Archive for April, 2011

Donated salaries – okay or not okay? A follow up

Thursday, April 7th, 2011

In October last year, we posted an article on this blog concerning “donated salaries”. The question was: is it ethically okay that employees donate a portion of their salary back to the organisation? What are the implications for donors, auditors, directors and employees? Is the “donate-back scheme” not a scheme fooling donors?

Usually it starts like this: You are the director of a local NGO, and luckily you won the tender for a really fat grant. The suggested salaries for the project personnel are simply far out – they exceed the salary of the director by the factor three. Moreover, the donor agrees on travel allowances that are PER DAY five times higher than the average salary in your country PER MONTH. If you paid out these amounts it would certainly destroy the solidarity in your NGO and, moreover, it would ruin your reputation in the NGO community until the end of all times. What do you do? It would be stupid to agree with the donor on lower salaries and lower daily allowances. I mean, if they want to throw out so much money, they are welcome, you think. So the best tactic would be to make a deal with the co-workers in the project. You say to them: “Look, we have this budget, and we want to receive these amounts. For this purpose, you have to sign that you have received them. At the same time, you donate it back to the organisation. Thus, we have free funds, and finally, we can buy a new computer and maybe even an air conditioner.” “An air conditioner in our office?”, your colleague says. “Wow, I agree!”. Is this practice okay or not okay?

Our position was very critical in this respect. We had two arguments: 

1. Difficulties in the relation between the organisation and its employees

A “donate-back” is a disadvantage for the employees: They first agree on a high salary, and then they are more or less forced to pay a share of it back. In most jurisdictions, the law would defend their rights. The employees could sue their employer for coercion, which contradicts good habits – and in most countries of the world, a court ruling would decide in favour of the employee. Thus, the “donate-back scheme” is at least very risky for the NGO.

But, even if the employee decides not to sue his or her organisation, there is a slight risk that the employee might sue his or her organisation. And this tacit possibility already influences the balance of power in your NGO. In other words, after introducing such a scheme, a director would feel a difference.

2. Difficulties in the relation between the organisation and the donor

 From the point of the donor, the transaction is clearly contra-productive. The donor buys services that he could have bought for less. The “donate-back scheme” might be even a breach of contract with the donor – funds are obviously not as efficiently used as they might be. In other words, the NPO might violate its fiduciary duties in relation to the donor.

 Both arguments resulted in our recommendation to avoid such schemes – in our opinion, it would be better to discuss the budget with the donor. One of our clients from the Balkans, 

Ms. Jasminka Tadic-Husanovic of the Humanitarian Association “Prijateljice” in Tuzla, wrote the following comment:

 

“In our local NGO, many steps were taken in order to obtain sustainability. Consequently, at the level of the Board of Directors a paragraph on collecting fee from employees were taken, which is an integrative part of the one of numerous regulations for employees. It says that each employee should pay 4 percent out of his/her gross monthly salary to the organization, as a fee, which is to be spent in some special cases, such as:

– death in employees’ family

– sickness of employee

– disasters which affect employee (flood, earthquake, fire, accidents)

– wedding

– birth of child

– moving costs

It is also a good reserve for the organisational rainy days. 

Most of the employees pay the fee regularly, but a few of them refused to pay. There is no instrument to force them to pay it (law or so on) or to sanction them. Therefore, this issue was raised at one of the staff meetings – how to handle this situation, because employees who were paying the fee were not satisfied with such attitude of the employees who are not paying the fee. After a long discussion in the meeting, we reached the consensus – the employees who do not pay the fees do not get financial support from the organisation in the above-mentioned cases.”

 

Dear Jasminka,

Your arguments made me re-think my position. I would say that the following criteria are a good indicator of whether the practice of “employee donations” is admissible or not:

 

·       The payments must be regular (i.e. not intended to remove agreed restrictions of the donor).

·       The payments must be modest and equally spread (i.e. between 1 or 10 percent of the salary of every month, as a rule of thumb).

·       The payments should be made voluntarily (i.e. there should be no coercion; a good indicator would be that some employees pay, but others don’t).

·       There should be the chance that the payments are for an individual’s personal benefit (funeral costs, wedding etc.).

 

In my opinion, your arguments give a good framework also for others.

 

What do the other readers of this blog think?

How are your experiences with “donate-back schemes”?

How do you access the legal risks of such a scheme in your legislation?

What do your donors or grantors say?

 

Write a comment, using the comment function below. You can also read the original article in the archive (go to October in the drop down menu on the right side).

 

With best regards,

 

Frank Fabel, CPA