The Worst (and Best) Way to Pick A Charity This Year

This giving season needs are greater and donations are falling – it’s more important than ever for donors and charities alike to make sure that every dollar goes farther. For years, people have turned to the overhead ratio – a measure of how much of each donation is spent on “programs” versus administrative and fundraising costs – to guide their choice of charity. But overhead ratios and executive salaries are useless for evaluating a nonprofit’s impact.

Now there is an alternative. In the last few years several organizations have emerged to provide donors useful – and free – information to help them choose charities that are actually good at what they do.

While the idea of sending money “straight to the beneficiaries” is tempting, nonprofit experts agree that judging charities by how much of their money goes to “programs” is counterproductive. “Achieving a low overhead ratio drives many charities to behaviors that make them less effective and means more, not less, wasted dollars,” says Paul Brest, President of the Hewlett Foundation, and co-author of Money Well Spent .

Experts cite many reasons that focusing on an overhead ratio is the worst way to choose a charity:

• It tells you nothing about the impact the charity has on people it’s trying to help;
• It discourages charities from investing in tools and expertise that would make them more effective;
• The rules for determining overhead costs are vague and every charity interprets them differently;
• Accounting experts estimate that 75% of charities calculate their overhead ratio incorrectly.

Bob Ottenhoff, president and CEO of Guidestar, notes, “Ratios can be extremely misleading. GuideStar has spent more than a decade educating the public about the dangers of judging an organization solely on its financial balance sheet. Our focus has always been on helping donors get a complete picture of a charity.” GuideStar was founded in 1994 and was the first web site to make financial and programmatic data on nonprofits easily available to the public.

Ken Berger, President and CEO of Charity Navigator, agrees that donors need to consider more than just financial ratios when choosing charities. “There is a place for financial measures, but donors need a complete picture of a charity to make a smart choice. We believe that too many donors are paying too much attention to measures like overhead.”

So what’s the alternative? Evaluate charities based on their effectiveness.

Berger notes that Charity Navigator will be launching new rankings in the next year: “Charity Navigator is revamping our ratings to increase the emphasis on effectiveness and transparency to help donors make better decisions.” That’s the same goal as Great Nonprofits, Philanthropedia, and GiveWell – organizations that were founded in the last 3 years to help individual donors find the best charities. Each provides information that hasn’t been available to donors until now: Great Nonprofits provides “user reviews” similar to those on shopping sites, Philanthropedia shares hundreds of expert perspectives on charities, and GiveWell conducts in-depth analysis to identify charities with direct evidence of impact.

“So many donors and volunteers want to know if their giving is going to make a difference. Now there are new tools for them to see which nonprofits are most deserving of their support,” says Great Nonprofits founder Perla Ni.

Summarizes Ottenhoff, “It’s understandable why people have looked at overhead ratios and executive salaries – they want to make sure their donation does the most good. The best way to do that isn’t a financial ratio, it’s information on how effective charities are.”

Now that information is increasingly available.