make other arrangements for trust administration. Then the trust administrator will have to interface with the mutual fund company to obtain the information necessary for trust accounting and tax filing. A charity must be prepared to select a trust administrator soon after it enters into a relationship with the mutual fund company because, currently, 80% of all referred gifts are for charitable remainder trusts. If the charity is offering gift annuities in states like California or New York, which have rules about allowable investments for gift annuity reserves, it will be a challenge to assemble a portfolio that includes the company's mutual funds and meets state requirements.

Arrangement between a charity and a brokerage company. Brokerage companies have established trust companies that act as trustee for clients wanting to establish a charitable remainder or lead trust. These companies have also entered into arrangements with charities, particularly community foundations, whereby the charity agrees to invest with the company outright gifts initiated by one of its brokers. Whether a broker's client establishes a charitable trust or makes a large outright gift, the broker receives a commission so long as the assets stay within the brokerage company. Thus, knowing that charitable gifts will not necessarily diminish commissions, brokers are more willing to suggest various gift plans to charitably minded clients.

With reference to outright gifts, the arrangement between a charity and a brokerage company is conceptually similar to the arrangement between a charity and a mutual fund company discussed in the last example. In both cases, the charity itself pays no commissions, and the charity, having total control over donated funds, may remove the funds from the brokerage company at any time. The fiduciary issues are also the same. Provided the investment returns and fees of the brokerage company are comparable to those of other managers, the charity's board would appear to be fulfilling its fiduciary duty. Yet, the desire to maintain good relations with the company and get additional referrals could cause the charity to be more tolerant of poorer returns and higher fees than it otherwise would be.

The situation regarding charitable remainder trusts is different when the charity is dealing with a brokerage company. This is because the brokerage company, unlike the mutual fund company in the previous example, has a trust department. The expectation is that when one of the company's clients wants to establish a charitable remainder trust to benefit a charity with whom the company has a relationship, the trust company affiliated with the brokerage company will serve as trustee.

Commitment to reinsure gift annuities. Some charities reinsure gift annuities in order to minimize their financial risk. Others reinsure them in order to stimulate life insurance agents to present the gift annuity option to their charitably minded clients. Whenever an agent persuades a client to contribute to a gift annuity, the charity purchases, through that agent, a fixed annuity to cover the payment obligations. The agent receives from the insurance company the normal commissions paid on annuity sales.

The obvious advantage of a policy to reinsure through the referring agent is that the charity potentially has a large sales force looking for gift annuity donors. There is a risk that the referring agent might not select a life insurance company with the best annuity rates in which case the charity pays more than it should for the contract. However, the charity can set some guidelines for agents, most of whom have access to the same markets.

As with an arrangement between a charity and a mutual fund or brokerage company, the charity in this case does not pay any commissions. Thus, again, the practice technically does not violate the Model Standards. From the standpoint of the Philanthropy Protection Act of 1995, the life insurance agent might be construed to be engaged in commission sales of gift annuities, though, in fact, the agent sells only commercial annuities.

Recently, some organizations have been marketing what they call the "Section 170 Plan." Under the plan, an individual makes either a single contribution for a deferred gift annuity, or a series of contributions in successive years for several deferred gift annuities. The donor for the gift annuities consents to have the charity purchase a life insurance policy on his or her life. At the death of the donor (or the survivor of the donor and another annuitant), the organization has available for its charitable work the residuum from the gift annuity (if any) plus the death proceeds if life insurance has been purchased and remains in force.

The charity is expected both to reinsure the gift annuity and to purchase a life insurance policy. Thus, the promoters of the plan can anticipate double commissions. Some of the promotional materials speak of the charity's matching a donor's benefits to the extent of a certain percentage. Such a statement implies that the charity is contributing some of its own money to increase the size of the donor's annuity payments, which would be illegal, for it would constitute private inurement. Actually, the statement promising a match means that the charity is paying annuity rates higher than those suggested by the ACGA. Thus, the charity is said to be matching a donor's benefits to the extent of 25% if it pays an annuity rate 25% higher than the ACGA rate.

The use of the word "match" in this context is misleading. Further, if the charity reinsures a gift annuity paying higher-than-ACGA rates, it is unlikely to have much of the original contribution left. The insurance premium would then have to be paid from the charity's general funds. The entire transaction may result in little benefit to the charity and could even be a money loser. The charity is also likely to encounter some gift annuity certification problems in certain states.

Collateral commissions. Commissions earned in connection with charitable remainder trusts. In recent years, a large number of charitable remainder trusts have been initiated by financial advisors, most of whom hold licenses to sell certain types of securities as well as life insurance. Some financial advisors are fee based, and they are compensated on an hourly basis by a client for whom they design a charitable remainder trust or other type of charitable gift. However, most financial advisors are either solely commission based, or they are compensated through a combination of fees and commissions. A financial advisor who spends considerable time arranging a charitable remainder trust for a client, and who has not been retained on an hourly or per diem fee basis by either the client or charitable beneficiary, can be compensated in any of the following ways:

  • Finder's fee or commission paid by the charity (unlikely because both the charity and the advisor will want to follow the Model Standards).

  • Commission on sales and purchases of securities, if the charity is trustee and elects to give this business to the advisor.

  • Commission on sales and purchases of securities, if the donor is trustee and chooses to invest trust assets through the advisor.

  • Commission on a life insurance policy sold to replace the value of the assets contributed to the trust.

The last two of these compensation methods have probably been the most common for financial advisors who depend on commissions. Although they do not violate the Model Standards, they can bias a transaction. For example, an irrevocable life insurance trust in tandem with a charitable remainder trust can be an excellent estate planning device, and it is perfectly appropriate for the donor's insurance agent to receive a commission on the sale of a policy owned by the life insurance trust. However, the prospect of a handsome commission may cause the agent to propose a wealth-replacement life insurance trust when one isn't really necessary. This is especially true when the advisor who initiated the trust has no other means of being compensated.

Commissions also can cloud judgment when it comes to recommending a trustee. It is appropriate for the donor to be trustee when investment control is important and arrangements for competent trust administration have been made. It is not advisable when the donor wants to simplify life or does not have the skills to act as a proper fiduciary. Nevertheless, a commission-based advisor may recommend, in nearly all cases, that the donor be trustee. If wealth-replacement life insurance is not contemplated, the only way the advisor can likely be compensated is for the donor to be trustee and invest trust assets through the advisor.

Commissions earned in connection with real estate investment trusts. A donor would like to contribute real estate to a charitable remainder trust, but cannot because the property is subject to recourse debt. A financial professional, aware of the donor's dilemma, facilitates a transfer of the donor's property to an UPREIT (an umbrella partnership where a REIT is the corporate general partner) and receives in return limited partnership units for the equity in the property. The donor, though under no obligation to do so, then contributes the units to a charitable remainder trust, whereupon the trustee exchanges these units for shares in the REIT. Once the shares become publicly traded, the trustee can sell the shares in the open market.

The financial professional who facilitates the transfer of property to the UPREIT receives a fee that is a percentage of the value of the property transferred. Payment of such a fee does not violate the Model Standards because it is not paid by a "donee organization," and it is not paid "as a condition for delivery of a gift." The commission is paid by a business entity to a person who helps an individual restructure investments so that the individual is then in a position to make a charitable gift. Here, again, the commission is collateral. It is not paid by a charity on given assets, but it is paid on transactions associated with the gift.

Suggested guidelines for consideration. The following are suggested guidelines for consideration regarding commissions:

  • A charity should not pay a finder's fee as a condition for delivery of a gift. Where a charity has engaged a financial advisor in advance to meet with a prospective donor and assist with the design and closure of a gift, it is appropriate to pay the advisor an hourly consulting fee based on a reasonable hourly rate. However, a fee for hours the advisor claims to have invested before approaching the charity, and required as a condition for delivery of a gift, is really a finder's fee in disguise.

  • A charity should not pay a commission computed as a percentage of a completed gift. A "service fee," which is a percentage of a gift and which is paid for services rendered prior to completion of the gift should also be avoided because it, too, is a commission in disguise.

  • A commission paid to a financial service professional in connection with the investment of donated assets is appropriate if the total investment-management fee charged on the assets is comparable to the fee charged to other assets invested by the charity. Charities typically sell donated assets and transfer the sales proceeds to one or more investment mangers. It is appropriate to sell the assets through the professional who arranged the gift, and to select investments that result in the professional's receiving a fee or commission. To exercise its fiduciary duty, the charity must be free to move the money, and it must make investment decisions based on the reasonableness of the fees, the performance of the investment company or professional manager, and the quality of service.

  • A commission paid on a transaction that makes it possible for a donor to enter into a gift arrangement is appropriate. It could be that the donor will make the gift only if he or she can replace the assets with life insurance, or that the donor must exchange a problem asset for another type of asset before making a charitable transfer. The issue is whether the overall plan is sound and the fees or commission is reasonable.

Compensation Of Development Staff

Commission paid to a development officer or consultant for closure of a gift. Certain charities have paid commissions to the following persons:

  • The development officer who solicits and closes a gift.

  • The consultant who runs a fundraising campaign, especially a direct mail and telemarketing campaign.

  • The telephone solicitor (often a student caller) who works part time in a charity's telemarketing program.

Payment of commissions to a development officer can lead to three unfortunate consequences. First, it encourages high-pressure solicitations. Out of eagerness to earn a commission, the development officer may rush the decision-making process, not encourage the donor to consult professional advisors, and fail to make full disclosure of all of the implications. Second, payment of commissions to one person in the development office is inherently unfair and destroys collegiality. Rarely does a gift result from the efforts of one person. The researcher who uncovered critical information about the prospect, the staff writer who drafted the proposal, and the professor who inspired the prospect all played a role. Thus, why should the financial reward go solely to the out-front person? The behind-the-scenes people, who also played a role, are likely to feel resentment against their colleague who walks away with the commission. Third, payment of commissions to development staff, like payment to financial services professionals, can cause charities to lose the exemption afforded by the Philanthropy Protection Act of 1995. In that case, endowment, trust, and annuity funds invested by the charity could be subject to regulation by the SEC.

Payment of commissions to consultants has been sharply criticized when a high percentage of contributions are skimmed off for fundraising costs. In some cases, where a small percentage of dollars raised was used for charitable purposes, the participating charity has lost its tax exemption. The incentives typically offered to paid student callers at colleges and universities have been of little concern, for compensation is generally low, and there seems little potential for abuse. These types of commissions are not specifically addressed in the Model Standards, which are more concerned with planned gifts. It should be noted, however, that the Code of Ethical Principles of the National Society of Fund Raising Executives (NSFRE), which addresses all types of fundraising, says "Members shall work for a salary or fee, not percentage-based compensation or a commission."

Bonuses paid to a development officer for volume of gifts closed. Charities regularly award merit increases based on overall performance, but arriving at the amount of the increase is likely a subjective judgment limited by the amount budgeted for all merit increases. A bonus, unlike a merit adjustment in salary, is often tied to measurable performance levels. For example, a planned giving officer might be promised a $4,000 bonus if the volume of planned gifts he or she completed exceeds the previous year's total by $500,000, an $8,000 bonus if the volume beats last year's total by $1,000,000, and so on until the maximum bonus attainable is earned. Of course, a formula for determining the relative value of planned gifts would have to be devised. A $100,000 outright gift, a $100,000 gift annuity by a 75-year old, and a $100,000 confirmed bequest expectancy by a 60-year old, would have quite different real values to the charity.

Bonuses are common in the business world, and they obviously are awarded because they stimulate productivity. Board members, who are accustomed to bonus plans in their companies, may be strong advocates of such a system in the charity. NSFRE's Code of Ethical Principles gives a qualified approval of bonuses with the statement, "Members may accept performance-based compensation such as bonuses, provided that such bonuses are in accord with prevailing practices within the members' own organizations and are not based on a percentage of philanthropic funds raised." In the bonus system illustrated above, the amount of the bonus is not "a percentage of philanthropic funds raised." Thus, strictly speaking, it would be allowable under the NSFRE principles.

The Model Standards do not pass judgment on bonuses per se. Some gift planners would no doubt see bonuses as a form of commission and thus prohibited by this statement in Article IV, "Likewise, commission-based compensation for Gift Planners who are employed by a charitable institution is never appropriate." Others would distinguish bonuses from commissions and compare them more to merit increases, the difference being that the development officer can work toward and anticipate a certain level of increase. They would argue that a charity is well served by a bonus system because its employees will work harder and raise more funds at minimal additional cost to the charity.

Well, at least some of the employees. If only those persons actually engaged in closing gifts qualify for bonuses, the question of fairness again rears its head. A possibly more attractive alternative is to award the bonus to the entire department so that all staff share it according to some proration, perhaps based on levels of responsibility. However, people outside of the department may also have played a role in the completion of the gift, and their efforts will go unrewarded except for possible merit increases. Payment of bonuses geared to levels of productivity, and not computed as a percentage of gifts raised, probably would not cause a charity or its fundraisers to lose the exemption granted under the Philanthropy Protection Act of 1995.

Finder's fees paid to staff of a charity. Some charities, in order to stimulate referrals of planned giving prospects to the office of planned giving, will pay a finder's fee to any staff member who makes a referral that results in a gift. This practice is uncommon and almost never followed by colleges, universities, and charities with a single location. Where it does exist, it is more likely in national charities with regional offices. Many staff in these offices are engaged in special events, or other forms of fundraising unrelated to planned giving, and it is felt that they need an incentive to look for and refer persons who have the profile of a planned giving donor.

When the drafters of the Model Standards prohibited finder's fees, they had in mind fees paid to a professional financial advisor as a condition for delivery of a gift. The internal finder's fee is actually a form of bonus, and whether it is encompassed by the Model Standards is a judgment call. It does seem strange that staff should require additional payment for doing what they should be expected to do in the ordinary course of business.

The charitable option plan. To the author's knowledge, no instances of "charitable options" have yet been reported. Rather, they are offered here for consideration as a form of incentive compensation. An increasing number of companies, especially companies in the technology sector, are granting options to employees. There are now over seven million workers in some 3,000 company option plans, and last year, the 200 largest of these companies handed out options that represented 2.1% of outstanding shares. These plans help companies recruit top talent and stimulate employees to be productive and innovative.

Charities, like for-profit companies, want employees to perform at the highest level, and they would also like to retain good staff members. To accomplish both objectives, a charity might offer an option plan designed as follows.

  1. Assume that a planned giving officer begins his or her job with Charity X on July 1, 2000.

  2. During the calendar year 1999, planned gifts for the department totaled $5,000,000.

  3. At the time the planned giving officer begins employment, he or she is given an option, which can be exchanged for a bonus no earlier than July 1, 2002, and no later than July 1, 2007, or the date employment is terminated, whichever comes earlier.

  4. The amount of bonus received through exercise of the option is:

    Average planned gifts for 
    calendar years 2000 and 2001    Amount of bonus
    $5,000,000-$5,999,999 $ 0 $6,000,000-$6,999,999 $10,000 $7,000,000-$7,999,999 $20,000 $8,000,000-$8,999,999 $30,000 $9,000,000-$9,999,999 $40,000 $10,000,000 + $50,000

  5. On July 1, 2001, the anniversary of employment, the planned giving officer receives another option, which can be exercised beginning July 1, 2003 (but no later than July 1, 2008, or the date he or she terminates employment, whichever comes earlier). The amount of the bonus received through the exercise of the option is per the schedule given with the option. The schedule would be designed so that the amount of bonuses achievable would depend on the increase in total planned gifts.

  6. It is presumed that all members of the department, from the secretary to the director, would be awarded options, though the options would be of unequal value and would depend on the positions held by members of the department.

In sketching a possible charitable option plan, I am not advocating such a plan. Like any incentive compensation plan, it can appear to be a form of commission fundraising. Also, it is not necessarily easy to structure the plan where people are fairly rewarded for efforts and are not unduly rewarded for serendipitous gifts. The objective is simply to raise the question of whether the practice of awarding stock options, now common in the business world, can and should be adapted to the charitable arena.

Suggested guidelines for consideration.

  • A charity should not pay a commission, defined as a percentage of a gift, either to a financial services professional or to one of its own staff. Commission-based fundraising encourages high-pressure solicitation, is often unfair, and may subject a charity to SEC regulation.

  • Bonuses paid to development staff based on level of productivity may be acceptable. Merit increases awarded for overall performance, though somewhat subjective, invite fewer problems and are preferable. However, bonuses, the amounts of which are based on various production levels, offer a more powerful incentive, and may be appropriate, provided they are not a set percentage of particular gifts.

  • A charity that chooses to offer incentive compensation may want to consider a charity option plan. Properly designed, it may serve both to stimulate productivity and retain staff.

When Compensation Is Reasonable And Appropriate

The Model Standards not only state that certain forms of compensation are never appropriate, but they also declare that the level of compensation should be "reasonable and appropriate."

What constitutes unreasonable compensation by a nonprofit institution is a judgment call. A commission, or finder's fee, of $50,000 to $60,000 for arranging a $1,000,000 charitable remainder trust strikes most gift planners as out of bounds. Accordingly, finders fee and commissions were opposed in the Model Standards, not only because they could provoke legislation and regulations detrimental to charitable giving, but also because they could result in an amount of compensation that was disproportionate to the time invested.

The reasonableness test has to be applied to all types of compensation-salaries, consulting fees, and speakers' fees as well as commissions and bonuses. According to a recent survey by Planned Giving Today, the median salary of planned giving officers is $62,500, and only 4.08% of salaries exceed $135,000. By almost anyone's standards, these salaries are not unreasonably high, though in some instances they may be unreasonably low.

One question is whether persons who are employed by, or provide services to, charitable organizations should expect to be paid less than people of comparable education and skills who work for, or provide services to, for-profit institutions. In enacting the intermediate sanctions legislation designed, in part, to curb abuses regarding benefits to executives and insiders of Section 501(c)(3) organizations, Congress did not require that compensation from a tax-exempt organization be less than what could be earned from a for-profit employer. Nevertheless, many believe that those who work for, or with charities, should voluntarily accept less. They fear that high compensation and fees paid by charities will turn off donors and possibly cause the charitable deduction to be re-examined. Thus, should a CEO of a charity be content with a smaller salary than the salary earned by a CEO of a business of comparable size and complexity? And, should a consultant or speaker in the charitable arena charge whatever the market will bear, or voluntarily curtail fees so that more dollars are preserved for charitable work?

The Model Standards and existing legislation both presuppose that there is a point beyond which compensation of people working in the charitable arena is unreasonable. Determining the crossover from "reasonable" to "unreasonable" compensation is not easy, because there are so many factors to consider. Perhaps, those who serve charities are less likely to cross the boundary if they view their work as a mission as well as a profession.

Exhibit A
Model Standards of Practice for the Charitable Gift Planner

Preamble The purpose of this statement is to encourage responsible gift planning by urging the adoption of the following Standards of Practice by all individuals who work in the charitable gift planning process, gift planning officers, fund raising consultants, attorneys, accountants, financial planners, life insurance agents and other financial services professionals (collectively referred to hereafter as "Gift Planners"), and by the institutions that these persons represent.

This statement recognizes that the solicitation, planning and administration of a charitable gift is a complex process involving philanthropic, personal, financial, and tax considerations, and often involves professionals from various disciplines whose goals should include working together to structure a gift that achieves a fair and proper balance between the interests of the donor and the purposes of the charitable institution.

I. Primacy of Philanthropic Motivation The principal basis for making a charitable gift should be a desire on the part of the donor to support the work of charitable institutions.

II. Explanation of Tax Implications Congress has provided tax incentives for charitable giving, and the emphasis in this statement on philanthropic motivation in no way minimizes the necessity and appropriateness of a full and accurate explanation by the Gift Planner of those incentives and their implications.

III. Full Disclosure It is essential to the gift planning process that the role and relationships of all parties involved, including how and by whom each is compensated, be fully disclosed to the donor. A Gift Planner shall not act or purport to act as a representative of any charity without the express knowledge and approval of the charity, and shall not, while employed by the charity, act or purport to act as a representative of the donor, without the express consent of both the charity and the donor.

IV. Compensation Compensation paid to Gift Planners shall be reasonable and proportionate to the services provided. Payment of finders fees, commissions or other fees by a donee organization to an independent Gift Planner as a condition for the delivery of a gift is never appropriate. Such payments lead to abusive practices and may violate certain state and federal regulations. Likewise, commission-based compensation for Gift Planners who are employed by a charitable institution is never appropriate.

V. Competence and Professionalism The Gift Planner should strive to achieve and maintain a high degree of competence in his or her chosen area, and shall advise donors only in areas in which he or she is professionally qualified. It is a hallmark of professionalism for Gift Planners that they realize when they have reached the limits of their knowledge and expertise, and as a result, should include other professionals in the process. Such relationships should be characterized by courtesy, tact and mutual respect.

VI. Consultation with Independent Advisers A Gift Planner acting on behalf of a charity shall in all cases strongly encourage the donor to discuss the proposed gift with competent independent legal and tax advisers of the donor's choice.

VII. Consultation with Charities Although Gift Planners frequently and properly counsel donors concerning specific charitable gifts without the prior knowledge or approval of the donee organization, the Gift Planner, in order to insure that the gift will accomplish the donor's objectives, should encourage the donor early in the gift planning process, to discuss the proposed gift with the charity to whom the gift is to be made. In cases where the donor desires anonymity, the Gift Planner shall endeavor, on behalf of the undisclosed donor, to obtain the charity's input in the gift planning process.

VIII. Description and Representation of Gift The Gift Planner shall make every effort to assure that the donor receives a full description and an accurate representation of all aspects of any proposed charitable gift plan. The consequences for the charity, the donor and, where applicable, the donor's family, should be apparent, and the assumptions underlying any financial illustrations should be realistic.

IX. Full Compliance A Gift Planner shall fully comply with and shall encourage other parties in the gift planning process to fully comply with both the letter and spirit of all applicable federal and state laws and regulations.

X. Public Trust Gift Planners shall, in all dealings with donors, institutions and other professionals, act with fairness, honesty, integrity and openness. Except for compensation received for services, the terms of which have been disclosed to the donor, they shall have no vested interest that could result in personal gain.

Adopted and subscribed to by the National Committee on Planned Giving and the American Council on Gift Annuities, May 7, 1997. Revised April 1999.

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