Nonprofit Overhead Myth: Are You Colluding in its Persistence?

If you work in nonprofit, you may agree with Dan Pallotta, who in his famous TED Talk said:

Our generation does not want its epitaph to read: "We kept charity overhead low."

That’s because you understand that measuring overhead does not neatly correlate with a nonprofit’s impact or effectiveness. A charity that spends 20 percent on overhead and knocks its mission out of the ballpark is not less worthy of support than one that spends 10 percent on overhead but helps relatively few people. It’s one way of assessing things, but not necessarily the most meaningful.

Why do donors still look at 'overhead' as a measure of nonprofit effectiveness?

Three years ago GuideStar and BBB Wise Giving Alliance joined in, with Charity Navigator, in writing "Letter to the Donors of America," stating that "The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as 'overhead'—is a poor measure of a charity’s performance." They also noted:

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called "The Nonprofit Starvation Cycle." We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

At this time, Charity Navigator changed the way it awards stars to focus more on results than costs.

Then why do so many donors persist in saying they want their contribution to go directly to help people, and not to "overhead" costs?

A recent Fast Company article, "No One Wants to Donate to Pay for Overhead—So We Need to Call It Something Sexier," caused me to ponder this question anew. They suggested the problem may lie with the words we use to describe these pesky costs. Here’s what they did:

We asked some branding experts to tackle a new name for "indirect costs" to help stop the chronic underfunding of nonprofits by wealthy donors who put restrictions on their gifts.

Hmm, this assumes that giving overhead a new name will, in fact, help stop chronic underfunding of nonprofits. The type of underfunding that leads to a chronic "starvation cycle."

Hmm, Shakespeare famously wrote that "a rose by any other name would smell as sweet." Will overhead by another name smell less sour?

Hmm, the branding experts couldn’t really answer the question. They came up with a number of alternatives. (The top eight were: circle funds, encompass funds, vessel funds, core funds, operations costs, operational costs, direct operations costs and general operational costs) In my mind, none of them really will move the needle.

Words do matter, but that’s not where this problem begins or ends.

The overhead myth is at the heart of the problem. The notions are that salaries shouldn’t be too high; folks who work for charities should wear hair shirts; and no one should complain about being overworked because, after all, nonprofit work isn’t really "work"—it’s a joy and privilege.

Does anyone tell sports celebrities or rock stars they shouldn’t get paid because they’re having too much fun?

The overhead myth is the "pig," and putting lipstick on it won’t change that.

A big part of the problem is the nonprofit sector’s collusion in allowing the overhead myth to persist.

I led fundraising efforts for nonprofits for 30 years before opening my own business. During that time, I became accustomed to celebrating how "lean and mean" we were, boasting about our low overhead and bragging about our four-star rating on Charity Navigator (largely, at the time, based on low overhead).

Everyone did that—if they could. But bragging about low overhead is a thoughtless practice. If you do stop to question it at all, it makes little sense because:

• Nonprofits just starting out necessarily will have higher overhead than those that have been established for a long time.
• Smaller nonprofits will have higher overhead than larger ones, who can benefit from economies of scale.
• There’s no uniform practice of measuring overhead, so often we’re comparing apples to avocados.
• Spending 50 cents to buy a bag of fresh, nutritious produce (that will last a full week) versus 20 cents to buy a bag of old and rotten vegetables, might just be a really good idea.
• People don’t get therapy without therapists, healing without social work and medical professionals, research breakthroughs without scientists, and on and on.

Work—whether nonprofit or for-profit—doesn’t get done by itself without workers; without buildings for them to work in; without computers for them to work with; without supplies for them to build with; and without cars, boats, planes and camel caravans for them to get to their places of work.

But here’s the rub. While few would likely say they believe the people (staff) helping the people (beneficiaries) are somehow not necessary, or that the work could get done without them, they might be likely to say that these "helpers" should be low paid. Or, even that they should, ideally, be unpaid volunteers.

Nonprofits still are held to a different standard than for-profit businesses—and often the folks who work in the social benefit sector are among those holding themselves to this "higher" standard.

• Founders go for years without taking any salary.
• Executive directors don’t ask for a raise for fear of it appearing unseemly, given their line of work.
• Staff brag about being "underpaid and overworked," as if it’s a badge of honor.
• Board members find no need to hire essential staff, suggesting they can run the financial/fundraising/marketing operations as a volunteer (even though they already have full-time, day jobs).
• Donors threaten to stop giving when they find out the organization has more than five staff members making more than six-figure salaries.