Answer: In a way that aligns the advisor’s incentives with those of the beneficiary. But which way does that?
Along with many others, I’m often asked to advise donors about finding good charities to support and/or strategies to make their giving effective. I’m struggling to find a structure which does that.
Time and materials?
Nope. There are two problems here – which are common to any professional service paid for by time. First, it incentivises the advisor to take ages. Hence some moves to pay lawyers on a piecemeal basis rather than hourly (why do I pay more just because you’re slow?) And second, it encourages the advisor to unnecessarily complicate their work (on the reasonable assumption that fees are deducted from the amount the donor has to give). Yes this arises even in the charitable world: I once saw an advisor claiming that managing a single, existing grant to a perfectly competently and stable organisation took him two days a week and required two foreign trips a year. Monsterous.
But there are two additional twists with charitable giving.
It’s easier (read: cheaper) to find charities in the UK than in, say, in South Sudan. So paying the advisor by time incentives the donor to support readily-findable charities. But you could easily argue that beneficiaries who are difficult to find because they’re cut-off from mainstream markets and funding are precisely where donors should focus.
Donors often achieve most by collaborating: partly because they reduce the number of programmes in existence, which reduces admin for both the donor and charities. They also therefore reduce the need for advisors. So paying advisors on a ‘time and materials’ basis disincentivises the advisors to push for collaboration (they’d put themselves out of a job). Putting that more strongly, ‘time and materials’ encourages advisors to promote fragmentation amongst donors, which is bad for beneficiaries. Furthermore, creating those partnerships can take no time at all. When I put together the one between Eurostar and the Ashden Awards, it only took about half a day, yet created substantial value for beneficiaries.
Percentage of funds managed?
Nope, because this incentives the advisor to advise against giving anything away!
Percentage of funds given away?
Nope, because this simply encourages the advisor to dish it all out at maximum speed, which doesn’t bode well for proper planning and research.
Furthermore, it disincentivises the advisor from looking at impact investing, i.e., using the capital for social & environmentally useful purposes before it is given away. And, of itself, this structure doesn’t encouraging using any other resources, e.g., time, contacts, reputation, convening power – which may amplify vastly the impact of any money given.
Success fee / performance-related pay?
Sadly this is impossible because there’s no single metric of success on which donors can judge their success. Charitable giving is fundamentally different to financial investing in that sense: the advisor can’t take 2% of the upside, because there isn’t one; they can’t take be paid based on whether the beneficiaries like the donor because they probably won’t know that the donor exists; they can’t take be paid based on whether the charities like the donor because that may be totally independent of whether the donor is really adding value.
The only other model I can think of is a fixed fee. Say £10k to fix your philanthropy strategy, irrespective of the amount you’re giving or the complexity of fixing it. That feels bizarre. It also leaves the advisor taking all the risk (they then have the incentive to opt for easily-findable charities.)
Perhaps some econo-brainbox can think of a better structure. Do give your suggestions in comments below.