Who cares about charities’ overhead ratios?

By Felix Salmon
December 2, 2009
blogging and tweeting and putting out press releases all trying to "kill the myth of overhead ratios":


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Tim Ogden is on the warparth, blogging and tweeting and putting out press releases all trying to “kill the myth of overhead ratios”:

The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio.

I’m with Tim on the importance of looking at outputs rather than inputs — although of course that’s harder than just looking at a single unreliable metric.

But is it really true that donors in general have been relying to a great degree on overhead ratios? Allison Fine seems to think so. If it’s really the case that large number of philanthropists have been using overhead rates as a proxy for effectiveness, the world of corporate philanthropy clearly needs much more shaking up than I’d thought.

On an individual level, I think that people generally give to causes they believe in, or because of some personal connection to the non-profit in question: I can’t believe that overhead ratios play a huge role in the decision-making process, although once you’ve started supporting a certain charity, looking at a low overhead ratio can help you feel that much better about your decision.

But if you are one of the people for whom overhead ratios are very important, then go read Tim’s post. You’re part of the problem, providing incentives for charities to spend extra effort fudging their numbers, as opposed to actually doing good in the world. And you’re also contributing to the slightly poisonous idea that there’s something morally dubious about non-profit workers being paid for what they do. This Christmas, I’m even thinking of giving money straight to non-profit employees, rather than to the charity itself, as a way of saying thank-you for all the amazing (and extremely underpaid) work that they do.

9 comments

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I agree with you. I don’t think donors, particularly small donors, are as focused on overhead ratios as accused. The problem has been that large individual and institutional donors have been looking at ratios to filter worthy candidates.That said, some evidence shows that large donors don’t care enough about performance measurement, the alternative to ratios, to spend the time it takes to review it.http://www.ssireview.org/articles/ent ry/why_measure/I teach my nonprofit management students that performance measurement should always be about improving what you do, not marketing to donors. If the measurements can sway donors, fine, but that’s not the reason to measure.

Posted by Aaron | Report as abusive

f. salamon…….. start writing about charles rangle, the theif, crook, and corrupt politician. You should be writing an article on and about him every day until such time as they throw his ass out where it belongs…in the gutter. Grab him by the balls and tell him he is a crook.Dick Hagopian

Posted by richard hagopian | Report as abusive

Felix,Thanks for your support on this.Unfortunately people do pay a great deal of attention to overhead ratios–not least because they are told to do so in countless articles in the media this time of year. For instance Forbes just created a useless list of charities that ranks them by overhead ratio.I certainly commend your thought of giving directly to non-profit employees. Another similar tack to take is to make very clear that any gift you give to a charity is “undesignated” or even specifically for “operating expenses.” That way you also get the tax deduction.But the best thing, in my humble opinion that you can do this year, is to convince your financial blogging brethren (and sistren) to pick up on this story. We’ve got a good decade of misinformation to fight.Tim

““undesignated” or even specifically for “operating expenses.”How do you know that isn’t going to go to pad the salary of the charity’s management, rather than the people doing the work?That’s basically what people are concerned about. They don’t want to end up giving money to a charity that turns out to be a bunch of highly-paid managers that spends little or nothing on actual charity work because they spend all the donations on themselves and on marketing efforts to generate yet more donations. ie, things like the United Homeless Organization scam.

Posted by Jon H | Report as abusive

I have a personal example:For the longest time, I refused to give to the united way because of their “egregious” overhead ratio and donated directly to two small non-profits. I now choose to donate to the UW because there are many good charities that cannot afford a “fund raising strategy”.The vast majority of my charitable contributions goes to a health and human services organization in my neighborhood. In general, their mission is to get the homeless off the street and those that want to stay off the street are offered job training, more permanent shelter, etc. However, I choose their organization over an almost identical one because of better overhead ratio. This is wrong? If so, why? If my dollar can be stretched to service more people in my neighborhood, isn’t this better?(Both organizations, when compared to the generic “soup kitchens”, look like they have very poor ratios.)

Posted by WSJevons | Report as abusive

@Jon HKeep in mind that charities that minimize their overhead costs are more likely to waste your money–by spending it on programs that don’t work. Is that any better than spending too much on executive’s salaries–the vast majority of whom make far less than they could in the for-profit sector?Charity frauds like UHO are going to fudge their overhead ratios anyway so it really doesn’t tell you much. Independent review agencies have concluded that 75% of charities calculate their overhead costs incorrectly. So even if the number meant anything, the data actually available are meaningless.So what to do? Take a bit more time and investigate the charities. There are now a number of organizations that can give you better information about effectiveness. Thry GiveWell, Great Nonprofits and Philanthropedia for a start.(note that I serve on GiveWell’s board)

Loved your points…just fyi, it is “homed” not “honed” in your opening paragraph about banks.Betsy

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