How Much Overhead is Reasonable?

The average American adult believes it is reasonable for nonprofit organizations to spend 23 cents out of every dollar on overhead expenses such as fundraising and administration. The problem is, that same average adult believes nonprofits actually spend 37 cents out of every dollar on overhead – in other words, 60% more than they should.

These figures come from a new study conducted by Grey Matter Research (Phoenix, Arizona) among a demographically representative sample of 1,011 American adults. The study is titled Where’d My Money Go?, and is a follow-up to a 2008 study of the same name.

Although the numbers above reflect averages for the U.S. population, the reality is that there is tremendous diversity in what Americans believe nonprofits should spend and do spend on overhead.

In terms of what is seen as reasonable for nonprofits to spend, 18% say anything over 9 cents on the dollar is too much (and most of them believe it should be five cents or less out of every dollar going to overhead). On the other hand, 18% believe 40 cents on the dollar (or even more) is quite reasonable.

The wide variety of opinion also exists for perceptions of what nonprofits actually spend on overhead. Twenty-three percent believe the typical charitable organization spends under 20 cents out of every dollar on overhead, while at the other end of the spectrum, 14% believe at least 70 cents out of every dollar is spent on things such as fundraising and administration.

In fact, 35% of all Americans believe the typical nonprofit spends at least half of its money on overhead expenses.

Grey Matter Research directly compared the answers to both of these questions for every respondent. This comparison shows 25% believe the typical nonprofit organization spends exactly what is reasonable on overhead (for example, if a person says 20% is reasonable, that person also says the typical organization spends 20% on overhead). Thirteen percent feel nonprofits generally spend less than whatever threshold they personally feel is reasonable. But this leaves 62% who believe nonprofits typically spend more than is reasonable on overhead expenses.

One very interesting insight compares perceptions of nonprofits to actual donor behavior. It might seem logical that people who have negative perceptions of the financial efficiency of nonprofits would be less likely to give, or at least might give less money. There is no way to tell from this study whether these perceptions have any impact on actual donor behavior (e.g. whether someone who gave $500 last year might have given $800 if they thought better of the industry), but the data does show that there is no real difference in perceptions according to whether people support nonprofit organizations or not, nor whether they support a local place of worship or not.

In fact, among donors, people who gave at least $1,000 to nonprofit organizations (excluding local places of worship) in the last year were the most likely to say nonprofits typically spend more than is reasonable on overhead. Seventy-six percent of the larger donors have this complaint, compared to 56% of people who gave $100 to $999, and 51% among donors who gave under $100 to nonprofits in the last year.

Ron Sellers, president of Grey Matter Research, noted that it’s possible negative perceptions of the industry could actually encourage giving to some organizations. “Consumer behavior is rarely straightforward ,” Sellers explained. “It’s entirely possible that someone could have concerns about overspending by nonprofits, but find a few organizations about which they don’t have that concern. It would be much like someone who thinks most politicians are crooks finding a candidate they feel is honest – the contrast could make their support of that candidate especially enthusiastic.”

But Sellers also pointed out that negative perceptions of nonprofits in general can serve as a barrier to individual organizations prospecting for new donors. “If someone believes charitable organizations typically spend too much on overhead, they’ll tend to believe that of all organizations with which they are not familiar. So when they’re approached by an organization for the first time, they will likely see that organization in the same light by which they see the whole industry. That’s a barrier to giving that organizations need to overcome. Many people see nonprofits as guilty until proven innocent, not the other way around,” he said.