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Fifteen percent. That’s what our society today expects a nonprofit organization to spend on overhead to be considered efficient and successful, or at the very least, honest. The thought is that if an organization is spending 15 percent of its budget on operating costs, it is putting the remaining 85 percent back into the work it does, to the benefit of the recipients or community the nonprofit serves.
When people talk about overhead, they’re referring to the general operating costs of an organization. What makes the work happen. It’s the phone bills to field or make calls on behalf of the organization. It’s the internet access to build a credible website. Sometimes referred to as infrastructure, it’s anything you can buy at Staples or Office Max – from the mundane, such as copy paper and ink for the printer to the office furniture – and a place to put it all: rental space for the office itself.
And nonprofits are being punished for needing it—or needing more of it than donors think is necessary to operate a healthy business.
“In the nonprofit world we suffer from presenting ourselves to the [rest of the] world on a cost basis. The only sign of success is that we don’t have [significant operating costs]. How does that lead to success? No one else is held to that,” says Curtis Klotz, chief financial officer of the Nonprofits Assistance Fund. “Unlike anybody else producing, like a for-profit or any other venture where people are judged on value, nonprofits are judged on cost. It’s a double standard in my mind.”
Fifteen percent. That’s supposed to cover everything that’s not fundraising or working on the mission itself. Fifteen percent. For rent, for the bills, for supplies. And, of course, it also covers employee payroll and executive salaries. It is on this latter point that the public seems to gnaw the most.
Myth Building
It’s hard to pinpoint exactly when or how people began to believe that was a realistic number for nonprofits to spend on operations, but cycles of economic recession seem to strengthened it. When the economy is tight and people have less disposable income, they want to make sure any money they are able to donate goes to the benefit of whichever group is to receive help.
And in the wake of scandals such as William Aramony’s defrauding of the United Way 25 years ago or the firing of Wounded Warrior Project’s Steven Nardizzi and Al Giordano (CEO and COO, respectively) just last year, under allegations of misspending, it’s understandable that the general public wants to know that their money is going to be used for good.
As such, many believe the most straight-forward way to tell if an organization is spending their money “correctly” is to look at how much, on the dollar, the organization spends on its mission versus how much money the executive officers make.
In fact, it’s those two nuggets of information that seems to get stuck in the craw of people who make infographics. Numbers, set up in easy-to-read charts or graphs, with a click-bait headline decrying charity spending or nonprofit CEO salaries, and in a matter of seconds another user or 100 have had a seed planted that maybe they should reevaluate their charity of choice. Such infographics make the social media rounds every winter holiday season with the same contagiousness as the germs kids brings home from school.
“They’re out of context, misquoted, and [sometimes] factually inaccurate,” laments Klotz, expressing his frustration when he sees friends of his sharing the erroneous information.
Some of those infographics share numbers that are, allegedly, what specific nonprofit CEOs earn and, again allegedly, how much of a dollar the same nonprofit spends on their mission. Other infographics list perks or benefits, real or imagined, that specific charity executives receive, such as the juicy but completely false tidbit that someone running a specific, large, and well-known charity organization uses a Rolls Royce.
The images often celebrate the organizations with CEOs that (allegedly) have what the creators feel is a reasonable salary, do not receive a salary, or whose salaries put them squarely living below the poverty level if they have a family.
And so in the era of 24/7 interconnectedness, the nonprofit industry faces a bit of an uphill battle convincing everyone else that 15 percent falls well short of what is needed to run a charity effectively.
Myth Busting
Then, in short order, a couple of important things happened. In 2013 Dan Pallotta gave a TED talk “The Way We Think About Charity is Dead Wrong,” which went viral, and not long after that a consortium of groups associated with the nonprofit sector launched a campaign to end the Overhead Myth.
That brings us to today. The first two and most important things nonprofit organizations can do to help bring down the Myth are to be honest and realistic where it comes to money.
“The first thing nonprofits must do is to make sure the salaries they pay their executives are in line with what other nonprofits of a similar size, with similar mission and programs, are paying their leadership,” explains Gabe Cohen, senior director of marketing with GuideStar, one of the groups leading the way to dismantle the Overhead Myth.
Cohen recommends nonprofit leaders use peer comparisons such as the GuideStar Nonprofit Compensation Report to determine what a reasonable salary for their executives is.
“Once they have confirmed that their salaries aligned, they shouldn’t be shy about sharing this information with their stakeholders. Also, it helps to find for-profit salaries as a comparison—just because we are changing the world for the better doesn’t mean we shouldn’t earn a fair living,” he continues. “Finally, this situation comes down to clarity—how clearly can you justify your executives’ salaries to your stakeholders? When determining executive salaries, keep the optics of that decision in mind.”
GuideStar also published its Six Tips for Busting the Overhead Myth to help those in nonprofit leadership positions go further with the quest. But sometimes a leader does the best work when he or she admits when they don’t know something and need the help of a professional.
“We have done a lot to try to channel those perceptions. We do a lot of training around financial management,” Klotz says, explaining Nonprofist Assistance Fund’s approach to helping nonprofits work to, among other things, get their operating expenses in line with where they need to be so that they can make a difference. “We don’t predicate the way we teach nonprofit financial health by cutting personnel and salaries. We don’t teach that at all. We think that high functioning, talented, well-paid staff is what the nonprofit world thrives on. Across the board, salaries are the largest line item and it should be because it’s people doing stuff.”
Develop a Stronger Core
That’s what it comes down to, of course. It’s generally understood that there’s not much money to be made in the nonprofit sector but people need to get paid for doing stuff and they deserve to be paid enough to live on, at least. To do that, nonprofit organizations, individually and together, need to reset minds: those of the donors and their own as well.
“Nonprofits can move the conversation beyond the Overhead Myth by shifting focus to the measurement of their impact,” Cohen says. “Donors and funders crave information about effectiveness, and in the absence of that information, are forced to rely on what they have. In too many cases, that has meant looking at overhead ratios. Nonprofits should spend time tracking, evaluating, and sharing the difference they are making toward their missions. This data will give donors evidence of each organization’s value.”
Getting the right handle on finances and being clear with those finances will strengthen the organization from the inside. Like a human’s core muscles, which help make a sturdier individual, one who can stand straighter, and in the long run is stronger than someone with weak core muscles, a strong core as Klotz calls it, makes for a stronger organization.
“Investing in the core of an organization is the smartest, wisest, most prudent, financially-wise decision to make for an organization and that includes all the things we’ve come to be suspect of,” he explains. “Investing in the core does not diminish or take away from the programs. Investing in the core is the way those programs succeed and thrive in the long term, and that makes the biggest change in the world. We have to set ourselves upright, go do good work and then have a good response, rather than thinking that investing in the core takes away from our mission.”
The Right Stuff
And once the thinking shifts, once organizations are willing to take that chance, to move beyond the 15 percent and invest more in strengthening their core, things should fall into place quickly, allowing the nonprofit to meet mission goals more effectively.
“For me when a 501(c)(3) gets it right, they start thinking and seeing overhead and all the administrative costs and indirect costs, the whole mix of language, they see it’s core mission support and realize it’s a core mission rather than a slice of the pie,” Klotz says.
“What’s at its core, infrastructure, that is important. It’s not incidental, it’s not a diminishment of program, it’s the foundation of it.”
Klotz illustrates his point – literally – in his blog post Balancing the Mission Checkbook: A Graphic Re-visioning of Nonprofit Overhead, in which he shows just how everything fits together in concentric circles, like tree rings, rather than slices of a pie that sit idly side-by-side.
What it comes down to, really, is that with the Overhead Myth hanging, well, overhead, it becomes a worry or a stressor that takes away from the missions and goals of the organization, which in turn makes it hard to meet those same goals effectively.
Looking Forward
As with anything, there are naysayers who opine that by reinvesting in the organization, addressing overhead adequately and paying the leadership more in some cases will work against nonprofit organizations. That concern circles back to the worry of fraud or financial mismanagement. And those concerns are valid.
“Of course it’s always the bad actors, and there have been, of course, scandals and frauds and excesses. I get that, people are going to point to that. They’re not representative of the vast majority – 99.9% of the nonprofit world, where people are driven by passion, commitment, and that’s what fuels their work, whether they’re paid appropriately or not,” says Klotz.
But those previously referenced scandals and fears of money not being well-spent are the reason organizations need to share their financial information honestly and openly; doing so will show how everything fits together, rather than cherry picked information selected to emphasize a specific interpretation.
“At GuideStar, we believe that an abundance of meaningful information about organizations could transform how people talk about social good in the next five to 10 years. Finances will not be viewed in isolation, but rather as part of a larger story—the story of the difference the organization is making toward its mission. Measurements of progress will be front and center, and overhead ratios will be used as a much smaller piece of the puzzle when determining an organization’s overall health,” Cohen says.
Progress versus cost is double standard by which nonprofits are judged, but where nonprofits might very well be able to hold their own.
“Where I think we should be spending money instead of arguing about the overhead myth, is where we create value. We don’t go to Apple to ask how much they spent on R&D on the newest iPhone. We just buy the iPhone. Yes, we can consider forces of competition if we just went to nonprofits and said ‘we need this done, who can get it done most creatively?’ and rather than figure out if they spent money on this or that, we look at what are the results of that group and put our money where great results are. Let them figure out where to spend the money for staffing, infrastructure. That’s the freedom that for-profits have that the contributor world doesn’t give us,” Klotz says. “Maybe the nonprofit world is finally realizing that it’s not a lesser calling or lesser service to the world.
