Why Can’t We Get Over Overhead?

Print Share on LinkedIn More



That slapping noise you hear every holiday season is the sound of philanthropic experts briskly applying palms to foreheads as they watch the perky nightly-news broadcaster reminding viewers to be generous, but to give only to groups that spend far more on programs than on overhead.

The program/overhead distinction, though denigrated for years by the most articulate and determined nonprofit professionals, simply refuses to die. Somehow, the general public doesn’t want to let go of it.

Why not? Will the simple-minded rubes whose donations constitute the overwhelming majority of charitable giving in America ever realize that it’s a meaningless if not downright pernicious distinction? Will they finally turn instead for giving guidance to the shiny new outcomes metrics upon which our experts have been beavering away?

My hunch is: not likely.

We know from Hope Consulting’s 2010 report Money for Good—one of the most exhaustive recent studies of giving by individuals—that donors give based on a variety of “heart-based” reasons that little or nothing to do with “head-based” measurable program outcomes.

They give to groups from which they have themselves received a direct benefit or that they encounter in their daily lives. They give based on the advice of friends and neighbors, to groups that produce practical results they can see and touch, and are in line with their religious and moral convictions. Only 35 percent of donors ever seek out any sort of data about their intended beneficiaries, and three-quarters of those spend less than two hours at it, very seldom resorting to third-party ratings or evaluations.

The vast majority of donors, the report concludes, are not rigidly-calculating utilitarians determined to eke out every last ounce of impact per dollar. Rather, they cursorily scan only the most readily accessible and digestible information about a group, and then only after they’ve already decided to support it, simply to reassure themselves they aren’t falling for a conspicuous fraud.

And “for better or worse,” one of the report’s bullet points lugubriously intones, “overhead ratio is the #1 piece of information donors are looking for.”

Our sector’s metrics mafia—the largest national foundations, plus their sprawling coterie of scholars, consultants, evaluators, and non-profit minions—are heavily invested in the notion that this gooey emotionalism, along with the inexplicably popular overhead ratio, will soon be driven out of individual giving by the arsenal of measurements they are now field-testing in their own institutional giving. Leaving aside the widespread failure of foundations themselves to live up to their own empirical rhetoric, however, this view overlooks the larger symbolic purpose the overhead ratio serves for everyday Americans. In its most literal sense, the program/overhead distinction claims to enable a donor to steer more dollars directly into program and to bypass the professional intermediation implicit in the overhead figure.


At a deeper level, though, this is a rare opportunity for everyday citizens to reject the message drummed into them in most aspects of their lives today: that they are not competent to manage their own affairs without expert guidance. For every problem, they’re told, there is a credentialed professional armed with scientifically generated spreadsheets who knows far better than they how to deal with it. Americans may have once prided themselves on self-government. But today, it seems, public problems are far too complex and abstract for everyday citizens to understand, much less to solve. For that, administrative experts are needed, who make decisions based on objective measures of impact, rather than subjective standards of moral or cultural significance.

In our economic lives, Americans are rated, ranked, and compensated according to ever more rigorous and arcane standards of performance, from the first days of education to the mature years of employment. A finely calculated and unyieldingly demanding bottom line determines not only whether someone keeps or loses a job, but whether an entire community keeps or loses a vital industry.

In the midst of all this hyper-rationalistic calculation, calibration, and coldness, one lone public act retains an element of uncalculating, uncalibrated, possibly even irrational human emotion: making a charitable gift. Although experts are working overtime to reverse this, they have not yet succeeded in making it disreputable to give based on obscure, antiquated motives like moral obligation, spiritual inspiration, or humane fellow-feeling. And I suspect that giving will continue to be governed “by the heart” in the future, even if reliable metrics ever do become widely available, precisely because so much of the rest of our lives are governed “by the head.” Charity offers citizens, in the words of the late Christopher Lasch, a haven in a heartless world.

The one number toward which givers seem to gravitate, the overhead ratio, captures this sentiment perfectly. It permits us to choose to be more directly, emotionally connected to the person, place, or cause we’re supporting (as much money as possible should go to program). For once in an expert-managed world, we can minimize the degree to which professionals and administrators intercede between us and that which we want to do (as little money as possible should go to overhead.)

That’s why we’re most likely to hear the claim, however tenuous it may be, that  “all your donations go directly to recipients” in moments of high drama, strong feeling, and powerful moral struggle. In the immediate aftermath of tragedy, charitable givers are more likely than ever to desire and demand a direct and unmediated link to sufferers. In that moment, the overhead ratio tells them all they want to know about the disposition of their gift. It ignores niggling statistical calculations about impact and speaks instead to their strong yearning for immediate, compassionate human connection. Donors are never amused to discover that their some of their giving in a crisis has been diverted to long-term administrative infrastructure, as the American Red Cross’s former CEO Bernadine Healey can attest.

This immutable psychological aspect of crisis giving is much lamented by nonprofit experts, who earnestly wish people would be more reasonable and realistic about dispositions of gifts. But it is a fact of human nature at the wellspring of human generosity, one that we tamper with only at our peril. If this is true, then it’s even less likely that expert-designed and propagated metrics are going to be welcomed by individual donors. The overhead ratio may be so resilient precisely because it enables us to express skepticism about the role experts should play. It gives us the chance to say to professionals, explicitly and loudly, “Back off! I can handle this.” It will not be displaced by standards that merely echo to donors the message they hear over and over again in their daily lives: “Trust us professionals. Use these new metrics we’ve designed to make you almost as smart in your giving as we are.”

There are many problems, no doubt, with the popular embrace of overhead ratio. In our eagerness to “send a message” to the experts, we do a disservice to the overworked and underpaid nonprofit managers whose work is counted as administrative expense. Some charitable undertakings do in fact require a lot more overhead to be successful. And the ratio is easily manipulated by clever and dishonest accounting (as if measures of impact are any less so).

But if what I suggest here is true, the overhead ratio expresses an important truth about popular sentiment toward charity. And since charity rises or falls by popular sentiment, it’s important that we be careful how we treat the ratio.

Right now, commentators freely and volubly express disdain for it. It seems to them to be just another contemptible manifestation of the naïve, antiquated, romantic view that nonprofits should be staffed by inspired, self-sacrificing amateurs and volunteers, rather than by well-credentialed and handsomely compensated professionals. The experts constantly remind us that today’s typical nonprofits are large, complex, bureaucratic structures, almost indistinguishable in means and ends from the major political and economic institutions in our lives—and therefore, not coincidentally, subject to the same rigorous outcomes metrics.

But this is a dangerous argument. Our economic institutions earn resources by delivering goods and services. Our political institutions extract resources by taxation. Our charitable institutions must rely for at least some of their resources on voluntary gifts given by individuals. The level of that giving depends decisively on the way nonprofits comport with public sentiments about them, no matter how naïve or romantic those sentiments may be.

When experts seek to debunk the myths of charity, the result may not be a more enlightened, realistic, and robust donor base. It may rather be a skeptical, disillusioned, and disappearing donor base. However inadequate and inaccurate the overhead ratio, its durability may attest to the fact that it is another of the myths that sustains charitable giving…a myth that we work to dispel only at great cost.

  • Jim

    The issue is not simply the fault of those outside the charitable non-profit sector looking in.

    There is no recognized standards of reporting and even 990’s are not properly completed. Non-profits report overhead in so many different ways that it only serves to confuse the issue.

    What have sector executives and leaders done to educate the public, little.

    Where have the metrics been to demonstrate the value that local economies get from many of these programs. Oh, its too hard to measure, so we don’t. Well, if the sector will not measure themselves, those outside will find their own way to do so. Read most charitable annual reports and they are filled with volumes on features, isolated stories of success and little about how the tax dollars, the contributions, the volunteer time contributed to the betterment and best use of money for the community.

    How many non-profits does any community really need. Can it really support the ever expanding number created because people became emotionally involved and decided to create another non-profit. In the wake of the IRS scandal one important bit of information was lost in the yelling and screaming. In the past few years the IRS has been receiving over 5,000 non-profit applications a month. 60,000 NEW non-profits nationally each year for the past few years. Why worry about overhead, worry about the duplication that creates the overhead.

    At the same time, existing organizations have been loathed to merge or expand into new areas, for fear of the dreaded and overrated and over feared Mission Drift. So instead of being more efficient in the use of the economic resources, we create and create and create, all of which lessens the actual amount of money that can be focused on critical issues.

    As America ages and the boomers cope with health issues especially obesity, (now the number one world health issue) tatoos causing new forms of hepatitis and younger people needing liver transplants from eating high fructose drinks and food, the issue of overhead will be a thing of the past as survival from the decreasing contributions will come to the forefront.

  • Justin Pollock

    The pendulum will continue to swing on this and many other measures of quality – be they health, education, the environment – when we try to provide simple answers to nuanced realities. The failure is to use the simple metric to obscure the “measured” assessment. A measured assessment being one that clearly can articulate what is being measured, how it is being measured, and what that measurement actually means in the context of the work being done.

  • Keenan Wellar

    We have a long way to go until the public understands that a charity with next to no overhead is either lying or acting with extreme irresponsibility. It is a huge problem that anyone attempts to analyze “the charitable sector” when the differences from sector to sector and region to region are virtually endless. I’ve been a part of the a sector of local agencies (less than 20) for most of my adult life, and it’s still not easy to arrive at valid comparisons or rankings.

    In my agency we don’t operate group homes. Other agencies do. There is a lot of necessary overhead with operating group homes, and it would be unfair to give us a “higher grade” on that basis. Someone showing low overhead in that sort of operation is likely cutting corners that could endanger people and/or the organization itself.

    Furthermore, this obsession with overhead s an unfortunate distraction from the questions civil society should actually be concerned with – for example, do we need all of those group homes? But that’s unlikely to be the debate that makes it to the public sphere. Instead of debating overhead or programs, we should spend a lot more time on the program model itself – increasingly programs have become an end instead of a means to one, which to me is the real problem in our sector. The program model is driven largely by funding traditions, not problem-solving traditions.

  • Eleri Morgan-Thomas

    Measurement done to for marketing purposes is, I agree, not useful and may not influence donor behaviour in any case.

    However, measuring outcomes and overheads is useful for both boards and management of non-profits. We should keep investing in measurement for those purposes – we owe it to our clients and communities.

  • Karen

    The situation is no better across the border. Our government supports the message by publicly urging us to get our administrative costs below 10%. When potential donors ask me about this, I give them two scenarios: give to support the direct service worker who has no desk at which to sit, no supervision to speak of, no monitoring of accountability, and lacking the equipment necessary to do their job….or to support the direct service worker with a place to sit, an effective supervisor, administrative and policy supports in place to support the worker in a healthy organization, and the equipment they need to do their job. The former means that 100% of their donation can go to the front lines, and latter means that a reasonable portion must be diverted to the administrative infrastructure of the organization. If they are still hesitant, I ask them which worker they want supporting them or their loved ones. Invariably they choose the ‘supported’ worker, and they get the message. It’s frustrating, but I understand how their perspective is formed and supported – I was once there myself. It wasn’t until I reached the senior management level that I truly understood what it costs to build a healthy, effective organization. More frustrating is our government’s dogged insistence on perpetuating a message that will only continue to undermine non-profits and risk sending us into oblivion.

  • Mike Stoffregen

    While one must concede that overhead is part of programming…Mr. Schambra only needs to truly drill down into the annual reports of different charities and witness for himself the incredible spending done on what one must also concede are frivolous expenditures…typically, the larger the budget…the more egrecious the details of the expense. Too many recent scandals at top name nonprofits fuel the resistance to why donors can’t seem to “get over the overhead discussion” .

  • Doug

    The challenge of measuring performance in the non-profit sector is that the overwhelming majority of organizations can be reasonably evaluated using accounting measures, but many other organizational models are not accurately portrayed by those measures. So, what are those organizations that don’t fit the model supposed to do?

    For the most part, non-profit accounting performance is deduced from an organization’s Form 990. I have had the opportunity to review thousands of 990s. A consistent trend I see is organizations simply missing the opportunity to tell their story. The 990 is as much “art” as it is a portrayal of accounting performance. Too many organizations–or their accountants–have failed to use the Form 990 as a framework to brag about their program achievements. They instead view the document as a static device required to maintain tax exemption. Some organizations are very good at telling their stories and I’m never confused or perplexed after reading their 990…. A lay member of the public should never be left with the question: “What did this organization actually do in the past year?” after reviewing your 990. If they are, you are doing something wrong.

    The reality is that funders, evaluators, regulators and the public will seek to evaluate and measure non-profit performance–regardless of what methodology the sector likes or doesn’t like. It seems to me that it is really the sector’s responsibility to accurately tell their story–not outside observer’s responsibility. If you are a good organization and you tell your story clearly and accurately, there will be little confusion about your value in the sector.

  • Isaac Castillo

    There is one substantial flaw with giving based on the overhead ratio – especially giving to organizations that claim that 100% of a donation got to programming: you have no idea if the program is actually effective, nor does the organization.

    Most people in the nonprofit community have the right intentions and really do want to help people. But everyone makes mistakes: there are no perfect people, no perfect nonprofit staff, no perfect nonprofit managers, no perfect curricula, no perfect set of interventions. Someone, somewhere, will make a mistake in the delivery of programming and will actually harm the very clients they are intending to help. Not every program or organization can achieve positive outcomes for their clients, and some will actually do harm.

    By giving to an organization with a low overhead ratio (or an organization that gives 100% of funds to programming) you are essentially saying: I have no idea if what you do works, nor do you, but I am going to give anyway, and hope that you actually aren’t hurting anyone. But you have no idea if you are hurting anyone, because you don’t feel responsible enough to devote some of your resources to even bother to check, and I am going to further reward this behavior by continuing to donate to you.

    This may seem harsh, but it is a reality of the world: not everyone does a good job, and some people actually make things worse despite the best of intentions. By using something like overhead ratio to make gift-giving decisions, you are potentially paying someone to hurt others. They may not intend to hurt others, but they will never know, since they don’t devote any resources to measure what their true effect is.


  • Caroline Fiennes

    As a campaigner for more effective giving (see http://www.giving-evidence.com), I agree: the issue is giving the public something more useful to use in their decisions. Hence I’m involved with Charity Navigator, which has now got a very sensible algorithm including transparency & results which should guide donors towards charities which do a good job.

    Giving Evidence recently published some data – gasp! – showing (not just arguing) that strong-performing charities spend more, not less, on admin. To my knowledge – which is pretty good after 12 years in this sector – it’s the first actual on this issue to ever surface. http://giving-evidence.com/2013/05/02/admin-data/

    Here’s an article in The Guardian about why admin costs are so dangerous & why we (the sector) need to provide something else: http://www.guardian.co.uk/voluntary-sector-network/2012/nov/15/publicising-spend-charitable-activities-disaster

    And this is about Charity Navigator’s new sensible algorithm: http://giving-evidence.com/2012/12/11/charity-navigator/

  • Elli Malki

    In Israel the government is checking the eligibility of nonprofits to public funding (both grants and contracts) based, among others, on the overhead ratio. In order to do that the General Comptroller has issued upper limits to the overhead ratio, that take into account the existence of economies of scale. The upper limits start from 22% for organizations with income which is less than $2.5M and go down in a sliding scale to 7% for income which is above $25M.
    The use of a sliding scale makes sense since it acknowledges the fact that small organizations – with a relatively higher overhead rate – are not necessarily inefficient.
    An empirical study on a sample of Israeli welfare NGOs (see the following link) provides evidence for the economies of scale, although the actual rate of decrease in the overhead rate is lower than the scale which is used by the Israeli government.

  • Deb

    The non profit I founded and run wouldn’t be possible without overhead costs to run the programs we have. As an art studio for youth at risk and people with disabilities we get a lot of art materials donated by local purgers of their personal art studies. So our overhead costs are the rent/utilities and salaries needed for our clients to make art and without that space there’d be no program so far as I’m concerned our rent/utilities etc is part of the programing.

    I think what donors need to look at is the amount that is being spent on these overhead costs and salaries. If they seem outlandish then question it. If they are modest salaries and appropriate for the times then all is good. For us with so many material donations of supplies, our ratio technically is not looking very good then. There so much more to consider and look at then just a number. And then of course there is the intangible considerations of lives being changed, which you can’t place a number or ratio on.