In 2013, GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote an open letter to the donors of America in a campaign to end the Overhead Myth—the false conception that financial ratios are the sole indicator of nonprofit performance. For our second letter, released in October 2014, we invite the nonprofits of America to do their part to focus donors’ attention on what really matters: your organization’s efforts to make the world a better place. We ask nonprofits and the social sector at large to join us as we move toward an Overhead Solution.
The Letters
Letter to theNonprofits of America
How To Share The Message
We need your help! Help us to spread the word that the percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is not a primary measure of a charity’s performance and that results matter more.
Both Overhead Myth letters are licensed under a Creative Commons “Attribution- No Derivs” License, which means that you can use either letter to communicate the message to your donors and other stakeholders. Both letters can be shared with your stakeholders however you like: e-mail them as attachments, print and include in your donor solicitations, put them on your website, share via social media, or print it out for your next board meeting.
My career of 40 years includes for-profit, government and nonprofit. It is the nonprofit arena that struggles with overhead. The agency I am currently working with is mostly funded through government grants that allow and expect to pay overhead, our current rate is 42.5%.
If we really want to change the world, lets invest in that change — general operating funding support good programs to become great!
I congratulate you for tackling this issue. As someone with more than 25 years of working with nonprofits – as a staffer, volunteer and consultant – I am equally frustrated by the use of this metric to determine effectiveness.
I also teach in Georgetown’s Public Relations and Corporate Communications graduate program. Many of my students are interested in cause related careers. I often, in my lectures, discuss how nonprofits are nonstrategic in their work. The reliance on overhead, as a measurement of effectiveness, certainly contributes to this as it focuses donors, staff and volunteers on the wrong objectives to achieve.
I have never used that percentage as a measure of a charity’s effectiveness or its responsible use of monies received. I look more at things like ceo salary to tell me what the charity’s priorities are. For example, at one time I used Charity Navigator’s rating to donate through Samaritan’s Purse, only to discover later that Franklin Graham, the ceo, paid himself a salary of well over three-quarters of a million dollars, not including all his perks and benefits. Are you kidding me?? These people want to solicit money from me, who earns less than $30k per year, and take my money to pay their ceo a top level six-figure salary? Absolutely not! I will never again give money to any charity that pays its ceo or any staff more than I make myself. I look now for local charities, run by volunteers, where 100% of what I am able to give will go directly to those who need it most. Charities have become just another way for the greedy to get gain for themselves. It doesn’t matter how much they do, if they are benefiting from donations themselves.
I would agree that anyone working for a charity, even a very large one, should probably think twice about accepting a three-quarters-of-a-million dollar salary. And good for you for giving locally. Those are often the charities that need the most support and have the least access to big national fundraising campaigns. That being said, I would ask that you reconsider limiting yourself to charities that only pay their executive directors less than you make. Unless you are in a corporate CEO position, which is what a non-profit executive director is, your job responsibilities may not be equivalent to what an ED has to manage every day.
At my non profit we pay our direct service staff a little over $30,000 a year starting salary. I make more than that as CEO but I don’t pay myself, my board pays me to lead and grow our organization. Without me and these staff there would be no program, and no children would be helped. Our salaries are part of the overhead percentage that is being discussed here. Please try to look at this more objectively. I know you would not want or expect our charity – or any other- to operate without competent staff and leadership?
I disagree with your premise. Size of salary has nothing to do with competence. I’m talking about values, mindset, attitude. If anyone wants a career as a highly paid administrator or ceo, fine. Let them seek employment in the commercial sector. However, I expect someone leading a non-profit to have a NON-profit motivation. I have heard this argument before, i.e. that a non-profit has to pay salaries comparable to the commercial sector in order to attract competent talent to run them. I disagree. I have come to believe that non-profits do NOT need to compete for talent by paying their employees a salary comparable to what they would receive in the private/commercial sector. If they do, then they are attracting people whose primary focus is money, their own money, their own benefit, not the goals of the non-profit, which should come first. I find suspect the motivation of both an individual expecting to receive from a non-profit a salary comparable to a for-profit enterprise, and a non-profit that thinks it must compete with for-profit commercial enterprises to get/retain expertise able to effectively direct the enterprise. I’d rather see both entities, the ceo/staff and the non-profit itself, have greater concern for the recipients of the charity they represent, than seeking to compete with commercial enterprises. If a person is working full-time for a charity, it’s appropriate to pay them a livable salary, but it should not underwrite a luxurious lifestyle. It should be no more than an average person makes. Size of salary is not the measure of expertise, only of values. I will continue to not support charities that try to compete with the public sector in terms of salary of administrators or other staff. I want to see people who are motivated to help, not to be paid lots of money. And there really are charities out there that fit that profile. That is where my money will continue to go.
Hi Chris,
I just read your response and I wanted you to know that I agree with you 100%. I left my paying job to start my non profit Technology For Autism Now, Inc. I have 6 children, and my 3rd son is severely autistic. He is 25. Having 4 kids in college and quitting my job because I believed I could make a bigger impact for the autism community based on what I learn from navigating this autism system and living with it 24/7. I do not even have payroll set up. I was incorporated in dec 2009. If I hired all the people that expect these high salaries, I would never have been able to fundraise, develop the app, pilot test the app, have it validated by a scientific researcher and so forth. We are getting ready for our first product launch into apple and google play and I am excited that I have been able to get this to the point it is getting way too big for me! It’s all great and we sure could use a little paycheck from me with 6 kids and one income and taking care of my son with autism as there are not appropriate services here in MA for post 22 kids with autism when they graduate out of the Boston Public School System. When my son was diagnosed at 18 months, no one told me anything, I felt totally isolated from everyone, (no one I knew had a child like mine). I had to navigate the system on my own, find out what would work with my son, and I never gave up. He has made tremendous strides, way more than the doctors and professionals ever thought. This is why I felt I had to leave my job at Children’s Hospital Boston because I felt I could reach more families getting that diagnosis. 21st century problems require 21st century solutions. Autism consumes me and is what gets me up in the morning. I know we are making a difference in the lives of children with autism and their families. BUT like you said, some of the non profits that deal with autism that have all this celebrity status, don’t live with it, they make 6 figure salaries and it makes me so sad. Their heart is not in it for the right reasons. I wish more people would look closer at the smaller non profits that are making a difference, it has taken me a bit longer but if I had to pay all those people I wouldn’t be where I am now. I really wish more people had the same mindset as you and would look at the non profits like mine, that live with autism every day and work my tail off so another family won’t ever have to hear when their child is diagnosed, “that they can love him/her til they can no longer manage them and then institutionalize!” It infuriates me. Autism rates were one in 10000 when my son was diagnosed and now it is one in 58 according to the CDC. Something is very wrong here. I have a mobile app on both platforms, based on the only scientifically evidenced based methodology to teach children with autism, have a published patent on my built in data metrics, and have this app ready to launch within the next 2-3 weeks into apple and google. It’s hard being a new non profit without a ton of money, I did all my own fundraising and events to get to this point and if I can make the world a better place by helping one child at a time, then I have done my job. We are now generating interest all over the US and Internationally and haven’t even done our product launch yet. We need people that feel the same way you do about being passionate about what they are doing moreso than making a big paycheck! Thank you for making me feel better about all the people that make comments to me about how hard it must be to have 6 kids one with autism and then have all those college tuitions, yes, it is but it’s also intrinsically rewarding when you recieve a note or an email from a parent telling you that your app or your visual support has helped their child go to the dentist at the age of 17 or got a haircut because of the visual supports I helped create for them. If I can leave this earth knowing I made a little bit of a difference (hopefully a huge difference) then my life will be fulfilled.
I agree with you very much!!! Thanks for your post!
Marie Duggan
Founder/President
Technology For Autism Now, Inc. (TAN)
‘I have heard this argument before, i.e. that a non-profit has to pay salaries comparable to the commercial sector in order to attract competent talent to run them.’
– Not comparable to the ‘commercial’ (private) sector. Not even close.
‘I have heard this argument before, i.e. that a non-profit has to pay salaries comparable to the commercial sector in order to attract competent talent to run them.’
– Not comparable to the ‘commercial’ (private) sector. Not even close.
http://thirdforcenews.org.uk/features/working-in-the-third-sector-is-a-double-edged-sword
Oxfam GB, for example, is worth more than £350 Million pa. Their CEO is paid a similar salary to that of a typical headteacher at a large school.
You really have no clue what the difference is in a “For- Profit & Non-Profit” corporation. Its not paying someone less because they work for a Charity! Especially, when charities do most of the beneficial “Good” work in this world…. Now, exorbitant salaries are a different story.
Even ur employees need to pay bills I don’t understand y people don’t understand it’s the owners biz to help people n raid his family n employees. Nobody starts a biz to struggle n b poor
So how do you propose a CEO, who puts in anywhere between 50-65 hours a week on the clock for the charity… doing their job plus all the things for which there are no volunteers… pay their personal mortgage, utilities, gas, phone, grocery bills, insurance premiums, etc? Methinks you’ve never run a nonprofit organization so you’ve set the bar higher for others than what you could possibly duplicate in reality. Please, be a 40 hour a week charity volunteer for a year before setting policy and paychecks.
It’s fair (and morally right) that nonprofits compensate their staff fairly. And that includes both rank-and-file and executive staff. No donor should expect an organization to pay their rank-and-file staff less than a good living wage (and I do NOT mean subsistence living) in their communities.
Conversely though, it is fair and morally right for donors to expect nonprofit executive staff to be people who are willing to make less than they would in the private sector and to take salaries that reflect their commitment to the mission and to responsible stewardship of donors’ contributions. Whether one defines that as an absolute number, or a percentage of the total personnel budget, or as a maximum multiple of average rank-and-file compensation is debatable. But what should not be debatable is that nonprofit CEO’s should not be contributing to widening income inequality in America.
For me personally, today (as both a nonprofit board member, which I am, and a donor), somewhere between $200K and $300K I am going to start asking questions about fairness of the CEO salary for most organizations. Really, no one needs more than $300K to live quite comfortably. Not even in NYC or San Francisco.
Franklin Graham’s salary, according to Charity Navigator is just over $400,000.00. not $750,000. No where near some of the other well known charities such as the American Red Cross and Unicef. Of course the lowest paid charitable head is that of the Salvation Army who heads a 90 billion dollar charity, yet makes less than $25,000. 00 per year which includes housing.
I hate to be the one to point out the obvious, but did you not read the letter? Overhead means staff salaries as well. I’m not trying to dig at your salary, but how effective do you think that CEO is going to be if he is paid $30,000 a year? Do you REALLY think someone with those credentials is going to stay in the non profit world. This is the EXACT thing these 3 organizations are trying to get people to realize. When you are a CEO of a major organization, they need to be paid like a CEO of a major large private business or why wouldn’t they take their skills and talents to the private sector, leaving the non profit having to lower their standards to attract a CEO who would be willing to be responsible for millions of dollars and thousands of jobs? How long do you think that organization will be around for and how many lives will they really be able to impact? The bigger the organization, the bigger the salaries for their top staff need to be in order to compete with the private sector. Hence, the whole point of the letters. Wake up people, we need to change our attitudes to allow non-profits the ability to compete against the private sector for the top talent out there for staffs or they wont be able to grow their cause and mission.
“Overhead means staff salaries as well. I’m not trying to dig at your salary, but how effective do you think that CEO is going to be if he is paid $30,000 a year?”
I believe that the point that is being made is that if you aren’t passionate enough about the cause to take on the responsibility without an enormous paycheck … then move aside and let someone who is more passionate about that cause, happy to work for reasonable pay and just as skilled take the helm and save the organization scrutiny about the overhead.
The weight of responsibility isn’t the principle matter … what’s coming into question is the dedication to cause or self. Just because you are a CEO doesn’t mean you need to own a $500,000 dollar home with a $3,000 a month mortgage. It shouldn’t be about keeping up with the Jones’s. It’s the same with Churches … the larger the church … the larger the salary … the more luxurious the life style. Churches may be full, but they are near empty in conversion.
It’s no secret the for-profit sector is in it for the money and the glory … if you are in the non-profit sector … your intentions should be to lend your knowledge, experience, and skills for the greater good with reasonable pay and not for profit.
Overall, It’s just poor form… requesting high fees to live like a queen or king as you ask donors – who in majority of cases make far less and live on fixed budgets – to help you in battling a seemingly unsurmountable cause.
Not to defend Franklin Graham, but I believe you have a distorted view of the nonprofit sector.
A CEO of any corporation (nonprofit or otherwise) is going to make more than $30K. That’s just the market rate of those salaries. And it has NOTHING to do with how effective the nonprofit organization is.
That shouldn’t have anything to do with your personal level of generosity.
Though not completely precise, my thoughts are stated in the article referenced below. The blog responses were one of the most active for Ms. Kristof at the time.
By KATHY KRISTOF MONEYWATCH December 14, 2009, 5:01 PM
Charities Fake Their Numbers to Look Good
Last Updated Dec 23, 2009 1:30 PM EST
I agree in part with this initiative, but I think we are being a little naive. Of course most non-profits would rather have overhead ratios drop off of donor’s radars because it takes pressure off. Sure it’s not the only, nor most important indicator of effectiveness, but it should still be a consideration of an organizations ability to think critically about how it spends donor money. Donors deserve to know and understand that if they make a $100 donation to organization X, that $40 of that will be used to send them more fundraising letters. And that if they give $100 to organization Y, only $5 will be turned around to seek more funding. They should not base their decision only on those facts, but they still are relevant. More relevant that perhaps those entrenched in the non-profit industry (yes, industry) would like to admit. Some non-profits have become nothing more than fund-raising machines, with programs becoming a necessary cog in the machine.
The reason that these overhead percentages are useless is because every nonprofit interprets and reports them differently. An example is the United Way. I saw one that says its overhead is 7% and another 20%. Don’t they do the same thing? Why the big difference if they have the same expenses? But I really want to know why not 100% of a United Way’s expenses reported as overhead? They are a fundraising organization that does not provide any direct services to clients? This is a crazy system. Also – it wouldn’t take any pressure off the nonprofits not to have to report overhead– if the nonprofit still had to perform and have positive outcomes for the cause. It would actually increase the pressure because the focus would turn to actually making a difference rather than figuring out how to categorize the numbers
United Way’s are all locally based and each has their own overhead numbers. I would encourage you to go to guide-star or CN to look at some United Way’s near you. Also, many United Ways do provide direct services. It just depends on the organization and its local board. Lastly, United Way’s overhead would never be 100% because if they paid 1 person $50,000 and they raised $500,000 their overhead would be 10%. United Ways traditionally raise dollars through business campaigns then give that money to organizations in a grant. Obviously this is over simplifying it but I hope that helps.
I worked in the social service nonprofit sector for over thirty years. There are no standards for measuring goals being met or even lack thereof. I watched various nonprofits manipulate formulas to measure productivity and when I spoke up was chastised. They changed services provided to match those required by donors. I also watched CEO’s spend their time trying to figure out how to put more of the dollars into their own pockets, even succumbing to destroying personnel files. I don’t have the answer, but there needs to be a way to enforce guidelines and products provided by nonprofit organizations.
It seems to me, we as nonprofits need to redefine overhead. My funders (mostly federal grants) and I don’t call paying the electric bill, staff training or IT infrastructure “overhead”. We call them operating costs, because that is what they are. In order to deliver a service, I have to have a facility, trained staff and infrastructure and I’m up front about those being part of the service-delivery costs. Calling these costs what they are – a direct cost of delivering the service — is a very effective way to bust the overhead myth.
I’m very glad to see that this might actually be a sustained campaign. I think it would be very helpful if Guidestar, Charity Navigator and BBB Wise Giving Alliance outlined how they intend to report on overhead, going forward. After all, they, and other rating groups, have been the ones to build up the idea of overhead as a primary measure of effectiveness.
Also, what exactly what do they mean when they say “outcomes”? Different services and projects have different outcomes, some of which are more closely tied to service units than others. Also, sometimes the definitions and / or reporting requirements are sometimes so complex that they are not only onerous, but obscure more than they illuminate. For example, I recently heard a news report on the issue of outcomes reporting where someone said in all seriousness that outcomes reporting is hard because you need people with appropriate degrees to manage this.
This makes no sense. Any intelligent layman should be able to understand the basic outcomes expected, and how they are measured (unless we are talking about very arcane or technical areas). And any professional with the appropriate qualifications to manage non-profits and services should be able to manage outcomes. At most, this should not require more than a course. Of course, in most fields there are going to specific measures whose details a layman will probably not understand, but someone who has the technical expertise should be able to understand these details fairly easily.
I often wonder how well different organizations are spending on overhead when I receive way too much mail from them.
Here is a good way to stop that. If a postage paid envelope is included, put everything sent in that envelope and return it with a note stating your concern. I also ask them to remove me from the USPS mail list. If an envelope with no postage is included, put the organization’s return address in the top left corner, and follow the above procedures. I have considerably reduced my solicitation mail with this method, and perhaps sent a message to the organization.
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The real dark side of the Overhead Myth is what it does to fundraising. I have been a development officer for 30 years and have watched countless effective small and medium non profits. Organizations with proven successful methods and models…strangle themselves. Keep themselves small by historic and long term under investment in fundraising. Even proven successful fundraising programs that might raise overhead are kept small. It’s pathetic and a national tragedy. Thanks for doing this Guidestar, BBB and others
I have been in the non-profit business for over 20 years. In general I agree with the focus on the mission and not putting extra emphasis on the overhead but in specific we always needs specific tangible metrics to measure the health and directin of organization. Typically the Board of Directors do not have the needed time to dig in the details. For our organization the following measures have been proven satisfactory in financial analysis and yearly budget definitions:
1. Define a targetted overhead % for the coming year based on the prior. Target should be an improved number
2. Define a targetted index based on raio of total expenses divided by total revenue. Total expense is defined as total revenue minus actual money provided to the receipient of aid.
3. Perform a yearly salary research of non-profit organization in our class and ensure the payroll is withing 5%.
4. Monitor the finances on monthly basis ensuring the trends of cactual vs budget is within 5%. If not specific action is needed.
I hope this helps my colleagues at it has been proven satisfactory and very successful for us knowing where we should put our efforts for improvement as we are following our mission with simple metrics to manage.
I’m a student at Pennsylvania State University who’s working on a possible solution to this problem. Please check my webpage and spread the word if this sounds like a viable option. We’re in the beginning stages, but we would like as much feedback as possible so that we know we’re moving in the right direction. The website is http://tinyletter.com/arrow
Thank you,
Logan
Are there any webinars offered on this topic? Our local Non-profit Business Council has been debating this issue for quite some time. We have not been able to find anyone in our area to do a presentation on this and we would welcome any way we could bring the information to our non-profit groups in the area.
It’s all in the metrics.
One of the great advantages of Rotary International’s Polio Plus program is that it has a simple metric: how many new cases of polio occurred in the world each year. (Of course, it assumes that case reporting is accurate.) And now polio is measured in a few cases world-wide per year. I think we can all agree that there has been a very impressive impact! Polio virtually wiped out!
But other non-profits have more difficult metrics. Habitat for Humanity (which I greatly admire) counts the number of homes it builds annually. Simple metric, but does it measure “impact” as Guidestar, BBB and Charity Navigator hope? How many new homes does it take to make an “impact” on housing for the working poor? Is a drop in the bucket an “impact?”
I’ve been trying to assign “value” (another way of describing impact) to activities my entire career. Let’s face it. It’s hard. And tends to be subjective. I don’t see that a methodology is being suggested by Guidestar, BBB and Charity Navigator.
My view: unless there is widespread agreement on a methodology of measuring impact, there is little to suggest that this new approach will be any more useful than the old “overhead” approach.
Wish I could be more hopeful… and helpful…
Millard Fuller, founder of Habitat for Humanity International, paid himself a modest salary. His mantra was that no one should become wealthy working to help the poor or needy.
He also said that it was possible to live in a ‘sinful’ house (or own multiple houses, when so much of the world lacks decent shelter. When asked how someone would recognize a sinful house, he usually replied it would be bigger than the one you live in. So in the same sense, too much compensation for a CEO could be anything more than you make…
This of course is all relative, and gets fuzzy at the edges. But not at the extremes.
We can see it often played out in foundations which due to the tax laws can spend lavishly on themselves, and still do their primary work. I have yet to meet a foundation staffer who is overworked, underpaid, or works in a shabby, crowded office. And they are respected and thanked continuously for their good work.
This page is a much needed myth-busting resource! However, I feel it could do more to clearly explain the issue (perhaps with info graphics etc) because, judging by several comments here, some people have missed the whole point. For example, CEO salary is irrelevant because it is simply one element of overhead, which itself is irrelevant (that being the whole myth in question).
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I personally know of one nonprofit organization that doubled its annual donations from $5 Milliion to $10 Million within 2 years by hiring one experienced marketing executive.
There is no doubt that many nonprofits (at the direction of their Board of Directors) still shy away from anything that might add to the “overhead” quotient.
There is also no doubt that effective marketing/advertising campaigns can make an incredibly positive increase in donations
.
My own expereince with NFP’s is that many spend next to nothing on advertising/marketing. Perhaps Dan’s message will continue to help inform, educate and move both the public and and NFP’s perspective.
We value the importance of demonstrated results in the field and being responsible stewards of the donations entrusted to us. For this reason, Trellis Arch is run entirely by volunteers and 100% of every donor dollar goes toward our projects. As we grow, we expect this to change but have incorporated an 85% floor into our by-laws. This requires us to spend no more than 15% of our revenue on administrative expenses. We are going to grow into that model and it works for us.
We need to ditch the word “overhead” and use a more appropriate word(s) such as “the cost of doing business”.
Overhead will always suggest something “over” what is necessary.
A simple, but powerful, step toward helping others understand and thus be less instinctively resistant, is to replace the word ‘overhead’ with calling it what it really is: ‘indirect costs.’
Overhead is a private sector term describing any costs which do not generate revenue, and as such are – at best – necessary evils, drags on profits and thus paychecks. Overhead is inherently a word with negative connotations.
Indirect costs is more accurate and carries less, if any, negative connotations. A cost is a cost, and can be either direct or indirect; but both are necessary. Surely more folks would more easily understand direct and indirect costs versus costs and overhead. It even sounds mysterious, negative and of doubtful value.
Let’s stop shooting ourselves in the foot by trying to justify ‘overhead’ and instead start talking about direct and indirect costs.
The biggest problem is that many nonprofits do not understand what overhead is nor how to account for it in their budgeting. They don’t know how to distinguish between “overhead” and “program costs.” Without that explanation, nonprofits cannot make appropriate choices or analyses. It is important to dispel the myth that nonprofits cannot make money. While your articles and letters are useful, without the foundation of understanding overhead and budgeting, many nonprofits can get into financial trouble.
I get that the overhead ratio, by itself, may be too simplistic a measure of a charity’s effectiveness in performing its mission.
But when it comes to choosing between so many worthy causes, how is a donor to decide? How can you rank order charities by “effectiveness” or “transparency”? Can you honestly tell me there is a score or some other objective way to quantify and then rank-order these measures? The answer is clearly “no”, and that is why donors focus on the overhead ratio. It is simple and easily understood.
If charities don’t like it, then give us an objective measure of those intangibles that is comparable across charities so we can rationally discriminate between competing causes.