The Overhead Myth and Charitable Giving
NEW YORK ( MainStreet) We work hard for our money, so when we give to charities, we want our money to work hard, too. If we are going to choose between providing food to the homeless or paying for a nonprofit's office supplies, most of us would choose the former.
The so-called overhead ratio indicates how much money a nonprofit spends on direct aid compared to administrative costs. Many websites like Charity Navigator list a nonprofit's administrative expenses, and the prevailing assumption is, the lower the better.
After all, who wants to pay for a nonprofit's office space when the money could be helping the masses?
Not so fast, argues The Overhead Myth , a new website that helps people direct their philanthropic efforts.
Richard Johnson, CEO of nonprofit Spark Ventures, which helps children in developing countries by creating a pathway to financial sustainability for the grassroots organizations that serve them, has experienced this bias firsthand.
"After spending the first half of my career working in the private for-profit sector, I transitioned to becoming the fulltime CEO of a 501(c)(3) nonprofit," Johnson said. "As someone with an investment-minded approach to my work, I was discouraged to learn about the ways in which charities were basically penalized for investing in infrastructure, hiring talented staff and prioritizing cash on reserves."
Steven Wray, founder of nonprofit Restore Global, which redistributes excess goods when one nonprofit receives contributions it can't use fully, agrees.
"What if we were to use the same criteria toward many of our common purchasing decisions?" Wray asks. "In our children's daycare, we would ask, 'How much of the weekly tuition was directly used for the care of my child?' We would ask how much the owners and staff made in salary. After our research, [would we] conclude that the five-star daycare center was spending too much on administration and choose the 95-year-old lady who is caring for five kids in her 1,500 sq ft home next to the train tracks?"
"One thing we asked donors to do was to make some trade-offs, the kind of thing they have to do in their everyday decisions," says Ron Sellers of Grey Matter.
The survey asked consumers if they'd rather support an organization that spends fewer donor dollars on salaries but hires less-experienced or less-capable managers (resulting in less efficient or effective management), or an organization that hires top-quality managers but spends more on those salaries.
"Donors were really split over this," Sellers says. "40% preferred spending less money on managers, 38% preferred more experienced managers who are more expensive and 22% had no preference."