Below is an image of a much-appreciated comment we recently received on Facebook regarding our article about corrupt charities. This discussion highlights something very important: the dichotomy of nonprofit overhead (don’t worry, we’ll define this phrase below).
We are grateful to anyone that engages with our content, and we intend to create meaningful discussion around these exact topics, especially when they are issues that plague the nonprofit space!
Before we get into it, let’s define some terms.
“The phrase ‘Dichotomy of Overhead’ is a mouthful!”
It sure is! Let’s break it down. Merriam-Webster defines “dichotomy” as “a division or contrast between two things that are or are represented as being opposed or entirely different.” Dichotomy refers to the division of one whole idea, thought, or concept, and in this case, we are talking about it in reference to nonprofit overhead.
“But what is nonprofit overhead?”
Great question. According to the California Association of Nonprofits, “In everyday conversation, nonprofit overhead is a fuzzy term meaning administrative costs such as accounting, insurance, and the salaries of administrators.” They also talk at length about overhead in this great post. Nonprofit rating website, Guidestar, defines overhead by saying “Overhead expenses are budget items that include rent, administration costs, salaries, and bills required in order to operate.”
When it comes to overhead, something we are learning is that overhead is a tool, and like all tools, it can be used for great things or for wrong things.
The major problem we see could be defined this way: some orgs misuse funds and attempt to shield them under the “veil of overhead expenses.”
Two Instances of Misusing Overhead
In our earlier article on corruption in charities, we just wanted to call to attention two instances where this misuse seems to have been the case as reported by sources.
The first is the Red Cross incident where a large amount of funds appeared not to make the coinciding impact they were meant to, and not much was heard about why.
The second instance is the cancer-related charities list, which seemed to go as far as having the Federal Trade Commission (FTC) report the misuse of funding. The Smart Asset article (acknowledge that Smart Asset is not as credible as the FTC or NYT) was also very interesting in regard to the imbalanced use of funds for that list of charities they break down.
Instances like these, and especially the second one with the cancer-related charities, negatively affect the wonderful charities that are actually using overhead as a tool for good, like Make a Wish. It is unfortunate that the “overhead discussion” and the skepticism surrounding it was kicked off and carried on by charities that misuse funds. This skepticism crept also into donor thoughts about ALL charities across the board, creating a spiraling effect for this “overhead myth.”
Transparency is Key
In the comment we received on Facebook, our friend linked to an awesome article from Guidestar’s Rick Cohen that broke down comments from Vu Le about overhead.
LOVED the article. I agree with his position that we need to break down the taboo of overhead, and I believe the best way for us to break it down is to make overhead as transparent as possible. The way to do this, in our opinion, is by putting impact at the forefront of reporting and proving how overhead is needed to make that impact.
I believe there needs to be a stronger call to action for charities to show the impact they intend to make, the impact they actually make, and the way they spend their dollars to make it. To use Rick Cohen’s words, “When you are asked about your overhead ratio, respond by demonstrating your impact and include an anecdote about how some of those overhead costs are a part of that. Show how those infrastructure investments increase your nonprofit’s impact.”
When it comes to making “impact,” we also need to specify our definition of impact!
A charity can choose to make a wide impact or a deep impact. If we talk about, for example, a charity that serves impoverished youth, they could choose to make a wide impact (i.e. giving 1 million children a meal for a day), or make a deep impact (i.e. giving 2,000 children meals for one year). Neither are wrong, it is simply the mission of the charity.
Where the problem comes in is when we have a charity that chooses to go neither wide nor deep and only provides 2,000 children a meal for a day (the lower impact of both options) when they clearly had enough funds to go wider or deeper. This would be an inefficient use of funds.
Salary vs. Impact
On the topic of salary specifically, it is also important to promote transparency and emphasize impact. I often pose this hypothetical situation to people: “Charity A can impact 100 children with your $1. Charity B can impact 10,000 children with your $1. Which charity would you rather donate to?”
Almost undoubtedly, respondents choose Charity B because it makes more impact for their dollar. Charity B has found a more efficient way to make the same depth of impact on a wider scale.
Then, I pose the same situation, only with added information: “Charity A has a CEO that makes $45,000/year, and the charity impacts 100 children with your $1. Charity B has a CEO that makes $500,000/year and impacts 10,000 children with your $1. Which charity would you rather donate to?”
Some people choose to switch over to Charity A when they have this added information. But why? Shouldn’t it be about the impact?
And here we have the dichotomy of overhead.
In the end, overhead is a tool, one that can be used for good or for bad, for right or for wrong. We also love the TED talk that Dan Pollata gives about Nonprofit Overhead that helps explain it further.
We are no expert here, and there is surely a lot to learn. As we learn more, we are also asking for a call to transparency. We believe it is this transparency that can eliminate the skepticism that strongly contributes to the nonprofit overhead myth.
Other articles about overhead we thought you might enjoy: