The Controversy Over Commissions

I have to start off this article by employing the use of a shockingly dirty word.  A word so heinous that it’s mention can curve an arts administrator’s spine, infect the soul of a donor, and cause America’s orchestras to fall into ruin.  If you have a child reading over your shoulder you had best cover their eyes.  This filthy word is: commissions…

This article has been a long time coming but I’m glad I’ve taken my time. Nearly every arts professional I’ve spoken with about the topic of commission based compensation for non profit employees has promptly leapt onto a nearby soapbox to preach about the pure evil that commissions would reap upon the orchestra world.

Their arguments, which we’ll get to in a moment, always rang hollow with me. But since everyone seems to think this way I wondered if I was missing the point, or perhaps my thinking is (yet again) on the outside looking in.

But then I ran across a quiet little story in the online version of the L.A. Times by Joyce Rudolph on June 4th, 2004.  The focus of her article was the appointment of Diane Hedrick as the new executive director for the Glendale Symphony Orchestra, located in Glendale, California.

Normally, such an event wouldn’t be more than a blip on the orchestra industry radar – but this appointment is truly a momentous occasion.  It appears that the orchestra has fallen on some tough times. Their old executive director’s salary was subsidized by a private philanthropic grant and when that money ran out, the old ED jumped ship.

According to Ms. Rudolph’s article, the old ED was unable to raise sufficient funds to necessary to maintain her salary.  So after she tendered her resignation, the board was left in a quandary.  Where do they find a new ED without any money to pay them?

The solution came when the board found Ms. Hedrick. The orchestra would pay their new ED based on how much money she was able to raise – via earned and unearned revenue.

I can hear the chorus of arts administrators out there right now, “How dare Ms. Hedrick step over this line of decency in our tidy little corner of the non profit world.  She must be the embodiment of wickedness!”

Well not exactly.  Instead, she comes from the for-profit world of entertainment consulting and has worked with groups such as Walt Disney.

The Details
I spoke with Diane Hedrick and can assure you that she doesn’t represent the beginning of the end for non-profit organizations.  She is a charming, articulate person that simply brings a new, but desperately needed, point of view to this industry.

According to Diane it took the board’s contract committee a good bit of time before they finally came to a solution they felt good about.

Diane said, “We talked through the issues at length before I signed a contract.  Many of the members had concerns since this isn’t a typical arrangement, but in the end everyone was very happy with the one year contact we developed.”

Diane continued by providing the details of her contract,

“I do receive a base salary; however, it is deferred until the organization obtains a minimum revenue.  If that minimum revenue isn’t there by the end of the fiscal year, I don’t get paid.”
“I also receive a performance bonus of $10,000 for every $100,000 raised over what is needed to trigger my base salary.  Any deferred salary not raised will be forfeited on my part.”

Given the size of the organization, Diane is responsible for all development besides that raised by the board and selling tickets.  So if she doesn’t raise enough money for the orchestra, she doesn’t get paid, but if she does exceptionally well then she gets more.  All of this is based directly on how well she does her job for the orchestra.

In other words, she’s being compensated for her talents based on the percentage of charitable contributions and earned income: commissions.

The “Problem”
There has been a long running ethical debate among non-profit organizations over the issue of development professionals which accept compensation that is based on a percentage of charitable contributions (a.k.a., commissions).

According to the 26,000 member Association of Fundraising Professionals (whose budget is more than twice that of the Glendale Symphony Orchestra) Code Of Ethical Principles And Standards Of Professional Practice, the arrangement at Glendale may violate their standards for compensation:

  • Members shall not accept compensation that is based on a percentage of charitable contributions; nor shall they accept finder’s fees.
  • Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accord with prevailing practices within the members’ own organizations, and are not based on a percentage of charitable contributions.
  • Members shall not pay finder’s fees, commissions or percentage compensation based on charitable contributions and shall take care to discourage their organizations from making such payments.

I don’t know if the Glendale Symphony is a member of the AFP, but if they are I hope they let their membership lapse.  They would be unwise to lose someone like Diane.

When talking to other executives in the industry about commission based compensation, I typically hear things like “it will lead to defrauding our donors and we’ll loose the public trust”, or “it violates the law that stipulates non-profits shall not be used for the personal benefit of any individual.”

I say those arguments and the AFP’s Code of Ethics is all a bunch of nonsense.  I would argue that plenty of orchestra executives are becoming quite prosperous from their salaries and “performance-based bonuses”.  And they continue to receive all of these bonuses and raises even though their orchestras are swimming in year-end deficits and accumulated debt.

So how’s that supposed to maintain the public trust?

Why Is “The Problem” a Problem?
What’s wrong with someone getting a percentage of grant money, private donations, or ticket sales if they do an exceptional job?  All of deal with commission based sales people every day when we buy a car, purchase a house, negotiate a loan, contract insurance, and even for purchasing most consumer goods.

Commission based compensation exists because it motivates people to do a good job.  Another good side effect is that it will create a concrete set of conditions that determine success from failure.  In order for employees and executives to receive their commission, the have to achieve a detailed set of conditions.

This is where I see the non profit industry baulking at the idea of commissions.  So many organizations set extraordinarily nebulous “goals” for success that even Lee Iacocca would have trouble deciphering them.  There are no concrete numbers, no absolute dollar amounts, and no common sense.

Take for example the goal “To become an invaluable cultural asset to our community”.  I bet you’ll find that goal in nearly every orchestra across the county.  And how exactly does one measure that?

I published an article awhile back where a reader related a comment he heard during an ASOL seminar last January from Bill Thomas, Chief Financial Officer of the New York Philharmonic.  The reader said that bill told those in attendance that he was “perfectly OK” knowing that his balance sheet would never add up.

Good thing for Bill and the other executives at the NYP they don’t have a contract similar to Diane’s.  If they did, they’d never be able to pay the outrageous rental fees for a NYC apartment.

Conclusions
It’s high time to abandon this faux moral high ground that commission based compensation is unethical among the world of non profits.

Based on my research while writing the series of articles about executive compensation, most orchestra musicians don’t care how much their executives are being paid – so long as the orchestra is doing well.  So why should it matter if their salary is based on commissions?

One of the reasons why many orchestras are having such financial difficulties is that they don’t force themselves to compete with their surrounding forms of entertainment.  They choose to live on an imaginary island where funding for, and interest in, orchestral music exists simply because it’s a higher form of art.

Hogwash.  Americans live in the largest free market system in the world and its high time American orchestras started acting like they do too.  What’s the worst that could happen?  Orchestras would go bankrupt, run up accumulated deficits which exceed their endowments, and have steadily declining audiences?  Whoops, that’s already happening.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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