Understanding the “Overhead” Myth

In our monthly column from Karen Minogue, Waccamaw Wisdom, we unpack the latest in philanthropy and offer tips to make your giving more effective. Topic suggestions welcome at communications@mywcf.org.

For those unfamiliar with the term “overhead” or “overhead ratio,” it refers to the amount of money a nonprofit spends on its mission versus the money it spends on overhead costs. Overhead costs include things like rent, employee salaries, administrative costs and bills. Donors are often hyper-aware of charities’ overhead costs, citing watchdog groups that maintain that overhead costs should be kept at a bare minimum as a sign of nonprofit effectiveness.

Unfortunately, this perspective can ultimately hurt nonprofits that are consequently starved for resources and unable to carry out their missions to help the community – everyone’s goal at the end of the day.

The conversation heated up when Dan Pallotta presented his now-famous TED Talk in March 2013 called “The way we think about charity is dead wrong”.

The video is worth watching if you haven’t seen it. Pallotta cites the double standard that drives our “broken relationship to charities” and proposes that nonprofits be rewarded for their effectiveness instead of criticized for what they spend on overhead. Pallotta’s talk set the stage for a pointed conversation and lively debate about the use of overhead ratios in the nonprofit world that truly resonates.

The bottom line and overarching message is that when it comes to overhead, the public should take some valuable lessons from the private sector – and would do well to heed some of them.

Perhaps the most important lesson is that it is critical for nonprofits to make investments in recruiting and retaining talent. Talent is the “magic” and proven ingredient. To paraphrase the author of Good to Great, Jim Collins, you must have the right people on the bus, and once you do, they will figure out where and how to drive it. With the wrong people, you can’t go very far.

The other important lesson is for nonprofits to retain good employees. Keeping good employees is no accident and companies in the corporate sector take great pains to do so by investing substantial funds in developing solid retention programs, including competitive benefits and professional development to increase capacity and expertise. The public must understand the importance of supporting the infrastructure a nonprofit requires to carry out its mission, vision and programs.

So in thinking about organizations that you wish to support, remember that the overhead ratio is only one tool for evaluating nonprofit effectiveness. Others things to consider could include strong leadership, transparency in operations and successful outcomes over time.

By supporting organizations with an unrestricted gift, nonprofits have the flexibility to use the funds where they’re needed most and invest in a capable, effective staff. Ultimately, this will strengthen their ability to carry out their missions and make an impact in our community.

Waccamaw Community Foundation is your first resource for all things charitable. We are here through the year-end giving season to talk to you about the overhead myth, the charitable sector and how you can make your philanthropic impact.

Please give Karen Minogue at call at 843-357-4483 or email her at karenm@mywcf.org.  She is poised to help you set up a charitable fund in as little as one day. Just remember that calendar year-end is quickly approaching if you would like to make a gift or receive a tax deduction for 2016.

Year-end gifts to Waccamaw Community Foundation should be postmarked by December 31st. For gifts of appreciated stock and mutual funds, please allow at least one week for the transaction. The gift date is the date we receive the asset, not the date you instruct your broker to initiate the transaction.