Social Entrepreneurship & Navigating NonProfit Sales Incentives

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.

Comments

[Paul Weatherhead]

Ann,

Thanks for the spotlight on the non-profits. We should be thinking outside the compensation box for them, too!

And thanks for two great compensation blogs. They are great forums for fresh thinking.

Merry Christmas to you and your family!

[Ann Bares]

Paul:

Thanks for the comment and the Christmas wishes - my best back to you ... and to all Cafe readers!

[Margaret O'Hanlon]

Ann, great to have you back, and thanks for touching on some great info for my clients.

All the best for the holidays!

[Ann Bares]

Margaret:

Thanks - glad you found the info helpful. Best to you and yours for the holidays as well!

[E James (Jim) Brennan]

Check out the technical notes at http://www.nonprofit-compensation.com/index.cfm?TrkID=612-49 which discusses more than you'd ever want to know about Intermediate Sanctions against managers. The harshest constraints against "excess benefit transactions" are on executives and their compensation advisors. It is much less of a problem for sales/marketing types as long as they are not board members or related to them.

Safe harbors exist and are simple to access. IRS TE/GE and Guidestar direct 501(c)3s and 4s to that site for mutually acceptable data for compliant pay practices.

[Ann Bares]

Jim:

Thanks for sharing the link and info here - could you clarify where on that page the technical note is? I tried a few things and didn't seem to come up with what you describe. I think it would be great info for readers.

As I have been made to understand it by legal experts in the field, the issue with sales/marketing types isn't so much the intermediate sanctions against excess benefit transactions - frankly, I think the IRS has done a good job in the area of executive comp here with a number of webinars and articles, many of which I have advertised on Compensation Force.

Rather, I have been informed that it is the possibility of private inurement, which can involve any private individual connected to a charity, whether they are technically a "disqualified person" (per intermediate sanctions law) or not. That is the area where we are in the dark. I don't know if the technical note you reference addresses that or is more focused on the executive compensation issue of excess benefit transactions - but either way, we all welcome the information and resource.

Thanks for sharing here !!

[E James (Jim) Brennan]

Personal inurement can be searched in the irs.gov site to produce a number of fairly clear references, such as

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

http://www.irs.gov/irb/2008-18_IRB/ar14.html gives specific examples.

The rather clear Intermediate Sanctions provisions (IRC 4958) deal more with big dollars spend on insiders. Personal inurement is broader but doesn't seem to apply in cases where arms-length bargaining produces competitive results, judging from the examples. However, any charity run for the sole benefit of the employees would seem to be in trouble.