The age of social entrepreneurship, where the lines between traditional business and charitable ventures start to blur, has brought some interesting challenges to compensation design. One particular challenge is that of appropriately rewarding the growing crop of sales roles in these organizations.
Traditionally, the rainmaking in nonprofits has happened in the area of development or fundraising. With a careful eye on the regulations governing tax-exempt organizations, which prohibit revenue sharing or private inurement/benefit (where any part of the net earnings of a charitable organization inures to the benefit of a private shareholder or individual), fundraising professionals have been strongly discouraged from accepting compensation based directly on fundraising contributions.
But the world is changing and (as usual) I'm not sure the applicable regulations are keeping apace. As nonprofits find their traditional funding sources drying up or even disappearing, manyare becoming more creative and more entrepreneurial, developing more self-sustaining business models. While there are certainly hazards along this path, I think it is by and large a good and exciting trend.
In their quest for self-funding, however, more and more of these organizations are bringing sales and business development talent on board. They then must determine an appropriate reward approach for a profession which customarily features highly leveraged compensation plans featuring commissions or incentive awards tied to sales results.
And there is very little guidance out there - by the IRS or any other regulatory bodies. Attorneys I've consulted who specialize in working with nonprofits will only say that this is a very complex area of law and one which must be carefully navigated.
Which isn't a lot of help to the nonprofit leaders trying to navigate this brave new world or those of us advising them along their journey.
So ... Dear IRS Tax Exempt Unit: We could really use your help here. Please get on the stick.
In the meantime, I offer a few thoughts to those of us - nonprofits and their advisors - trying to do the right thing in designing rewards in the area.
Pay attention to total cash opportunity. While sales staff may not be disqualified persons by the IRS' definition, you will want to be sure that the package you put in place to reward sales performance is reasonable in light of competitive practices and cannot be construed as an excess benefit transaction. This is not the private sector, where it is OK for an exceptional salesperson to make way more than the CEO.
Keep variable pay at a conservative level. This may mean setting incentive targets at 15% to 20% of base, rather than at for-profit levels. And yes, that means more pressure on effectively managing your sales talent, since you cannot depend on the commission plan (and a 50/50 pay mix) to drive the low performers out the door.
Use broader, not-exclusively-financial metrics. Rather than a simple commission approach where the salesperson earns a percent of the revenues brought to the organization, consider a broader, more holistic set of performance measures for reward purposes. Yes, even for salespeople.
Honor the charitable mission. Ensure that some element of the reward package includes measures tied to the charitable purpose and mission of the organization.
Those are my thoughts. Readers, particularly those who work in or regularly advise nonprofits, let's hear yours!
Ann Bares is the Editor of Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations. She earned her M.B.A. at Northwestern University’s Kellogg School, enjoys reading in her spare time. Follow her on Twitter at @annbares.