Hala Altamimi is Assistant Professor in the School of Public Affairs and Administration at the University of Kansas. Her research centers on public and nonprofit management and finance with specific interests in organizational behavior, decision-making, and result-oriented approaches to performance, including performance measurement, auditing, and evaluation.
Is Nonprofit Overhead a Need or Greed?
In the nonprofit sector, donors may hesitate to give to organizations with high overhead expenses. Yet, spending on information technology, equipment, staff training, and fundraising is critical for their success. This dilemma raises a question: how much overhead is enough?
Charity monitors recommend nonprofits not spend more than 25% of their budget on overhead. We found that overhead spending has a curvilinear relationship with program outcomes, and the optimal point is about 35%, contradicting this common rule of thumb.
Spending too little deprives nonprofits of the resources necessary to improve their production and can trigger a phenomenon called the “starvation cycle.” The cycle starts with funders’ unrealistic expectations that nonprofits should run on low overhead. Nonprofits feel pressured to meet those expectations to attract funding. They may skimp on overhead by paying low salaries, replacing paid staff with volunteers, and using outdated facilities and equipment.
Equally, spending too much on overhead may be a symptom of waste and bad management. Some charities made the headlines for lavishly spending on conferences and executive salaries. In this sense, overhead serves as a mechanism to hold nonprofits accountable for donor contributions.
We are not recommending a new benchmark for overhead spending as the appropriate levels vary from one organization to another. Instead, we join the ongoing efforts to adjust donor expectations and reduce the reliance on overhead in assessing nonprofit performance.