A GuideStar Initiative to Improve Donor Choice

It’s Time to Move Beyond Overhead

The experts have spoken: the percent of charity expenses that goes to administrative costs—commonly referred to as  “overhead”—is a poor measure of a charity’s performance.

JOIN US to end the Overhead Myth and start supporting nonprofit INVESTMENTS IN sustainability and success. 


OverheadMythLetterIn a historic move, the leaders of the country’s three leading sources of information on nonprofits – GuideStarCharity Navigator, and BBB Wise Giving Alliance – penned an open letter to the donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance.  

The letter, signed by all three organization’s CEOs, marks the beginning of a campaign to correct the common misconception that the percentage of charity’s expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is, on its own, an appropriate metric to evaluate when assessing a charity’s worthiness and efficiency. The nonprofit sector, which all three organizations provide information to and about, has too often erroneously focused on overhead over the past few decades, which has starved nonprofits from investing in themselves as enterprises and created what the Stanford Social Innovation Review calls, “The Nonprofit Starvation Cycle.”

We need your help in eradicating the Overhead Myth once and for all. In doing so, we will help to ensure that nonprofits have the resources to invest their own sustainability and success!

166 Responses to “It’s Time to Move Beyond Overhead”

  1. Chris Coats

    Thank you for taking this issue to the public. I hope it will resolve some concerns donors may have about ‘overhead’.

    Reply
  2. Diane Fletcher

    This is so long overdue! A productive and ethical nonprofit MUST have adequate management and administrative support personnel in order to conduct its mission-driven work, and MUST be able to sustain itself through its marketing and fundraising efforts. Thank you for this important effort to inform the public.

    Reply
    • Thomas

      Nothing than support for the campaign and for your comment. I’ve been working myself for years in management of an internationals impact-driven NGO and since years i support by consulting. One main issue is the self-believe of Organisations in that overhead myth … and not too easy to build up a self-driven opinion of investment and return in terms of sustainable impact.
      Thanks for the campaign.
      Thomas

      Reply
  3. Steven Libman

    Thank goodness! I thought I was the only one preaching that this unnecessary focus on “overhead” was misguided. What counts are results: can the non-profit establish criteria for measuring its success both qualitatively and quantitatively? Is the non-profit transparent to the community? Is the non-profit achieving its mission? The arbitrary emphasis on the vague term “overhead” is destructive and hampers fund raising efforts. Bravo for this letter!.
    Steven Libman
    The Libman Group

    Reply
    • Kathleen Taylor, Executive Director

      Well said, timely, essential research which reflects the struggle of so many non-profits and charities. THANK YOU for stating it so plainly and effectively. I applaud this new initiative.

      Kathleen Taylor,
      Executive Director
      Haitian Children’s Aid Society

      Reply
  4. Aron Goldman

    Too many great organizations implode because they lack the internal capacity to spread their wings programmatically. Subtle or not-so-subtle pressure from funders to reduce or completely eliminate administrative overhead costs is a huge factor. Of course nonprofits must be efficient and accountable to achieve their missions, but admin overhead rates are very poor proxies.

    Reply
  5. Kera Jewett

    Finally, someone has begun a dialogue about the structure needed to sustain arts in our country.

    Reply
  6. Julie Condy

    Hurray, someone is finally seeing the light! As a small nonprofit with a budget of less than $150,000, all of our so-called overhead is actually needed to run the program. You have to have a business office of some kind to work out of and you do need some kind of business address to receive mail so that you can legitimize your cause in the eyes of potential funders. Yet that is considered overhead but it is necessary to run the actual programming. Once an organization is big enough and have “stuff,” meetings in coffee shops no longer suffice. There needs to be a place for staff whether volunteer or paid can work together to develop and run the programming which can take place off site.
    The staffing of this portion of the organization is also necessary to run the actual programs. Program staff without adequate support staff are worthless. Who handles the scheduling of clients? My program, a children’s theater, “starves” itself by having very limited staffing. The program which transforms children’s lives could be much bigger but so much of the funding out there is for programming not capacity building. Thank you so very much for this effort! The children who will be served as our programming grows thank you in advance for assisting with growing the Crescent City Lights Youth Theater to serve them in 2014 and beyond which is not possible in 2013. If you need more info from me, please email me. This is a big problem in the sector as a whole. Changing the mindset of funders and donors is a big part of the creation of sustainable nonprofit organizations.

    Reply
    • Robert Betancourt Junior

      Yes, I try to explain to tribes how to set up a community sailing for all such as the Bay Area Association of Disabled Sailors located in San Francisco California to which I belong. It is amazing that they think grants appear before the $5200 fee to the IRS is done. It takes a year to get even the status not including the $120000 to set up an accessible 12:1 dock, two access liberties with joy stick controls(fully assisted), and two access 3.03 Wide (trainer) with a “C” crane along with a safety boat.

      I am lucky if I make $20,000 a year with my social security and military pension. As you see I work hard to set this up and no monetary reward just satisfaction that people who sat in a wheelchair and looked at the boats can now be in the boats. I hope you do like other tribes
      and look up (http://baads.org http://accessdinghy.org/sailability ). I hope I can read http://indianvoices.net and see where you did help our wounded warriors and those looking at the water in wheel chairs.

      Reply
    • GuideStar

      Hi Julie,

      We’re glad to hear that this campaign strikes a chord and will be useful to your organization. What gets classified as “administrative” expenses is murky and part of the problem in the first place. It sounds to me, though, like you may be classifying some legitimate program expenses as administrative. We’d recommend speaking with an accountant who knows nonprofit accounting practices to make sure.

      Thank you for signing the pledge!

      -GuideStar

      Reply
      • Ximena Querol

        What´s even worse is when donors DO NOT want to may ANY overhead!! And do not allow any of the organization´s personnel to be hired by the Project they are financing. So that leaves us with no way out!! Under that scheme, how can we survive, pay salaries, etc?

        Reply
      • Claire

        I am a nonprofit accountant. The accounting guidance on what expenses count as program, G&A, or fundraising is minimal and incredibly murky. That’s part of the problem. Even if we assume these overhead ratios provide some value, there is almost no consistency in their application. Thus, the ratios become meaningless.

        Reply
  7. Edward Berry

    This seems to be an unfortunate focus at a time when huge compensation packages for cause-related non-profits are being discussed in various media circles.

    To downplay the overhead ratio as a “myth” and not fill in the more complete picture feels one-sided and highly inadequate. The continued development of large intermediary charities that collect a lot of money, pay high executive salaries and pay decreasing amounts to the charities that actually support the “good causes” directly only emphasizes the need to monitor the size of overhead.

    This “educational” campaign strains the credibility of those who signed this letter who purport to promote efficiency and transparency in the non-profit world.

    Reply
    • Ted Mullett

      I totally agree with your commentary and believe the letter dispelling the “myth” does more to create further concern than it does attack the real villain here — the apparent disregard of some non-profits for expense control (including salaries). There is a clear distinction for me in giving to an organization that outsources all fundraising and therefore only receives 15-20% for each dollar raised versus one where volunteers abound and 80-90% of all funds raised end up in the programs that are touted during the fund raising process.

      Reply
      • Christine

        Unfortunately, very few nonprofits will be able to offer programs if they have volunteers doing their fundraising. Most board members won’t even do fundraising. Nor will most staff, for that matter, and they’re paid.

        To Edward, which organizations are you talking about? Fundraisers or other intermediaries?

        Reply
        • Edward Berry

          While I have a couple of intermediaries in mind, I think my comments stand on the whole without reference to a specific organization.

          Overhead is not a “myth”; it is a friction in the flow of funds from donors to ultimate recipients. I simply find it odd that these various charity-tracking organizations are saying that overhead is really over no concern.

          The mantra for board members has always been, “give, get or get out”. If board members refuse to participant in the process of “asking”, they might not be the best board members (of course they might bring other talents to the board).

          I think volunteers who are actually committed to the cause can be very effective. College students on scholarships are a great example. I find it hard to say “no” to a student from my alma mater who is saying “the only reason I am here is because of gifts from people like you.” I was one of those students and it hits home. When the paid people call me, I usually end the conversation quickly.

          Charities and non-profits more generally are important parts of our society and economy. However, they can’t be let off the hook on controlling expenses simply because they don’t have share holders/owners. Metrics like “overhead” are important measurements. Of course organizations will vary from one another and also across time. But such frictions need to be transparent and tracked.

          Reply
          • wayne martin

            Right, as a donor I would like to know where my money goes, to someone in need or to pay the $250,000 + income of some CEO

          • Christine

            Edward, I agree that there are several metrics on which organizations should be judged, including how funds are spent. I am torn about paid fundraisers. For some organizations, they bring in enough money to justify the expense. In others, they don’t.

            I do think your example of your alma mater is unfortunate given the point you are trying to make. There is no other sector of the nonprofit industry that comes even close to matching the bloated overheads of higher education. It is truly shocking. I would never give money to either my undergrad or grad alma mater because I see right in front of my eyes the outlandish and wasteful spending that goes on. $1 million for football coaches? Lavish dorms? Vastly bloated administrations? Start paying professors what they deserve and then I might consider it.

          • Richard Trebus

            I would agree that overhead is not, literally, a myth. Overhead is an area that is real and should be addressed when evaluating performance. However, the current system that nonprofits are measured by has indeed oversimplified the perception (i.e., myth-making) that low overhead = high performance and large overhead = low performance.
            We would never question a for-profit organization for reinvesting 40% of its resources in infrastructure/overhead (e.g., staffing, technology, planning systems, salaries, etc.) in one year with the goal to increase its capacity to be competitive over the next 5-10 years. However, if a nonprofit implemented such a strategy so that it could scale its operations to actually meet the demand of its mission (e.g., end homelessness) long-term…that nonprofit would most likely be vilified as maintaining too much overhead. This system perpetuates the cycle of nonprofits never really addressing critical social needs, but simply putting the proverbial Band-Aid on a much larger issue from year-to-year.
            So…a nonprofit can be spending 90% or more of its budget on programs, but is it actually making a difference? For instance, the numbers may show that a nonprofit supported 200 men who are homeless with a variety of essential services to support health and safety, but why not give that nonprofit the same advantages we afford for-profit organizations so that it might be able to scale its operations and perhaps eliminate homelessness? It is something we really need to think about.
            As a donor, I might be able to sleep better at night knowing that my $10,000 went directly to providing meals for those 200 men who are homeless. However, could I as a donor take the risk to allow my $10,000 to go toward “overhead” necessary to build the capacity for that organization, to not only serve healthy meals, but eventually eliminate the need for those meals because those men are now able to feed and shelter themselves?
            Check out this Ted talk that offers some challenging and practical steps to flip the current way we think about nonprofits and performance: http://www.youtube.com/watch?v=bfAzi6D5FpM

      • j debacker

        Right Ted- because volunteers are free, and easy to recruit, schedule, train, supervise, and acknowledge. Absolutely no cost to do any and everything with volunteers – and they never need anything like tables, chairs, roofs, parking or restrooms. Donations going to anything other than programmatic work? Wasteful. And keep what expenses you do have to less than 10%. I’ve worked with board members with this mindset. This initiative is long overdue, best of luck. Jd

        Reply
    • Jim Rudnicki

      Thank you Ed Berry for doing a good job expressing what was also my reaction to the letter.

      Reply
    • Lisa Scheff

      I completely agree, Edward. There are many metrics by which nonprofits should be evaluated. In a tiny nonprofit with total revenue of $150,000 like the one Julie Condy describes, of course a greater portion of revenue may go to overhead such as salaries for support staff. But, an organization of that size cannot justify paying its ED $80,000 a year, either. There are interests that need to be balanced: the organization must be adequately staffed to serve the mission, and no one should be starving just to do work they believe in. On the other hand, no one should be getting rich working for a nonprofit that represents to donors that their money is being spent on mission.

      I am alarmed by how much traction the notion that we should stop paying attention to the overhead at nonprofits is getting right now–courtesy in no small part to Dan Pallotta, whose fundraising machine was fired by Avon and the California AIDS Ride because he was taking such a huge portion of the funds raised to support his own bloated salary/self-promotion machine. I do believe that nonprofits should be properly staffed, and that directors should be adequately compensated for their skills. But there should be a limit far, far below the for-profit world. One would hope that someone running a nonprofit would be doing it in least in part for the satisfaction of making the world a better place everyday. And, when an organization takes people’s money under the auspices of using that money to serve the mission, most of the money should go to the mission, not the overhead.

      We need to pay attention to overhead in relation to budget, AND how well the mission is being served. Most of the time I suspect there’s a significant correlation.

      Reply
      • Jeff kassover, CFRE

        Hi Lisa and Ed,

        How nice of you to decide how much I can or cannot earn! Since when did the non profit world become a business where people donate their time and not expect a fair salary. However, I do have a family, my work is NOT a donation to the organization, however noble that may be.

        As for the article itself, I agree that metrics may be a measure of the success of an development office, but the playing field is not level. A comprehensive approach that includes all metrics, as well as capacity building, and a host of other activitie sthat help sustain organizations in the future as well as the present need to be addressed as well.

        I support this pledge and urge all those who understand the complexities of evaluating a non-profit to do so as well.

        Reply
    • GuideStar

      Hi Edward,

      Your concern about high executive pay is a common one, and we just answered it in an FAQ: http://overheadmyth.com/faqs/#q13

      In short, the overhead ratio doesn’t tell one much at all about executive compensation – which is part of the “myth” in the first place! There are certainly fraudulent charities out there, but they are an exception rather than a rule. Most nonprofits are squeezing every drop of value out of a dollar, and have staff that are under-payed for their market value. This is part of the beauty of the social sector in America!

      Sincerely,
      -GuideStar

      Reply
    • Roger N.

      I am sad to say that some may be right about consequences of the non-profit sector trying to shed the unduly heavy burden of having virtually no overhead to “warrant” charity. By its very nature a non-profit is usually an organization that provides services, material, or opportunity to their customers who are ill-positioned to directly meet their own needs nor able to financial compensate for such. So, the charity has no choice but to seek and solicit precious resources/treasure to serve its mission- not just wretchedly serve its purpose but to do the greatest amount of good under its charter and stretching a dollar further than a gifted magician.

      Extremely few 501(c)(3)’s have exec’s that earn “huge compensation packages”. If you look at the vast number of non-profits throughout the country, compared to the slim few that earn a king’s ransom is less than 1/2 of 1 percent. And, those precious few may deserve to be vilified by the media. If you were an experienced MBA making $1M+/year for a major corporation you would be celebrated. Conversely, if you were that same experienced MBA making a paltry $65K/year running a non-profit you would be scorned and shamed. The major corporation can make obscene profits at whatever self-serving purpose but, heaven forbid, the non-profit struggle to lift the unfortunate up the humanity ladder and the E.D. make an above-poverty level salary.

      I have argued for a long time: a grantor would do far greater giving a matching-fund incentive grant to a 501(c)(3), encouraging the benefactor to find additional funds and resources- thereby increasing the amount of good their dollars do- than restricting the non-profit from using any of their funds for seeking other funds, overhead. -Basic economics.

      I don’t think the media has any clue how much time, miles of driving, personal resources, and other personal sacrifices many staff, executive directors, volunteers, and board members and their families donate to non-profits. God bless those grantors and foundations that understand and encourage quality leadership, administration, and solicitation, (aka: overhead).

      Reply
  8. Ron Sylvan

    Having spent over 30 years in the nonprofit sector, I am elated by the news of this initiative. Although an organization’s expenses should be scrutinized, it is only one measure of a nonprofit’s effectiveness. All nonprofits need to spend donor monies wisely. Charities must have the ability to invest in infrastructure to advance their missions. This may mean that expenses increase for a period of time while investments are made. I applaud the efforts to dispel the Overhead Myth.

    Reply
  9. Elaine Renzi

    Our CPA firm audits nonprofit organizations and I agree – without a much clearer indicator of which costs should be classified as G&A vs. program vs. fundraising, the percentage comparison between organizations is too simplistic. Currently, there is no objective, consistent manner for all nonprofits to allocate to the various classes and focusing on percentage allocations rewards nonprofits who are aggressive in allocating costs to program and penalizes those who are more thoughtful and conservative in their cost allocations. It also penalizes organizations who are using best practices of investing in their infrastructure in order to better serve their charitable purpose on an ongoing basis.

    Reply
    • Susan

      Thanks, Elaine, for pointing out the part of the issue that has always been a problem for our organization. We have a funder who counts all salaries as “overhead,” not “program.” This is crazy! As a DV shelter that provides social services, most of those salaries go to people who are providing those services. Every year I point this out, and every year they answer that they have a matrix to fill out, which puts all salaries into the “overhead” category. They do continue to fund us, but always point out that our overhead percentage is “too high.” Until there is some uniform consensus on what expenses go into which categories, we will remain in this muddle.

      Reply
    • GuideStar

      Thank you, Elaine, for your accountant’s perspective on this. It’s true – part of the problem of using overhead as a proxy for performance is that everyone defines it differently. With a lack of objective standards, two organizations could classify the exact same expenses and come to vastly different overhead ratios. This just underscores the problem of using the overhead ratio to evaluate a nonprofit.

      - GuideStar

      Reply
  10. Jared Skok, Director - Community Investments, Tesoro Corporation

    I agree with the spirit of the letter, but would include an even stronger argument. Staffing is probably the single largest overhead expense for any organization – public/private, for-profit/non-profit. For non-profits especially, be they soup kitchens, shelters, clinics, etc., somebody has to do the work; services do not magically provide themselves. Personnel, often highly-trained personnel, are need to feed the hungry, comfort the homeless and/or abused, provide medical services, etc. Without allocating “adequate” dollars towards staffing (as well as other overhead expenses), particularly as part of a grant, non-profits will be unable to “adequately” serve their clients and, in turn, there will not be an “adequate” improvement in their clients’ conditions be they malnurished children, abuse women, the uninsured, etc.

    Reply
    • GuideStar

      Hi Jared,

      Thanks for your comment. We wholeheartedly agree that adequate investments in staffing are crucial to nonprofit service delivery. However, it is a common misconception that staffing costs are counted as “overhead.” We just answered this question here – take a look! http://overheadmyth.com/faqs/#q13

      - GuideStar

      Reply
  11. Mary Pustejovsky

    Absolutely! I particularly hate when people say “100% of your donation goes to programs”. That just means that someone else is paying their overhead directly and does not mean they are actually effective at all.

    Reply
  12. Robyn K. Taylor

    Thank you for bringing into focus the importance of investing in systems, infrastructure and training. These are critical for charities’ success and sustainability. The overhead ratio has been such a sticky concept partly because it is easy to understand and can be universally measured for any charity. I would like to see the authors of this letter comment on what specific performance measures are better suited to provide the complete picture for donors. This letter is a good start, but in order to shift the focus away from the overhead ratio, don’t we need to actively educate the public about alternative measures that are easy to grasp?

    Reply
    • GuideStar

      Hi Robyn,

      You are absolutely right – we need better measures of nonprofit performance. In this FAQ response, we detail our recommendations for how donors can approach the critical task of evaluating a nonprofit’s impact: http://overheadmyth.com/faqs/#q8

      We hope this helps!

      - GuideStar

      Reply
  13. Jenny Niklaus

    This is great and long overdue. We are businesses and need to run and operate as such. Thank you for saying this out loud.

    Reply
  14. Manon Banta

    I’m starting a campaign I call Locavore Charitable Giving #givelocal. If donors are so cautious about to whom they donate and what their donations are being used for, lets encourage them to support charities and non profits in their own communities where they can see their dollars in action first hand and meet the people that run the organizations and programs. Once they see that, by goodness, programs are not run automatically, successful programs depend on talented people – people that also have rent/mortgage, etc. to pay. This hands on involvement would then provide a better metric on which to judge national and international non profit organizations.

    Reply
  15. Cynthia

    So what measure(s) should donors use to judge the worthiness of the nonprofits that we consider donating to?

    Reply
    • kattiekhiba

      Their results! What DIFFERENCE are they making? Are they making the change they say they are?

      Instead of using “overhead”, use return-on-investment as your measure of success. Looking at overhead alone says nothing about effectiveness. An organization like the Boys & Girls Clubs, whose entire program is based on having a physical place for kids to go (i.e. buildings) and trained adults to nurture them (i.e. staff), could easily look like it has high overhead if all you look at is cost of rent and staff. The important question is what difference are they actually making in these kids’ lives and how much money are they saving society by keeping these kids out of jail, in school, not pregnant, etc.

      Who cares if they spend 80% of their budget on clubhouse rent and staff if they save society 5 times, 10 times, 100 times that amount in reduced tax-funded programs in the future?

      Reply
      • gosha

        Whatever they spent should be on their financial report. Instead, they show 10% of the budget as wages and benefits for administration and in reality it is 70%.

        Reply
        • J

          In most nonprofits I’ve worked with (10 years experience), the “admin” staff and “programming” staff are often one and the same. Therefore, It doesn’t shock me that salaries are split between G&A and programs. The TRUE picture of so called “Overhead” for many non-profits is that there is never enough staff to do all the programming.

          Reply
  16. Sandra Thiesen

    I can only hope this is the beginning of a groundswell movement to educate funders about the fact that without adequate overhead costs we cripple our efforts to do the good work we were established to provide.

    Reply
  17. Doug Taylor, CFRE

    I applaud your efforts to undo this persistent myth. I would ask that you consider your market more directly when attempting to ‘flip’ public opinion on this issue. This data is a great start, however, do you have a strategy for educating reporters and other news people about the reality you are attempting to portray? In addition, I strongly recommend you create a digestible metric that public could more easily consume that competes directly with the ‘overhead’ morsel currently being swallowed. Perhaps a reality sound bite that confronts the overhead myth directly? For example: The public is often too busy with data/media overload so they gravitate towards the easiest answer. They desire to give and want their $ to count. They need a fast metric to help their decision. ‘Overhead’ has become that metric. Could we (the NPO’s of the world) create a more accurate metric that competes with this one? What about: Overhead Turned On It’s Head? or Consider Total Performance; bullet point 1, 2, 3. If you truly desire to overturn this long standing myth, you need to add a marketing layer to communicate your truth so the public will easily grasp it and so you will overturn the myth sooner.

    Warmly,
    Doug Taylor, CFRE, MABC
    Development and Marketing Director
    MarriageTeam

    Reply
    • GuideStar

      Hi Doug,

      This is a great question, and one that we are actively trying to solve. Unfortunately, there IS no one simple measure of nonprofit performance (read more here: http://overheadmyth.com/faqs/#q9). However, there are a lot of other things you can consider. We recommend that you start here: http://overheadmyth.com/faqs/#q8

      In the meantime, we will continue to work towards bringing the public better and better standards for nonprofit impact evaluation. And yes – we are working to spread this message far and wide!

      - GuideStar

      Reply
  18. Pat Mitchell, SFCC

    Amen! As a nonprofit Executive Director I whole-heartedly support this effort. The overhead rate here at FACES is low: 13%. And while our impact is measurable, I think it could be even greater if we had the opportunity to invest more in building our infrastructure.

    Many thanks to GuideStar, the BBB Wise Giving Alliance, and Charity Navigator for leading the charge. And a big shout out goes to Dan Pallotta for getting this issue on everyone’s radar as a result of his TED Talk (http://www.youtube.com/watch?v=bfAzi6D5FpM)!

    Reply
  19. Pat Fallin

    Thank you. For too long this has been the measure of a successful non-profit without acknowledging that a small non profit often has only one or 2 employees and without these
    employees, and their salaries, there would be no program. Many times these small non profits
    offer a much needed program, especially in small communities, and the paid employee develops and manages the program.

    Reply
    • GuideStar

      Hi Pat,

      Thanks for your comment – we’re glad you appreciate the campaign! We just want to make sure that you see this FAQ response clarifying that most salary expenses are NOT actually overhead: http://overheadmyth.com/faqs/#q13

      Sincerely,
      GuideStar

      Reply
  20. Ellen Rabin

    As a career non profit professional I welcome this letter with great fanfair. I see how great the community needs are yet my hands are tied to conduct the outreach and marketing that needs to be done because these activities will increase the “overhead” of the agency. The double standard between the for profit and non profit with regards to salaries, benefits is ridiculous. People have actually told me that it is my own fault for choosing to work in non-profit service delivery that I do not have a good salary and benefits! Just as we favor (with salary) the professional athlete over our teachers so we also favor the selfish over the selfless. I will help circulate this letter.

    Reply
  21. Cynthia Stead

    This is especially hard on small charities like mine. Using the exact same overhead/administrative formula from the Form 990 data, in 2010 we had 17% overhead, in 2011 we had 25% overhead, and in 2012 we had 12% overhead. When your budget is around $100,000, a single new part-time hire or a single large donation or bequest totally skews the overhead figure – up AND down. If anything, we had more effectiveness in the year with the highest overhead because we added a new part-time client worker!

    People need to realize that gas and electic prices, payroll tax increases, and rising rents affect non-profits no differently than a paint and wallpaper store, with the additional whammy of fewer donations in a bad economy. Without administration, there are no services that can be provided.

    Reply
  22. Robert Cohen

    When there are standard measures of charitable effectiveness, donors will focus less on overhead costs. In the absence of those measures, it’s the only number that donors have readily available to compare charities in the same sphere.

    Your three organizations need to develop more robust ROI-type measures for donors to hang their hats on. The best efforts of leading foundations and philanthropy professionals need to be translated for average donors.

    Reply
  23. larry

    I identify as a personal donor, serve on a family foundation board making grants, and work for a small ($130,000 annual) community arts nonprofit. My education includes several accounting classes and a BS in Economics from a major business school. I have been working with state officials on this limitation of using a single ratio formula, and welcome the more expansive views. The comments by a donor about relying so heavily on an arbitrary dividing line and expression of such negativity regarding the idea of re-examining the value of this single indicator I find most uncharitable.

    Reply
  24. Beth Harris

    How will this report be disseminated to foundation donors and other private groups that make award with limited overhead rates? They are also a critical audience. Thanks for your hard work.

    Reply
  25. William Murrell

    Perhaps its not the size of the overhead budget but what “overhead” expenses are spent on is a more important matter. For example, I don’t like to see glossy, expensive mailings in my mailbox from charitable organizations that cost as much to print, design and mail as my small donation was.

    I also think that charitable organizations should cap executive salaries to $150k annual. There are lots of people who have the prerequisite skills and can do the jobs of non-profit execs in Massachusetts who are getting paid $400,000 and up annually.

    You are right to educate your audience about a charity’s need for overhead expense coverage but let’s not get carried away.

    Of course, high executive salary levels and exactly what charities spend my donation on must be questioned!

    Reply
    • Iqbal Husain

      I agree completely with William Murrell’s comment about executive salaries. Non-profit executive compensation should not be compared with private sector CEO compensation. Also, non-profit should not encourage the high multiple in executive salary compared to that of rank and file who are some times unpaid volunteers. For very large non-profits, even with a low overhead percentage, the actual sums are staggering, which the executives justifies their high salaries.

      There is no easy answer to having checks and balances in a non-profit. I propose that there should be compulsory donor representation on the board of non-profits. Unlike a private company, non-profits have no shareholders to answer to.

      I personally have stopped giving to non-profits with high executive compensation.

      Reply
      • Maria

        I can’t imagine an instance where donors aren’t represented on a board. At any well-run nonprofit, board members usually invest the most dollars in the mission. Most nonprofits are ALWAYS looking for ways to engage our donors and board service is certainly one of those ways.

        Reply
  26. Richard Trebus

    For too long, the funding environment in most nonprofits has been structured to support lean operations that are focused on developing strong programs over-and-above capacity building efforts (McKinsey and Company, 2001). For instance, for-profit organizations tend to view compensation and reward systems as capacity building tools that can be used to support innovation, creativity, and improvement, whereas, nonprofits tend to view any investment in capacity building as money lost toward direct service programs (Niven, 2003). Human Resources consultant Larry F. Beers (2004) indicates this is compounded by the public scrutiny nonprofits face from state and local governments, individual donors, and foundations who expect their grant resources are earmarked toward service delivery not administrative overhead. It is time for nonprofits and funding entities to partner together to build long-term sustainable organizations that have the capacity to do good things and to do them well.

    Beers, L. F. (2004, June 4). Incentives in not-for-profits: A review of basic principles. PowerPoint lecture presented at the National Nonprofit Human Resources Conference.
    Portland, Oregon. Retrieved from http://www.idealist.org/hrp/compensation/incentives.html
    McKinsey & Company (2001). Effective capacity building in nonprofit organizations. (Report prepared for Venture Philanthropy Partners). Retrieved from Venture Philanthropy Partners’ website: http://www.vppartners.org/learning/reports/capacity/assessment.pdf
    Niven, P. R. (2003). Balanced Scorecard Step-by-step for Government and Nonprofit Agencies. Hoboken, NJ: John Wiley & Sons, Inc.

    Reply
  27. Bob

    Its interesting to see all of the non-profits chiming in on this issue. I, as a donor, will continue to scrutinize the charities I give to on their “overhead” numbers. It was discouraging to learn that a charity I was researching took in $20M, spent $12M on advertising and $1.5M on travel. The CEO paid himself almost $400K, employees $380K, and other expenses totaling almost $300K. this left very little to fund the “cause” I would have been donating to help. I will continue to scrutinize the “overhead” of any charity that I consider giving to simply because people are applying for 501C’s in record numbers. The public needs to stay informed and know how much these charities put effort into the cause instead of the pockets. I shake my head every time I think of the $525 iPod shuffle I saw listed on a 990 form.

    Reply
    • Maria

      I applaud that you took the time to delve into the numbers and learn how the money was actually being spent. I think part of the argument here is that most people look at a number but don’t take the time to dig deeper into the details or to visit and talk to a nonprofit’s leaders and beneficiaries. I do take issue about employee salaries, however. Many organizations are effective precisely because they have experienced staff to implement and oversee programs and train and manage volunteers. At any nonprofit, the vast majority of paid staff are engaged in delivering the mission. And those who don’t provide direct service are the ED, finance and fundraising staff who are making sure that your donation is properly spent on that mission. Or are admin staff who make sure that program staff time is devoted to delivering the mission instead of ordering supplies or making copies.

      Reply
  28. Linda Hansen

    Fantastic! It is indeed time that ‘administrative’ expenses be looked at under a new light. No nonprofit can exist without the ‘nuts & bolts’ of keeping an office open. And, yes, these costs are ‘program’ expenses. There is much to be discussed on this subject. There are many fine lines and subtleties as what is program and fundraising expenses. It is difficult to assess in what percentage of the rent, phone, paper, stamps, etc. are appropriate and necessary, but… it is time.

    Thank you for opening this dialogue.

    Reply
  29. Peggy

    Thank you for helping us understand the rating system better and being willing to change it to more accurately report which ones you think we should spend our precious dollars on!

    Reply
  30. Michael Erwin

    I think this is a very timely article because I have seen too many ministries starve themselves with their general fun too much which makes them unable to grow their ministry because they have any resources for development. It all goes to outreach because they believe their donors always want it that way.

    Reply
  31. Patrick J. Nugent

    This argument has been made for some time by thought-leaders like Dan Palotta and Peter Brinckerhoff. The three organizations publishing this letter have been (perhaps unwittinggly) promulgators of the Overhead Myth, so I am delighted that they are taking leadership in overturning it.

    It is a paradox of the world of foundations and donors that they want (1) tight financial controls, (2) elaborate financial reporting, (3) sophisticated measures of outcomes and impact, and (4) more fundraising, while insisting that organizations cut “overhead.” Overhead consists of these items they want so badly! Overhead is quality leadership, quality financial controls, quality program evaluation, and quality fundraising–not just lights and water.

    On executive salaries: Some may well be too high, but there are in fact not enough non-profit CEOs who can do the job well at CURRENT rates, much less than if we cut them to $150,000, as one writer suggested. If I may paraphrase Dan Palotta, why is it that when a corporate mogul makes $5MM a year creating violent video games we all applaud the free market, but when a corporate CEO makes $200,000 trying to cure malaria, we call him a parasite himself? Where are our values?

    Non-profits MUST invest in excellent financial controls, excellent program evaluation and reporting, skilled and effective fundraising, savvy and productive marketing, and capitalization of risk ventures. We won’t solve homelessness, cure cancer, educate the next generation, produce great art, care for the mentally ill, or keep our environment clean if we starve the organizations that do these things.

    Kudos to Guidestar, Charity Navigator, and BBB for stepping up to the plate to defeat the myth of overhead.

    Reply
    • Arin

      Here here! So many nonprofits balance their budgets on the backs of their staff and exist in a constant state of employee churn. I would rather invest in an organization with a strong, supported, qualified, and capable staff who will STAY with the organization to continue to deliver high-quality programming while also capably delivering ” (1) tight financial controls, (2) elaborate financial reporting, (3) sophisticated measures of outcomes and impact, and (4) more fundraising.”

      Reply
    • GuideStar

      Hi Patrick,

      Well said! Thank you for your support of the Overhead Myth campaign.

      -GuideStar

      Reply
  32. Eric

    Aren’t these the three organizations that have helped instill the overhead myth in the publics mind – that high overhead is bad and low overhead is good? I blame the IRS for creating the reporting strucure that has casued tons of misunderstanding and focsued on the best metric of all – which is RESULTS. But having the three reporting agenices finally, after so many years of many of use complaining, is for me a little bit too late. If you haven’t watched Dan Pallota’s TED talk you must do so now. Google it and watch it. A grass roots upheavel should come from nonprofit leaders – not from the charity rating systems – in my opinion anyway. But I’m glad to see the conversation get elevated…

    Reply
    • GuideStar

      Hi Eric,

      Great question about responsibility. Here’s the FAQ question and response we wrote on this:

      Wait a second…wasn’t GuideStar one of the places that told donors to focus on the overhead ratio in the first place?

      No; we’ve always urged donors not to rely solely on financial ratios to evaluate organizations. We do, however, share the information that could be used to calculate the overhead ratio from IRS Forms 990. And we have, at times, displayed the ratio in our tools and we take responsibility for any confusion caused by that. That said, we haven’t promoted the ratio to donors, and in fact have actively spoken against it.

      The Overhead Myth campaign is a new movement; the first time we’ve had a coordinated crusade to end the focus on overhead. Never before have we joined our voices with BBB Wise Giving Alliance and Charity Navigator. And never before have we asked you to pledge your commitment to eradicating the myth about overhead.

      Hope that helps!

      -GuideStar

      Reply
      • Eric

        Thanks for your reply. I think it’s great that there is a new movement to bring this all to light and hopefully help changes the hearts and minds of donors. It’s going to be a long haul. And I point a lot of the blame on the confusion and unwarranted focus on overhead on not just the IRS but also the philanthropic community. We have not done enough to “defend” our results and the impact we are making. We have rolled over and structured our reporting and financials around costs/revenue ratios. It’s a blatant mistake that any business person can recognize.

        Dan Pallotta has done more in one 20 minute talk then the entire industry on one decade – in my opinion. We need grass roots action like Dan’s message. Hopefully people will begin to get it. The other unfortunate turn of events are the efforts by Grassley and his ongoing efforts to call charities on the carpet (all based on how they potentially misuse funds); and secondly on some the very biased reports by CNN (i think its them anyway) focusing on a few charities that are doing a horrible job. Where are the stories about charities making HUGE and noticeable positive impact in lives of people domestically and internationally?

        Reply
  33. LM

    I think it’s very difficult for the average donor to know how to measure or in any way judge a non-profit’s transparency, governance, and
    leadership, (results – yes donors can and do look for this). In fact the terms governance and leadership are almost synonymous in some contexts. Maintaining low overhead doesn’t mean hiring unqualified people, limiting employee training, or poor quality IT; However maintaining low overhead DOES mean eliminating Perks, expensive lunches/dinners, awards, high rent offices, and excessively high salaries. A non-profit is not the same as a for profit business, and should not use the same model for rewards and spending. Non profits should be willing to sacrifice most of these things and communicate these sacrifices to donors as an impetus to donate. I have stopped donating to several non-profits because I felt my donations were going towards an event or salary, and not to the cause I care about.

    Reply
    • GuideStar

      Hi Eric,

      Great question. GuideStar doesn’t do nonprofit ratings, and we can’t speak to what our co-signatories will be doing. Here’s the FAQ we wrote about this question: http://overheadmyth.com/faqs/#q13

      Hope that helps!
      -GuideStar

      Reply
  34. Anne

    Rob: Do you want your major contributions to be properly accounted for? Do you want the organization to be able to get and pay for an external audit, much less pass it. Do you want the organization to be able to pay experienced and knowledgable accounting staff who are willing to work adequate hours to get the job done? If so there will be admin costs for the accounting and finance functions. If not, well you will never really know what happened to the money you donated, will you? At some NFPs a CEO or ED’s salary MAY be inflated some. But this does not happen so much when you look at all the sizes of NPOs. One thing you can count on is the accountants have been trying to get it all done with too few staff and not nearly adequate pay for what they know and do.

    Reply
    • AJ

      Absolutely. For a non-profit to be able to put into dollar terms the results of its work (say, prison costs saved by keeping a kid off the street, cooling costs saved by planting trees to reduce greenhouse gases, or even the price of the lives saved by food or medical treatment to those who would otherwise die), someone needs to figure out the answer. Someone skilled in research, accounting, and reporting would be needed to put together that kind of information. I would think that person would be worth no less than $50,000 per year, with average benefits bumping that up to $70,000 total cost. It would take someone at least 3 weeks to figure out what info they’re looking for, find it, fact-check, crunch numbers, and prepare a report. At least. Which works out to $4038, at a minimum. Plus computer, phone, electric, office space, etc. for that person for the month say $400 in a medium-large office in a moderately-priced city, so up to $4438. And they didn’t actually *do* anything programmatic, just reported – all overhead. For an organization with a $200,000 annual operating budget that is 2.2% overhead just right there. I’m betting my estimate is low by half at least, and would take more time for a larger organization and therefore a similar percentage of the overhead.

      Reply
  35. Janet

    I love Guidestar – don’t get me wrong. I use them to check out every solicitation that comes to me from an unknown source. I think they provide an important service.

    However, I’m quite disappointed in the way that this initiative is presented. The website says that overhead rates of 20% to 30% may be appropriate, and tries to back that up with research saying that entities overhead rates of just over 11% do better than entities averaging just over 10%. So – why not really do the research – assess those with overhead rates of >30%, >20%, >15%, etc. But the way this is presented is self-serving. The boards should take the CEOs to task!

    And I looked at the 990′s available on Guidestar. For 2011 and 2010, Guidestar’s ratio was 16.1% and 17.3%. And the CEO got a raise of 38% to pull down $477, 200.

    BBB had ratios of 16.3% and 18.8%, and the CEo only got a 1% raise to $243,747.

    Charity Navigator is a private foundation so has different reporting, and I’m not sure it can be presented on a par with the numbers above.

    Meanwhile, I know of several very important, meaningful organizations that are staffed completely by volunteers and do their own fundraising. They may be local, but they are very effective.

    So – Guidestar came off my donation list this year!

    Reply
    • pwpadmin

      Hi Janet,

      I’m so glad you are using our service – we need more donors who really take the time to go through the information and sort out what’s going on at every organization.

      I should take a moment to explain GuideStar’s 2012 Form 990, however. The CEO pay that year was different, because we had a leadership change in the middle of the year. So the compensation listed to our outgoing CEO, Bob Ottenhoff, actually included several years worth of deferred compensation that wasn’t realized until the end of his tenure. Our new CEO, Jacob Harold, actually makes considerably less than our past CEO. You can make of these numbers what you may, but I thought that might help to clarify that the details of the leadership transition lead to what could easily look like a raise but was actually deferred compensation taken upon exit.

      Thank you again for caring enough to look into this information!

      - GuideStar

      Reply
      • Tish Mogan

        This explanation makes a lot of sense. It would have been helpful to have included this explanation in Schedule O so that donors like Janet can understand why there was such an increase.

        Reply
  36. Lilia Gonzales Chavez

    For non-profits that provide service to the field with limited staff and resources it is critical to eliminate the administrative overhead percentage. While administrators, services provided are more that just administrative. An administrator is often wearing two hats and is providing direct service as well as providing administrative oversight.

    Reply
    • Jenny Senier

      I run a very small non-profit. We are 100% volunteer driven. I as the director do not get paid. We will continue to be 100% volunteer driven. We are an animal organization. Lions and tigers and other big cats. Food, water, electric, and vet care is what our money is used for. None of us in our organization went into this looking for a salary. We went for the cause. I have no problem with people getting paid a small stipend. I will continue to donate based on what I see as exorbitant administrative and fundraising costs. It’s a difficult economy now and that much harder to get donors. Boy would I love for our organization to have even $75000.00 in the bank. The overhead issue is a huge issue in my eyes. And I know I’m not popular for thinking this.

      Reply
    • GuideStar

      Lillia,

      Thanks for pointing this out – it is indeed common for nonprofit employees to wear many hats. As explained in this FAQ, anyone who divides their time between functions can divide their functional expenses between program and overhead as well: http://overheadmyth.com/faqs/#q13

      -GuideStar

      Reply
  37. Sonja Palmer

    Thank you!!! I am in the middle of strategic planning with my organization (past 3 years of 130% growth) and our consultants are saying, “the biggest risk to our organization’s sustainability is that we have not put the resources into infrastructure.” Fortunately, our Trustees are coming around to see the importance here.

    Reply
  38. Sanna Roling

    The letter is well stated. I represent one of the charities who is ALL VOLUNTEER. Regrettably we don’t have fund to pay staff and that does mean training and certain response times are limited. However, we ARE one of those “underfunded” charities that has determined the most important standards of transparency… and thus, after 14 years in business we look forward to the future which eventually will hold paid staff positions. Yes, administrative expenses are ONE part of the overall picture which determines a good, bad, or superior charity. Results NEED to be a major component also, however results do not have a singular measure but are at best charity type specific.

    Reply
  39. Sanna Roling

    The letter is well stated. I represent one of the charities who is ALL VOLUNTEER. Regrettably we don’t have funds to pay staff and that does mean training and certain response times are limited. However, we ARE one of those “underfunded” charities that has determined the most important standards of transparency… and thus, after 14 years in business we look forward to the future which eventually will hold paid staff positions. Yes, administrative expenses are ONE part of the overall picture which determines a good, bad, or superior charity. Results NEED to be a major component also, however results do not have a singular measure but are at best charity type specific.

    Reply
  40. Murray Hills

    It is a long overdue discussion that is vital to the nonprofit industry. While measurements of G&A, Personnel costs and Fundraising expenditures are still important to review, at the end of the day nonprofits generally all exist to solve important social problems. How do you compare a low cost org running a program that doesn’t have eradication/self-sustainability as an end goal, with one that invests in creating a quality replicable program that truly leads to long term program self-sustainability and/or eradication of the ill within the targeted beneficiary group? Thinking small sometime only leads to small results! In my corporate for-profit career I understood the value of investing what was needed in the infrastructure required to produce great products, active markets and large profits. All too often people working in the non-profit world are expected to embrace a poverty mentality, while at the same time change that reality for tens of thousands of others without batting an eye. As an earlier commenter wrote, maybe it is best to become familiar with the nature of expenditures that make up an orgs overhead that you find unpalatable (gifts, entertaining donors, flashy brochures, expensive travel & hotel costs) than the pure cost itself. I really think the conversation is a healthy one that finally needs to be allowed out of the closet!

    Reply
  41. Barbara

    I’m confused. Aren’t you the ones who put emphasis on overhead to begin with (I have cited Charity Net before). Why the turnaround? I do agree that transparency is key. Whatever you spend, whatever your mission, be open to questions and input about it. Hold open meetings. Publish financials on your website. You might learn something from the feedback you get, and it builds trust with your service recipients and donor community. For example, if you run an animal shelter, be honest about animals being killed and ask for the public’s help to reduce it. If you spend 50% of your budget on salaries, explain who is getting paid what and why. What do they do for that money? How are they worth it? My hope is that this will encourage more transparency, not less. But we’ll see.

    Reply
    • GuideStar

      Hi Barbara,

      Thanks for expressing your confusion – we addressed your very question about responsibility for the Overhead Myth here: http://overheadmyth.com/faqs/#q7

      We also absolutely agree with you about nonprofit transparency. In fact, it’s one of the main indicators we recommend when evaluating nonprofit performance: http://overheadmyth.com/faqs/#q8

      Hope this helps!

      -GuideStar

      Reply
  42. Gabor Salamon

    Well! I see that “results” is well down the list of factors in determining a non-profit’s effectiveness. Interesting, and of course there is no self-interest in this letter. What I look for is not even the overhead percentage, but rather the compensation the top staff receive. I find that in many organizations the percentage of the “overhead” that goes to the top staff, in various forms, makes me think that what we have with these non-profits are out-of-control organizations, with no stockholders to exert even minimal control, and boards which may or may not have personal interest in the non-profit.

    Reply
  43. C. Michael Garverick

    I am surprised that Guidestar and Charity Navigator would be signatures to this letter. I do not follow BBB but I do not hold them in the same category as the other two organizations. Both Guidestar and Charity Navigator post the 990s which I use to evaluate these charities.
    We get about 10 letters a day requesting donations from organization we do not know. If I am at all interested I go the these two entities to check their recommendations, and if still interested, I go to their websites, looks at what they publish for the activities, governance, and financial status, and if not there, then to their 990s. There I will find how much of their money they say is going to the Not For Profit purpose and how much is spent on “overhead”. Carefully note how much is used in fundraising as many use fundraising as the who purpose of the organization.
    One entity I recently reviewed specifically reported grants of $22K for their stated purpose while reporting over $800K in for fundraising using entities that I could not identify on the internet. That immediately raised a red flag and I crossed them off.
    I recently review three major organizations, one in the $3B revenue category that faithfully reported over $1B in salaries for their work. I then saw they also had less than that amount in specific support of the stated purpose on their Statement of Activities. We stopped supporting that organization.
    I have been directly involved in preparing 990s for a Not for Profit 501(c)3 organization for the past 24 years. I made maintaining the “overhead” of our organization at about 30% as we provided services to our members and our supported functions. I am a member of another organization that is approximately the same size that has taken similar steps to reverse their percentages of overhead versus functions supported when the Board identified what was happening there.
    Bottom line – it is a personal decision as to what organizations you want to support. A good steward will take steps to verify what they do with your gifts. I appreciate what Guidestar and Charity Navigator do to help in this process. However, I am still surprised at this endorsement.

    Reply
  44. Chalres Mohan

    Dan Pallotta said it best and you highlight it well, we need to allow non-profits to invest in strong administrators to acheive their mission:
    “While business advertises, charity is taught to beg. While business motivates with a dollar, charity is told to motivate with guilt. While business takes chances, charity is expected to be cautious. We measure the success of businesses over the long term, but we want our gratification in charity immediately. We are taught that a return on investment should be offered for making consumer goods, but not for making a better world.”

    Pallotta, Dan (2009-03-01). Uncharitable (Civil Society: Historical and Contemporary Perspectives) (p. 10). University Press of New England. Kindle Edition.

    Reply
  45. Carol Millwater

    What a breath of fresh air. My challenge is trying to validate a small nonprofit that provides case management and oversight of specialty medical care…nearly everything we do is administrative! And what do I need? Another staffer for marketing/fundraising! I think Mr. Salamon is missing the point. Sure, the big national organizations somehow get away with paying their CEO’s exorbitant salaries, but for the nonprofits in the trenches, where the rubber hits the road, we are not talking about high salaried positions. You know that. This conversation is about true overhead that is hard to fund but necessary expenses.

    Reply
  46. Bruce Eberle

    I have been in the fund raising business for nearly 40 years. I can understand your concern, because I am a donor as well as a fund raiser. In fact, in the past 12 years my wife and I, both personally and through our company, have donated in excess of $4 million to nonprofit charities. In addition, we volunteer many hours each year working for charities of our choice. However, the ratings services, as presently constituted, are meaningless if they only focus on the efficiency with which funds are collected and then totally ignore the effectiveness with which the funds are spent to accomplish the mission of the organization. If you have not already done so, I urge you to read Forces for Good by Grant and Crutchfield. Some of the most effective charities in the US would have scored poorly based on ratings by such questionable groups as API and others.

    Reply
  47. Mario Morino

    Thanks for your leadership in making it clear that overhead ratios are not a way to assess the effectiveness of nonprofits. The field has unfortunately allowed overhead to become a proxy for understanding how well a nonprofit is managed. As we move away from using overhead numbers, let’s focus even more rigorously to understand what factors truly matter for nonprofit effectiveness — and how funders can help!

    Reply
  48. Len Carlman

    The thesis of this campaign is correct; effectiveness matters more than hitting the relatively arbitrary metric of <20% overhead. But we need to challenge ourselves, and with this note I ask for help in this from Mr. Taylor of BBB Wise Giving, Mr. Harold of GuideStar, and Mr. Berger of Charity Navigator, to develop relatively standard metrics for the criteria that make more sense: transparency, governance, leadership and results. Trying to displace a simple quantitative metric with four qualitative topics looks like replacing a clear target with mushiness – it's worse than unconvincing to donors, it looks like an avoidance of accountability. That's not where these three authors, or any of us, want to be. So we have to craft a language, using numbers as well as descriptors, of how we will declare, measure and account for our performance on the four categories of transparency, governance, leadership and results. The "Overhead Myth" will persist until we do that; a strongly worded letter from these three elite leaders denouncing the "Overhead Myth" is helpful and inspiring, but it does not get us even half-way to an NGO sector-wide campaign to displace the corrosive myth with a constructive alternative.

    Reply
  49. Alan Salisbury

    While there are very few non-supporters commenting above, I cannot fully support this initiative because it is incomplete. I respect the three organizations that have initiated the dialogue, but it is an incomplete dialogue at best. These same three organizations need to do more than just drop a bomb on the existing practice and offer a very few words about other factors that need to be considered. I would expect them to collectively develop a sound alternative to using a single ratio, with a thoughtful analysis of how to go about it. Then, putting themselves to the test, take at least a representative sample of organizations and give them a grade that takes these other factors into account along with an analysis of how they reached that conclusion. (Why would some organizations, for instance, merit a higher grade than some others with better ratios?) It’s probably not unlike stock analysts who develop buy, sell and hold recommendations and back them up with words you can accept or not. I think this type effort would add considerably to the credibility of these three leaders. Absent this analysis, I must give this effort, although nobly intended, a grade of “Incomplete.”

    Reply
  50. Gordon McClelland

    The dirty little detail that is missing in “overhead” is salary. It is absolutely ridiculous what some nonprofits pay in salary, benefits and perks to upper management while paying their low level workers dirt wages with little or no benefits. In essence that kind of NONprofit is really a profit organization that, after paying low level workers, skims the remainder to the Director or CEO and other upper managers. This is particularly endemic to the health care industry where managers are paid in the middle six figures and in some instances the seven figures. It’s particularly interesting to watch the end of the year arrive. The “extra” that is left over is paid out in bonuses to upper management. Very cute. Why would I want to contribute to an organization like that? I would not and I do not.

    Reply
    • Christine

      My overwhelming response to this effort is “Thank you, it’s about time.” But I agree with your point about health care nonprofits. The same thing is happening in the education “reform” sector, though probably not as extreme. The CEO of Teach for America makes $350,000. The CEO of the KIPP Foundation makes $350,000. (They happen to be married so their household income is $700,000 – pretty good for two nonprofit workers.) The CEO of NewSchools Venture Fund makes more than $400,000, while the next highest workers make in the range of $200,000.

      I run a nonprofit and know that the most important factor in our success is the people we have. Therefore, I have no problem with nonprofit workers making good salaries. However, the internal inequity in some organizations is outrageous.

      By the way, if anyone wants to really get blown away by overhead and inflated salaries, look at organizations working internationally. The nonprofits are bad and the UNICEFs of the world are even worse. Or take a look at universities. They are nonprofits, too, and far more money is donated to higher education in this country than it is to run-of-the-mill nonprofits.

      Reply
  51. trapper creek

    This is a step in the right direction. However, I really wonder what data supports the notion that individual and/or corporate/foundation donors make decisions (wholly, or in large part) based on a single metric?
    In many regards, the “overhead” issue is more of a problem for vendors who supply local, regional and state governments with services. It seems to me there is far more rigidity in contracts that limit funding/reimbursement to 12-15% for indirect or overhead expenses. Is there any discussion to attempt to influence/educate this substantial source of revenues for so many non-profits?
    Absent in this discussion is the notion (also false) that employees of non-profits should settle for less than market wages and/or benefits. Perhaps this is the most important “myth” that most non-profits face: Their employees’ time, expertise and achievement is not worth that of their private, for- profit sector colleagues.
    I look forward to the authors collaborating on that one…

    Reply
  52. Josh Slocum, Executive Director, Funeral Consumers Alliance

    Thank you, Guidestar! The public and the nonprofit sector need to realize that “overhead”—i.e., staff—are *the people who carry out the mission*. Overhead isn’t a dirty word. At my organization, we have a budget of $200,000 and a staff of two and a half. The largest portion of our budget goes to staff salaries—because it’s the staff that actually serves our mission advocating for consumers.

    Charities aren’t just providers of money or food where you can easily tabulate how many dollars go into buying the food as compared to distributing it. The model is outdated and needs to go.

    Reply
  53. Marsha Schweitzer

    While I agree that % of overhead should not be the sole measure of organizational efficiency, I believe it is an important factor to consider, not a “myth.” Some organizations show high percentages in administration because they ARE inefficient, producing few or poorly funded services, directing limited resources to admin rather than to the people carrying out the mission. Granted, there is a threshhold of admin activity below which an organization cannot function, and no organization should be expected to fall below that threshhold in order to meet an arbitrary standard set by charitable funders. However, high overhead percentages can reveal excess benefit transactions or even fraud, and often a common condition I consider to be immoral — paying managers and office staff more than service providers of equal or greater professional stature. Top-heavy organizations must show a compelling justification for their apparently high admin expenditures.

    Reply
    • michael

      Thanks for that insight. I hope we don’t get to an ‘overhead backlash’ whereby the donor ignores admin costs entirely. There are so many grossly inefficient nonprofits out there that it’s as much a disservice to ignore cost ratios as it is to use them as a sole evaluation tool

      Reply
  54. Robynn James, CFRE

    The very rating organizations that set up the overhead myth are now in the business of debunking it! It was Charity Navigator itself, along with BBB’s Wise Giving Alliance, that promoted the idea of poverty as efficiency. Nonprofit organizations suffer a crisis in retention–mainly because their boards and donors have been told repeatedly (by GuideStar, CN, BBBWG, and others) that they should NEVER give money to an organization with “high overhead costs.”

    So what has caused this road to Emmaus conversion? Well, this is a start:

    http://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.html

    Reply
    • Walter

      The commentary is more meaningful than the letter that initiated the discussion. The discussion may well be needed but, as others have said, the language used to initiate it by Guidestar, Charity Navigator and others is unfortunate and reflects poorly on their capacity to fulfill their stated mission. Criticizing contributors’ concerns about overhead and labeling this topic as “a myth” surely is a mistake. They should be proposing guidelines and conducting research to establish measures of administrative costs relative to other variables that distinguish charities (their size, income, purpose, location, scope of services, etc). To fulfill their mission, these organizations should address the issues that concern and educate donors rather than chasten them.

      An appropriate and useful evaluation of non-profits requires transparency of administrative costs and how these support the mission of the organization relative to the size and income of the organization. Different missions require different percentages of income for overhead. Unexpected events may cause ups and downs in the costs to support the organization from year to year. Detailed information relative to overhead should be made available to donors to justify the costs as well as detailed information about the use of volunteers. Unfortunately many charities fail to understand the needs of their donors and tend to take them for granted, overwhelm them with solicitations that highlight suffering or need, or believe that tributaries to them attract contributions more than an honest, open presentation of how the donated money is used. Their tax returns and the limited information they typically provide unfortunately often suggests little desire to be transparent. The organizations that evaluate charities should be seeking and promulgating the information donors want.

      All job classifications, professional positions and business operations involve a range in salaries and benefits based on the nature of the work and the value society places on it. If employees’ aspirations and goals are not fulfilled in their current position, they typically seek another position or line of work. The expectations of material rewards of those working for non-profit organizations realistically should be lower than those in commercial enterprises. The CEOs of charities inevitably will be seeking growth, and staff inevitably will be desirous of increased salaries and benefits, not only for themselves but to manage their organization (as the commentaries of those affiliated with charities have expressed in this dialogue). However, their interest and personal satisfaction from working for a charity should mollify their career aspirations relative to salary. Their desire to grow the charity by hiring additional staff and adding to the impact of the organization should be balanced by the ratio of added income to added expenses.

      Reply
  55. John Ramirez, Jr.

    As a financial professional, it is too clear the limitations people have in interpreting financial information. Even many pros can prepare it, but lack the ability to comprehend it. It is complicated. It is dense. It takes work. More, it may take more information. With that, there is a great lore to relying on a “magic-bullet dashboard.” Unfortunately, to do so without putting in the effort to understand the details is dangerously myopic.
    Competent financial professionals have always known that.
    I thank Dan Pallotta for giving it visibility.

    Reply
  56. Andrea Moravec

    It is necessary to have good infastructure in place to ensure a NPO’s programs have the proper support they need to be effective and expand impact. I’ve long been irritated by this measure of “performance”. Bravo for starting this public plea to repeal an ineffective benchmark!

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  57. Ingrid

    Thank you! This could not be more necessary, in India as much as in the US. I hope we can finally get this long overdue debate started here too. The endorsement by well-known voices duch as yours is extremely valuable in doing so. Parallely, though, we need a conversation about a code of ethics for fundraising, especially for INGOs raising resources in emerging markets.

    Reply
  58. Mathias Craig

    Thank you for this initiative. When individual nonprofits and nonprofit executives sound this alarm, I get the feeling that people see it as self-serving – as if we are trying to hide inefficiency by convincing the donor about the need to fund overhead. I’m tired of fighting that battle. It’s not a fair fight. If a nonprofit has to spend time and energy educating a donor about this issue, they usually end losing anyways as the donor moves on to an organization promising a much rosier, lower-overhead picture. So, I think it needs to be an industry wide movement driven by umbrella organizations like yours. So thank you again for taking this issue head on and doing the hard work of donor education.

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  59. John McDougal

    When a charity can eliminate donor prepaid “event” costs from fund raising overhead, that reported figure also has questionable meaning. How about rating a charity based on working to eliminate their reason for existing? Too many use the phrase: “The need has never been greater”.. Witness the growth in food pantries!! Food stamp programs provides a food selection many non food stampers can not justify and begs the question of “How does one uable to buy food NOT be egible for food stamps ?. How does this lead to an ever increasing growth in these pantries with ever “increased needs”?

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  60. Roz Racanello

    It is important to remember there are several types of non-profits. I am a generous donor to several good causes, I also work for a non-profit. My non-profit does not try to cure a disease or feed the hungry — although I personally donate to some of those causes. My efforts ARE the non-profit, I am a grantmaker and a policy and partnership builder for other smaller non-profits within a region.

    While I operate on a small budget, with a donated office and support services, my own salary is not quite a living wage. With several degrees and a lot of experience I am over qualifited for my salary by a wide margin. So when people start to shout about that 10% being the ultimate measure of high-functioning non-profits, I think we do need to educate them.

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  61. Joe Armstrong

    Question:

    Throughout the letter, the discussion is focused on charities. Given that there are many non-profits other than charities, do your comments on overhead hold for them as well?

    Comment:

    In the Feb. 20, 2012 issue of Time Magazine, p. 16, was an interesting article titled “Initial Public Payday”. In it, they looked at the compensation of the the top 5 executives in several public corporations as a percentage of revenue. The companies and numbers were: Facebook – 8%, Apple – 2%, Costco – 1%, Goldman Sachs – .8%, GE – .7%, and McDonalds and Walmart – .5%.

    While I don’t know what a “good number” for executive compensation is for non-profits, as I research non-profit 990′s, I now routinely include rolling up the compensation of the top 5 and compare that to the numbers provided in the Time article. It seems to me that executive salaries as a percent of revenue that are in the range of public companies would be considered acceptable. Those higher get excluded from my consideration.

    Reply
  62. Elaine Grogan Luttrull

    I’m so glad to see such insightful and detailed comments on this topic. While I don’t suggest that donors (or funders, boards, the public or anyone else!) eliminate ratio analysis completely, I have long advocated that ratios are only a starting point for further analysis. They shouldn’t be used as a litmus test to evaluate the quality of programs. Unfortunately, there is no singular measure of programmatic quality and relevance, and blindly observing ratios (or attempting to find a way to perfectly quantify ROI across the board) is a recipe for misguided evaluations. Kudos to the community for continuing this conversation!

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  63. Lori

    Rob – Guidestar is free. It doesn’t cost a charity anything to be included. You are also missing the point. They are not saying a high overhead is acceptable. What this letter is saying is that when donors look at the overhead ratio as the sole indicator of whether they are donate to them or not, they are effectively forcing charities to cut so many corners they cease to be effective. What happens to innovation if it can never be invested in? What good is a charity who spends nothing on overheard but doesn’t actually help anyone?

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  64. Katherine

    This is an important subject bring to the forefront in discussions. I’m pleased that it is beginning to get the visibility that our partner donors and potential donors. Like so many businesses, the overhead ration is often a function of your business and where you are in the business life cycle.

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  65. Steve Stirling

    This could be the game changer which levels the playing field for not for profits to compete for capital (donor funds) based on sustainable outcome measures (ROI) aligning to the mission of the organization versus the arbitrary overhead rates set by reviewing agencies.

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  66. Tony Caparelli

    I agree with those above (like George) who advocate for a sensible review of this standard. Well said George!

    Reply
  67. El Ahlwardt

    Well Done, Gentlemen. Time for us in the non-profit world to step up and assume anew a leadership role in educating others about our realities.

    Reply
  68. Philip Rovner

    I have been the CEO of a community foundation for 17 years. In this capacity, I have the opportunity to review the financial statements for a wide range and differing types of organizations. Our Foundation raises endowment funds for a number of local, national and international charities. While our organization would survive the metric imposed by the writer, I offer it is unfair to conclude that any one metric is comparatively applicable across all charities or even charities categorized by type. There are too many variables and each variable needs to be considered in light of what is required and in consideration of the desired and expected outcomes. Arguably, there are some abuses in the non-profit arena; but for the greatest majority of charities, I offer that they would truly benefit from having adequate sums which could be used for properly allocated overhead to achieve the organization’s mission and goals. Sadly, the non-profit industry has not done its job to better educate donors or lay leadership to the financial needs required to operate and manage a charity for the greatest good to the populations being served. In one clear regard, lower salaries hardly serve to induce comitted and qualified professionals. I offer that the field itself may be less attractive to the more qualified and that the industry, this most important of industries, cannot thrive were it to be deprived of the financial resources to achieve worthy goals.

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  69. Cara

    I have to say that initially when I saw this article I was so happy that people might start having this important conversation but after reading through the comments I am so disheartened. So many of the comments were about how employees of nonprofits should be paid less than their for profit counterparts. So in other words I have spent my entire professional career (15 years) in the service of others and I read how choosing to do this work means I just have to be okay with making less money. I had so much hope when I read the article, but then I made a rookie mistake and read the comments and that has hurt my heart and soul – the thing that has kept me going.

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  70. John McDougal

    How about a test to see if the charity is working toward a time they are not needed? It seems to me that should be their altimate objective.

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  71. Susan

    Not everyone understands how a nonprofit works and not all are the same. The nonprofit I am involved with is run by a volunteer board of directors that sets the salaries of the paid staff. What we have come to realize is that unless you have a good CEO, it is difficult to get the attention of major donors. The CEO’s of those corporations often do not want to speak with volunteers. We have been fortunate to have a CEO who took a cut in her salary to come to our organization. She is dedicated to helping us grow and in aiding our cause (someone mentioned above that a nonprofit CEO must be dedicated to the charity as opposed to being after a big salary).
    Our organization is staffed by our CEO and two other paid staff members. We also have a position funded by an Americorps VISTA grant. This small staff is responsible for an entire state AND portions of two bordering states. What they do is remarkable. They work harder at their jobs than some people I know who do less and bring home 6-figure paychecks. They also put in enormous amounts of time outside the office for which their families also sacrifice. They do everything they can to plan and execute fundraising events on the smallest budget possible in order that the profits will cover event costs and bring in enough money to accomplish the goals of our charity (which are to help people suffering from a debilitating disease). Not one of them is in it for the money.
    Governing boards have the responsibility for creating bylaws and policies that support ethical opearation standards and allocation of funds–and enforcing them! Transparency is of the utmost importance. Nobody wants to donate to a charity that spends more on running itself than it does on the charity. But unless you have a staff willing to do the work it requires to raise funding to support the charity, how will you then generate funding? How will you distribute funds? How will the people served by the charity be served?
    There is a bigger picture than is painted by this letter. An understanding of the way nonprofits operate is essential. At the same time, the need for nonprofits to be transparent in their fundraising, expenditures and operations is also necessary. Good nonprofits know this and already have sound practices in place. In fact, a lot of funding and grants generated from outside the nonprofit would not be possible wihout it.

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  72. Ivy Hill

    It’s not the overhead per se that a problem. The bloated salaries of some CEO’s are a turn-off. They seem to forget they are working for non-profit organizations rather than Fortune 500 corporations. The donors they seek have been through a severe recession. It’s time for the offending CEO’s to lower their salaries in line with the “new economy”.

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  73. James T. Reynolds, Sr.

    For 30 uears I have tried to convince others that you can’t judge the worth of an organization by its overhead cost. Some charities with the right kind of benefactors can get off to an excellent and glorious start enjoying a low fund raising cost and as a result may rate well with charity evaluators the first couple of years. As a result of their good numbers and proslperity, they have the power to attract volunteers of either financial means to keep the momentum or have influence to bring in nuch need support. When a charity struggling fom a megar beginning , whether defending itself against the media, similar well based charity , regulators or the trio, they find themselves reaching out to any one for survival. This stretch for survival is much like one in quicksand—–you will reach for even the smallest twig offered you to reach safety. When a qualified independent auditor issues an audit according to Generally Acceplted Accounting Principles, and often has a peer review by an auditor from another firm without change, it is a real slap in the face to his/her education and experience to have a “nose turn-up” to there audit without proper cause. Once a charity evaluator makes a decision about the charity, they should never be pursuaded by public opinion, media or any other factor to change their rating or opinion until they have provided an oportunity for the charity to defend itself. What I am trying to say is: If adequate research to qualify or rate a charity, good or bad, has been adequately done, why should a media blitz, regulatory investigation or even a complaint by another charity cause the evaluator to reconsider, temporary redraw or cancel their rating for that charity.
    YOUR FUND RAISING IS TOO HIGH
    Professional Fund Raiser—-why has this become such a Taboo word in the last couple of decades. This charity has attemped twice to raise funds on its own and has never been able to net what the professionals have for our charity. Oh we have listened to others and we could foresee the colorful horizon of netting 40 or even 60 % . Having listented to certain ones say, “The charity gets 20% and the P.R. sticks the 80% in theri pocket. We we were going to
    set the woods on fire . My goodness, the nightmare of running a call center, the horindous bills—rent, long distance, workmen’s comp insurance and clams, EEOC claims, printing, mailing of invoices, 1, 2 and even 3 follow up mailings to get the pledges in, caging and data entry of receipts, file managemet company fees, list rentals, purchase of computers, furniture and dialers and what have you. All of a suddeen we begin to realize the Professional Fund Raiser had to pay the same thing and still give us a satisfactory net that we had negotiated. So Charities are criticized for taking the area of least resistance, skipping the headaches, leaving the headaches to those who are proffessionals and settling for the meager crumbs, according to others, in order to use those crumbs to place on the tables of those they have been so honored to serve.

    IOne must always keep in mind, there is a fine line between commercial and non profit. They each must make a profit. A commercial company takes
    their and turns into sustaining the company and dividends to stock holders of thus organized. A non profit must take its profit to sustain the comlpany
    and serve according to their mission (dividends, if you will. I worked for over a decade with a large national charity, bringing my total years of charity
    employment to over 42 years, and I demanded Justice because of those meager little competitors who irritated me with their high fund raising cost Now as a small national charity, I find myself so often pleading mercy. Again another fine line between two.

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  74. Wayne Snyder

    Your initiative should be appreciated and applauded by all concerned — the donor community, non-profits, and the people they serve. Misplaced focus on overhead ratios has hurt non-profits seeking to plan strategically for a more effective future, incentivized GIK valuation abuses, and been misleading to the donor community. On this point, we have been asking the question for some time now: Would you rather invest your donation dollar in an enterprise that raises funds efficiently (or in one which has scaled its administrative functions to a less than optimal level), or in an enterprise whose programs get results for the people they serve?
    Clearly, your initiative is needed, and will benefit all concerned… Thanks!

    Reply
  75. Debra

    Finally there will be accountability and proper outcome to the issue o non-profits and how and where the costs get dispersed.
    This will lead o to right proportions, fair proportions and proper dispersement of funds.
    Bravo.

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  76. Elizabeth

    After 17 years serving the non-profit sector, this petition has brought me to tears of appreciation. Thank you!

    In response to the salary of non-profit professionals, I’d like to share my own experience. I’ve been paid very generously as an executive and development director – 70K. However, I tripled the money the organization previously raised in the last three positions I’ve held. I know first hand that everyone is dispensable, especially because my recent board of directors felt the need to find another professional to lead the organization. However, I don’t think they envisioned having to hire two more people before they found someone who could not only keep the organization running, but also achieve the development results that I had. Sure, they were able to offer the new exec much less than I was making, but did the turnover costs x 2 justify keeping a higher paid, results driven and proven professional?

    I’m now trying to find a job in the corporate sector with little luck so far. After 17 years of impeccable service to the non-profit sector, I can’t find a position to pay me a decent salary and the for-profit sector doesn’t believe my skills are transferable.

    I hope for the sake of the many dynamic professionals serving the non-profit sector, this campaign has a major impact on the perceptions of boards and donors. If so, those many causes that keep this world turning will ultimately be the true beneficiaries.

    Good luck and God bless to all!

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  77. Beth Burnett

    When measuring the performance of a charity, there are many factors to consider. The number to eventually focus on is the percentage of every donor dollar that goes to the client; however, this will flunctuate within the timeline of the company. If the non-profit org is just starting out or if they are re-enginnering themselves, then they’ll have high overhead costs. At some point though, the non-profit does need to be accountable for client assistance vs OH.

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  78. Ivy Hill

    Last night, the national public TV program “Nightly Business Report” reported that charitable giving had decreased 8% from 2007, due to the Recession. The AP reported recently that “the AVERAGE household has recovered only about 63% of the wealth it lost.” But “most families recovered much less than the average amount.” Is it any wonder that people who can contribute to charities scrutinize how much of their money goes to the PROGRAMS they want to support, vs. to administration/overhead? (Successful businesses have also had to cut overhead since the recession).

    Wealthier individuals have apparently been contributing more than before; charitable giving overall increased 3.8% in 2012 (per NBR).

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  79. Heidi Coffman

    Agreed, but there are ways to deal with this. Focusing on allocating your overhead appropriately to the programs the overhead costs support can go a long way in solving this problem. Sadly, the lack of internal personnel and financial professionals with nonprofit specific training results in many financial statements that don’t accurately reflect the proper functional allocations.
    Maybe we should work on better education of nonprofits, especially small nonprofits, to help deal with the problem, in addition to your point on relying on this calculation. As far as I can tell, much of the training offered by the state CPA organizations and the nonprofit support groups provide little or no educational opportunities geared towards small nonprofits and sole practitioners.

    Reply
    • Tish Mogan

      This comment brought a smile to my face. The Pennsylvania Association of Nonprofit Organizations is a Standards for Excellence Replication Partner. In providing a lot of a capacity building services through the Standards program and conducting 100′s of reviews of nonprofit organizations (with the goal of helping them improve operations) we uncovered early on that there is a huge issue with nonprofit staff not understanding what creates an admin, program or fundraising expense. So we created a program that we do in conjunction with CPAs in PA that focuses solely on providing staff with better understanding of how to track and report their time.

      In the whole debate about overhead we see this as a huge “hidden” issue that is much overlooked. We have taught for years that the overhead ratio is not a valid indicator for two main reasons: 1) we need to invest in capacity that creates efficiency and effectivness; 2) that the error rate is huge and this makes the overhead ratio meaningless. Check out the Howard Scribbs News Service article at http://www.knoxnews.com/news/2012/may/20/many-nonprofits-incorrectly-claim-no-expense-for/.

      Reply
  80. Laurie

    Since Charity Navigator is the group that took this concept of using overhead to determine an agency’s effectiveness and essentially highjacked the conversation with their star-rating system, it’s good to see them admitting defeat. Non-profits are SO much more than their budgets, their overhead. Watch the Dan Pallotta Ted Talk and understand why this way of thinking has crippled US non-profits for year.

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  81. Paula MacKinnon

    It’s about time. The story you shared is being played out again and again by hundreds of non-profits setting themselves up for failure. Like any industry aiming for long term sustainable success International Development needs systems, tools, HR and general infrastructure, all of which require appropriate investments. If done right, long-term sustainable results are achieved.
    I hope this campaign helps to change the attitudes of donors. If they really care about long term impact they should pay attention to this!

    Reply
  82. AJ

    This is an interesting thread, mostly because the comments either seem to come from “inside” or “outside” of the non-profit world. I’m a little bit of both, and I agree this “overhead” is a silly metric of performance but not necessarily a myth. Some of the comments have really bothered me at a professional level – particularly those saying that non-profits shouldn’t pay anyone to do work, or should pay people significantly below their market value. They miss the point that in most non-profits with fewer than, say 20 staff members (probably many more actually), the folks receiving the highest salaries are directly responsible for writing the grants or organizing the fundraising to pay their salaries. That is – if they don’t get funding for next year, they don’t have a job, or they have to let other program staff go. I know multiple non-profit employees who have voluntarily lowered their salaries so that they could keep working longer or keep their staff employed, or receive benefits instead, without reducing the amount of programmatic work they are able to accomplish. To think that they don’t make the most judicious possible choices in fundraising or compensation is outlandish.

    To those who say that non-profit CEO salaries should be capped far below market value: one of two things will happen – you will have poor executives who are significantly less efficient and effective at getting work done, or you will have excellent people come in for short periods of time, burn out, and move on, only to have a replacement and lack of continuity – also ineffective and inefficient. Consider this: If someone could earn $300,000 easily in the commercial world in the executive or financial offices of a large company, and you are only paying them $150,000 – because it is “for a good cause,” you are asking them to donate *one half* of their salary to the charity that is paying their wage, in addition to long hours doing often thankless work. Are you willing to do that for the causes you believe in?

    I am college-educated, about 10 years into my career, have a government job, and make about $34,000 a year, salary – take-home is about $1,000 every two weeks, after witholdings and deductions for benefits, which I am lucky to have excellent representatives of. I would like to give 10% of my salary, or even take-home, to charity, but am trying to save for the future and a family and buy a different vehicle, so I provide some service work to make up some of what I can’t contribute financially. I mention all of this only to say that I’m probably about average, demographically.

    Case study: I work closely with a couple non-profits, both personally and professionally, and give small amounts to other local and global non-profits annually. One of the non-profits I work with is small, most of the “partners” are other agencies/groups represented by people like me with full-time jobs doing related work. Most of those representatives are permitted to put some paid time into this work, but also complement that with additional personal time, either in after-hours professional work or weekend/evening work with other volunteers. In my case, I devote at least three times the personal as professional time to this organization. Currently, this organization has grant funding through 6 different grants for the next two years to the tune of about $85,000, which goes primarily to paying salaries for 3 part-time seasonal staff and one coordinator who can currently be paid for about 12 months (of the next 24) full-time, or longer but with fewer hours per week, and no benefits. In order to get those grants, I gave up a weekend day and two evenings in one week, and at least three colleagues did the same on their parts – personal time, not professional – a total of at least 60 hours by folks with applicable professional training. We also give significant time to trying to get our coordinator – who is understandably younger and less experienced than we are – up to speed with everything she has to accomplish, and how to do it, not to mention the work we do ourselves for the organization. This isn’t so that she can have a job – it’s so she can get work done that we all believe in. We are just hoping that she doesn’t burn out or get a better job before it gets done.

    So – if you don’t think the amount you are giving to a non-profit is being spent wisely on salaries or on outsourcing work to qualified individuals, consider how much of your time your donation could buy. Maybe you could donate something that you are able to do professionally. Say that you currently earn $25 per hour. Your $500 donation could pay for 20 of your hours (with no benefits). What could you accomplish in your first 20 hours with a new organization? Is it possibly that someone with a history in that organization could get more done with that time? Maybe you are volunteering to do something you don’t have much experience in, so you’re willing to accept $7.25 for your time. Then your $500 could buy 69 of your hours – almost 2 weeks! Would you be willing to donate 8 hours each week for the rest of the summer (yes, I’m talking evenings or weekends through July and August) to cold-calling potential donors or stuffing envelopes? And what would be an acceptable success rate for your work? And if you aren’t willing to do that, why would you begrudge paying that money to someone who is, for a cause you believe in?

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  83. Allen Proctor

    Making grants only for “programs” is another manifestation of the “overhead myth.” While excess is always bad, too many nonprofits have too little overhead: for computers, building maintenance, training, finance, program assessment, etc. Ironically much overhead is now imposed by reporting requirements of donors and government contracts. The upshot is that too many nonprofits LOSE MONEY on grants and government contracts. Great, if grants and government contracts are money losers, what is left to close the gap? Well, that is where (and why) social enterprise now has higher visibility. Nonprofits need to start more money-making complementary activities to get the money to support their money-losing mission-centric activities.

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  84. Manon

    As ED for a new non profit, entering our 2nd fiscal year today, I am so grateful for this shift in focus. Since we incorporated last September, I’ve worked 60+ hours a week for less than part-time pay. I don’t have another job, a spouse supporting me or a trust fund, but am willing to risk my financial life for a program and cause I believe in with the understanding that a new business of any kind takes time to grow. I have a suggestion for those that are concerned about how their donations are being used: donate to local charities where you can get to know the people running the programs and see what they are up against. I believe this will give a better understanding of the overhead myth. I’m all for a locavore charitable giving movement -#GiveLocal. Thank you GuideStar, Charity Navigator and BBB Wise Giving Alliance for addressing this issue. Seems even more relevant today. http://www.huffingtonpost.com/2013/07/01/oregon-charity-law-overhead_n_3528295.html

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  85. Marisela

    NGO are also working with high levels of profesionalism. We manage financial resources, design and develop programs, negotiate with donors, communicate our work in the media, coordinate a team of profeisonal people and we need experts. So, how can we imagine to do all this work without overhead? NGO need to have enough financial resources because we do work with a high level of results. It is time to see NGO as a profesional and serious institutions; not because we do social work, we do not need a completed organisational strcuture.

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  86. InfoCision Managment Corporation

    As a fundraising partner to the nation’s leading nonprofits, InfoCision applauds GuideStar, Charity Navigator and BBB Wise Giving Alliance for starting this important campaign! So many times donors are erroneously guided to give to organizations that have low ‘overhead’, as that is what the media tells us is the mark of a good charity. It’s important for donors to have all the facts, and to fully understand the dynamics of fundraising before they decide who to donate to. Thank you for shedding light on this important topic. We stand by you in this effort and have helped spread the word on our blog. http://bit.ly/13dQ7Cx

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  87. Diane Solinger

    Finally! No other businesses would survive without investment in infrastructure, people, processes, technology, etc. Thank you!

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  88. Della pollock

    picking up on AJ, June 25 and others: how about the “volunteer myth”? echoing the exploitation of unpaid interns in the for-profit sector (using students eager for job experience for largely menial vs apprenticeship work to supplement admin/overhead costs), is it efficient, effective, or fair to valorize volunteer labor? don’t get me wrong: THANK GOD for those people nourished by giving their time and hard work without expectation of recompense other than personal returns on their own investments in non-profit missions. But even the most sophisticated volunteer needs training in organizational life, aims, and methods and cannot be expected always to be there as needed– for any number of reasons. The term of volunteer investment tends to be short ( unfortunately reminding me that we have new hourly measures of appropriate numbers of “community sevice” hours promulgated by the courts and schools) and volunteers who are in fact sacrificing livelihoods for meaningful service are most at- risk for burn-out. even in my gratitude, I fear that I romance the volunteer at his/ her expense. yes, we can claim volunteer hours as contributions –but 1) how many volunteers know their hours are de facto being counted against overhead in reporting? and 2) this is a false and shaky ground for sustained effectiveness. I really hate to say it but donors (and organization) should probably be as cautious about volunteer as overhead ratios.

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  89. Barb

    Well said. Without a solid foundation a structure collaspes. The organization attempting to accomplish their mission without investment in it’s own growth and stability will flounder. Overhead, in and of itself, is not a measure of an organization’s integrity nor of it’s ability to provide invaluable resources to it’s community!

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  90. Chris Kotting

    “Overhead” to any organization can be compared to “food” in a human body.

    Too little food is as deadly to the health of a person as too much. They’re just deadly in different ways. (Substitute “overhead” for “food” and “organization” for “person” in the previous sentence, and it’s equally true.)

    You can’t even judge the need for food based on physical size or level of activity. We all understand that a 230 pound competitive bodybuilder needs to eat more than a 165 pound accountant, but we forget that a 165 pound pro cyclist in competition needs to eat more than a 230 pound bodybuilder.

    Similarly, the overhead needs of organizations differ depending on mission and growth. Simplistic comparisons don’t work.

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  91. David Davidson

    All this blather about overhead is a red herring. What counts, as many respondents have noted, is whether the org. is accomplishing its mission. So, focus should be on accomplishments; however, it is not easy to cut through the PR fog some orgs. are putting out to determine if mission is being accomplished, and this is where we fall back on things like how much money is going to overhead. Focus on telling us how to determine if the org. is actually performing and how to get below the PR to find out what is actually being done with our contributions. I fund environmental organizations, and have realized that TNC, CI, just to name 2 of many who are relying on PR heavily and who have made it nearly impossible to determine if they are still on mission. Looking at overhead is one way of trying to make the determination about where my donations are going – I hate funding PR!

    Reply
  92. Jerry Bowman

    We might be able to help smaller nonprofits reduce your overhead costs. Our organization, Partners in Action, http://www.partnersinaction.org is partnered with causes in 25 countries, mostly orphanages. We have a group exemption and are able to handle all aspects of donor management (including monetizing non-cash like computers or cars)and some donor communication as well. We charge a small fee to help many smaller nonprofits in the US or similar causes that have not yet received 501c3 status or NGO’s outside of the US.

    Reply
  93. Cindy Mondello

    Thank you! Thank you! Thank you!! Finally, someone is recognizing that non-profits can better fulfill their mission when they have the adequate resources necessary to run an effective business.

    Reply
  94. Mark Atkinson

    In the UK, charity overheads have been the subject of much debate for many years and with CEO pay now being lambasted they are under the spotlight again.

    This is a terrible shame. It is of course incumbent on any organisation (whatever sector it is in) to operate as efficiently as possible but I certainly do not know of any successful organisation which operates without the provision of any central services be they HR, Finance, IT, Marketing, Governance…or a leader at the helm.

    Take for example a company manufacturing widgets. The people who operate the machines that make the widgets are the frontline staff…in charity terms they are the service deliverers (aka the bit of the organisation donors generally prefer to see their money spent on). However, the machine operators won’t make many widgets or do so for very long if they have no engineers to service or repair the machinery; or no-one to manage supplier relationships; or no sales reps to sell the widgets; or no marketing personnel to ensure the widgets are meeting customer need…and the machine operators will surely all down tools if no-one manages the payroll or recruits new people to replace the leavers ….and so on….

    A charity is no different to the widget factory. It can’t run itself.

    It is also ludicrous to try and set cross sector targets for what is a reasonable level of overhead as this can differ for very legitimate reasons from one organisation to the next.

    From a charity perspective, what ultimately matters is whether it is delivering the intended beneficial impact for the people it is there to support in line with its strategic objectives and in a manner which is as efficient as possible taking into account its own unique operating environment.

    Charities need to take individual and collective responsibility to share this simple analogy with the media and the media need to recognise simple operational realities. This is a worldwide problem and I am pleased to support this campaign.

    Reply
  95. garry

    Of course transparency, effectiveness, etc. are the most important criteria for evaluating the worthiness of a charitable organization, but where can you get that kind of information and the necessary documentation that what is reported is true? And let’s be clear here that the salaries of the CEOs and execs are part of overhead. Is it reasonable to accept that they are paid say 11 times the poverty income of a family of four? Oh! Yeah. They are working their asses off and their fingers to the bone. Get real! Scammers and morally bankrupt predators thrive on lies, misinformation, deceit, misdirection, etc. etc. ad nauseam .

    Reply
  96. Bryann

    This is a great conversation. I can see where a few folks are misinterpreting the intent of this, though. This initiative is just trying to kick off wider awareness by educating donors that overhead should not be the sole indicator of effectiveness when there are plenty of other variables involved to consider.

    One might refer to the flow of resources as an organization’s “business” model, because all organizations whether nonprofit or otherwise, have to deal with revenue one way or another. We can communicate this to donors, about what it actually takes to run the organization and sustain the infrastructure to deliver outcomes, but it’s not an easy endeavor.

    I’d like to read stories and case studies about HOW nonprofits are educating their own donors about overhead etc. It’s always interesting to see how nonprofits are succeeding in this, and where the trouble still lies, etc.

    Good luck and prosperity to all!

    Reply
  97. Peter Burgess

    Dear Colleagues

    The dominant metrics in organizations is double entry accounting, a system invented more than 400 years ago to help merchants account to their investors. It has worked well to keep control of business assets … primarily money and inventory and to calculate profit.

    Beyond that, double entry money profit accounting falls short.

    Others have argued for a system of metrics that includes not only profit, but the impact on people and planet … the so called Triple Bottom Line (TBL). This is a step in the right direction, but, in my view, is not enough.

    I envision a multi dimension impact accounting system that uses one set of data to report the progress and performance of organizations, places (communities) and products. The data will embrace money metrics (revenues, costs, profit) and impact on people and planet.

    Impact on people has many elements. In total progress is improvement in quality of life (QoL). Jobs that have wages and benefits are a big part of QoL. Money enables the purchase of things that are needed. Things like health, education, availability of housing, critical infrastructure, etc. are all components of QoL. People may be investors, executives, workers, customers, suppliers, etc. People impact is complex, but people impact is at the core of everything.

    Impact on planet has two parts: (1) the depletion of finite resources; and, (2) the damage to the environment / ecosystem as a result of solid waste, liquid waste and gaseous waste.

    In traditional money profit accounting, the impact on people and planet are ignored. The size of these impacts is now bigger than the profits, but not accounted for in the prevailing scorekeeping systems.

    Of course, there is a need to quantify impact in a way that is widely accepted. This can be done using a system of standard values rather like the systems of standard costs that are used in manufacturing business cost accounting.

    The way in which data are organized is fairly basic. The data starts out associated with an economic activity run by an implementing organization in a place. There might be other organizations associated with the financing. The economic activity is also associated with products that it uses as inputs and products that are outputs.

    Another aspect of the data comes from the double entry idea in accountancy and the difference between a balance sheet account and a profit and loss account. In accounting, the profit or loss in the profit and loss account is the same as the difference between the balance sheet at the beginning and the end of the period.

    The same idea can be applied to impact … both for impact on people and impact on planet.

    Progress is change in state … change in the value balance sheet associated with people and change in the value balance sheet associated with planet.

    Performance is the relationship between progress and the consumption of non-renewable resources to facilitate this progress. The good news is that many resources (including human resources and some energy resources are renewable).

    Product is important for two reasons (1) products are the link into the buy or not to buy decision by people which determines behavior; and (2) products flow through the economy in a variety of ways all the way from the start of the supply chain, through use to the post-use waste chain. Products may have a small difference in price, but an enormous difference in total life value chain impact.

    I argue that when this rather complex data framework is operated with the same sort of rigor associated with money profit accounting, the data may be summarized reliably so that it becomes possible to summarize simply and use to determine which organizations in the not-for-profit world are operating well and which are not … just as is possible with companies that focus on making profit.

    Peter Burgess TrueValueMetrics
    I

    Reply
  98. Pris0ner

    You say overhead is a “Myth”, do you believe that psychopaths are a “Myth”? The charity field is rife with people with no empathy taking advantage of people with empathy. You deny the metric of “overhead” as correlated to the profit taking of ruthless people. Well then introduce a metric that will uncover these unsavory characters. Until then I will continue to use “overhead”. We (empathic people) will not be your minions.

    Reply
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