May 27, 2018
 
Study Finds Donors Are Not too Anxious about Overhead Rates

February 12, 2018 — Despite their professed concern that nonprofits spend too much on overhead, donors pay far less attention to the overhead ratio than is often assumed, a recently completed study has concluded.

The charitable sector as a whole has a reputation problem, according to the analysis, part of The Donor Mindset Study, a series of research reports about American charitable donors completed by Grey Matter Research and Opinions4Good.

Nearly six out of 10 American donors believe the typical charity spends more than a reasonable amount on overhead, the study said. In addition, donors often believe the overspending is substantial. Half of all donors who feel charities overspend also feel they typically spend at least double what they should on overhead, administration, and fundraising.

The average donor considers 19% spent on overhead to be a reasonable limit, but believes the typical charity spends 28%, the study found.

At the same time, donors often have no idea what their favorite charity actually spends on overhead. And while there are widespread perceptions that charities in general spend too much, nearly half of all donors have a favorite charity that reports an overhead ratio of 20% or higher. Ron Sellers, president of Grey Matter Research, noted that charitable organizations may need to re-evaluate the importance of keeping overhead ratios as low as possible as an element in attracting and retaining donors.

“In a variety of ways, our research demonstrates that overhead ratios are not as important to donor decisions as many people believe,” Sellers said. “Placing too much focus on keeping expenses very low can restrict available resources and harm an organization’s ability to attract and retain talent, take reasonable risks, and invest in systems and infrastructure that will aid future growth and efficiency.”

The new study, in a sense, confirms the message Dan Pallotta, president of the Cambridge-based Charity Defense Council has been championing. He maintains that one of the most detrimental questions donors and watchdog agencies can ask concerns the share of donations that goes to the cause vs. overhead, because “it makes you think that overhead is not part of the cause, that overhead steals from the cause.”

The new report notes that the sector’s poor reputation in this area may actually benefit many individual organizations: “If you believe the typical charity spends 28% on overhead, ratios as high as the low-to-mid 20s would seem lower than average, even if they’re a tick above what you consider to be reasonable spending.”

According to the report:
  • While the average donor believes 19% is a reasonable ceiling for overhead spending, nearly half of all donors name a favorite organization that has an overhead ratio exceeding this.

  • Only 11% of all donors name a favorite charity with a seriously low overhead ratio (below 10 cents on the dollar).

  • About half of all donors believe their favorite charity’s overhead ratio is higher than it actually is.

  • Among donors who feel very confident they know their favorite charity’s overhead ratio, 70% are off by at least 50%.

  • 40% of donors believe their favorite charity’s overhead ratio exceeds what they feel is a reasonable limit – yet that organization still remains their favorite charity.

  • When asked their primary reason the organization they named is their favorite charity, just 12% say it’s because the organization uses their money very efficiently.
“This research doesn’t mean an overhead ratio of 60% would be acceptable to donors. This is not a blank check for profligate spending, nor are donor perceptions the only reason to keep overhead reasonable ," Sellers said. "But at the same time, we see no evidence that scrimping to drop your overhead ratio from 19% to 16%, for example, will make your organization significantly more appealing to donors.”

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