If someone else pays for overhead, do donors still care?
Charles, Sloan and Schubert find in their study that donations decrease as overhead spending increases when donors have to pay for overhead. However, results are mixed when someone else covers overhead costs.
In recent years, sector advocates like CalNonprofits have argued that the use of overhead spending as a primary proxy of financial health and stability is intensely flawed and has brought a number of unfortunate consequences to the nonprofit sector. For example, reducing spending on overhead can negatively impact a nonprofit’s ability to initiate fundraising campaigns, invest in long term planning, sufficiently support overall infrastructure which can ultimately undermine efforts to fulfill the mission effectively (Hager et al., 2004).
In addition, it may encourage dysfunctional behavior by managers like hiding administrative expenses as a part of programmatic expenditures and underreporting of fundraising expenses (Krishnan et al., 2006; Parsons et al., 2017). Further, Hager and Flack (2004, p. 4) argue that competition to show low overhead expenses “induces nonprofit managers to under-invest in good governance, planning compliance, and risk management, collection of data for service performance evaluations and staff training”.
Overhead aversion still persists.
Our results indicate that donors are willing to allocate funds to organizations with some overhead expenses, the more so when those expenses seem reasonable or not extreme. However, when given a stark choice between no or lower rates of overhead, donors rewarded organizations those organizations having less overhead with higher donations.
Results of our study affirm the persistent evidence of overhead aversion exhibited in the literature and underscore the need to educate donors regarding the purpose of overhead expenses in the overall fiscal health of nonprofit organizations.
This study has been accepted for publication in a future issue of the American Review of Public Administration so look out for it!