Most donors think charities spend too much on “overhead,” like staff salaries and other administrative costs, yet contributors usually support organizations that spend more than is deemed acceptable, according to a new report.
Fifty-seven percent of donors surveyed said they think nonprofits spend too much on overhead. On average, donors said 19 percent of a charity’s budget is a reasonable amount to be spent on administrative costs. However, the researchers found that 28 percent is the average among charities that donors cited as their favorites.
Furthermore, only one out of five donors surveyed could closely guess what share of their favorite charity’s budget was spent on overhead.
“I was very surprised at just how little donors really knew,” says Ron Sellers, president of Grey Matters Research, which conducted the survey of 1,000 donors with another marketing research company, Opinion 4 Good.
The findings suggest that donors’ concerns about high administrative costs of nonprofits are overhyped, and that the levels have little impact on giving decisions.
By trimming costs to show donors that overhead accounts for the lowest possible share of a charity’s budget, organizations might be damaging their ability to carry out their mission, Sellers suggests.
“If you’re looking to reach some kind of unofficial goal that no one cares about but you, what are you giving up?” he asks. “Are you chasing away good employees because you don’t pay them enough? Are you running on antiquated systems? Are you failing to provide training?”
Favorite Charities
The study’s results should not be surprising, Sellers says. He points to organizations that are not required to file their financial data with the Internal Revenue Service and don’t advertise their overhead spending figures, groups such as religious institutions and very small nonprofits.
“If it’s not bothering all the people who give to these tiny organizations or to religious organizations, we have to ask: Why would it bother someone who gives to the American Cancer Society or Goodwill or the ACLU?” he says.
One out of five donors surveyed in the new report said they believed their favorite charity spends more than the typical charity on administrative costs. Among the study’s other findings:
- Only 11 percent of donors named favorite charities that spent less than 10 percent of their budgets on overhead.
- Twelve percent of donors said financial efficiency was the reason they picked their favorite charities.
- Nearly half of all donors thought that spending on overhead as a percentage of expenses is higher for their favorite nonprofits than it actually is, according to the charity’s informational tax filings.
- Donors age 65 and older were the most stringent in their standards yet were also the most likely to support charities that dedicated a high share of their budgets to overhead. Donors 35 or younger were more lenient but also more likely to favor charities that spend a smaller share of their budgets on overhead. While 54 percent of older donors favored organizations that spend more than 20 percent of their budgets on overhead, only 32 percent of millennials did.
The youngest generation of adults may have researched charities more recently than their elders, which could help explain their choice of leaner organizations, Sellers says. He adds that the financial circumstances of people of retirement age may affect their attitudes: “Older donors are on a tighter budget personally, and that may be spilling over into how they view charities’ spending.”
Using the Data
So, if overhead expenses matter relatively little to donors, how should a charity act upon this news? Sellers offers some strategies—and a word of caution.
The report does not suggest that “nonprofits can spend whatever they want,” Sellers says. “The industry needs to be very diligent at rooting out and identifying and getting rid of abuses. There are absolutely abuses.”
But, he adds, “There’s too much attention given to this at organizations where the overhead ratio is just sweated over: ‘Wow, we’re at 16 percent, how do we get that down to 14 percent. Our closest competitor is two points lower than us. That’s gonna kill us in fundraising.’ ”
Sellers offers some guidelines for putting the data to work. For starters, he says, “If your ratio is already 30 percent, you probably don’t need to start looking for, how do we do more spending?”
Organizations with lower spending on overhead might find more leeway in how they invest in their staff and operations. Or they could make their situation a selling point.
“If you are running a well-oiled machine, and you’re not putting yourself into a disadvantage— you’re at 6 percent, at 7 percent? Maybe you promote that,” he says. “And not just that number but the whole idea of, your money goes farther.”
But, Sellers says, if an organization pays low salaries that result in high turnover or its technology is antiquated, maybe it’s OK to loosen the purse strings. “If we’re at 18 percent and we start spending more money and pop that up to 21 percent, is that really a big deal? Can we do more to affect our cause by being a better organization, rather than an organization that spends less?”
