Charity Navigator and the overhead myth

The then-President and CEO of Charity Navigator signed on to a letter about the Overhead Myth that you can read here if you wish.  

There are a couple of key quotes in this piece:

We write to ask for your help to end the Overhead Myth—the false conception that financial ratios are a proxy for overall nonprofit performance.

While overhead can help us identify cases of fraud or gross mismanagement and serve as a part of an organization’s dashboard of financial management metrics, it tells us nothing about the results of your work (i.e., how you meet your mission).

So, financial ratios are good for catching really egregious cases of negligence and help nonprofits with their internal metrics but aren’t really something that you should base your decision to donate to a nonprofit on if they are making an impact in their community.  So says Charity Navigator.

Now, let’s look at Charity Navigator’s rating criteria for financial effectiveness:

  • Percent of expenses spent on programs: a variant of overhead ratio
  • Administrative expense percentages: part of overhead ratio
  • Fundraising expenses: part of overhead ratio
  • Fundraising efficiency: the reciprocal of fundraising expenses and thus the same thing twice, just phrased differently
  • Primary revenue growth
  • Program expense growth
  • Working capital ratio

Four of Charity Navigator’s seven rating financial effectiveness are subsets of the overhead ratio that they claim to disavow.  If using overhead ratios to measure effectiveness is an evil practice, meet the practitioners.

Not only this, but they make the overhead ratio more arbitrary by taking out joint cost allocation.  For those who aren’t direct marketing nerds, what this means is if a mail piece is half to get a donation and half to get someone to sign a petition, 50% of the costs go to fundraising and 50% go to mission (and lobbying).

Charity Navigator says “as an advisor and advocate for donors, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.”

The problem with this is only mail and phone scripts are joint cost allocated.  Efforts like walks are determined by the nonprofit to have a certain programmatic and fundraising component (let’s say 90% mission, 10% fundraising).  So if you put a stamp on a mail piece that asks for a donation, it’s 100% fundraising according to Charity Navigator.  If you hand it out at your walk, it’s 10% fundraising.  Were it possible to make an actively negative measure worse, they did it.

It also ignores that millions of Americans relate to nonprofits only through the phone or mail.  It’s where they learn about issues and act on the causes important to them.  To mark all of this as transactional is whatever the opposite of being an advocate for donors is.

Not surprisingly, this distorted view of charity’s financials is used by the general public and the media to perpetuate the overhead myth.  Consider CBS News’ piece on Wounded Warrior Project:

What caught our attention is how the Wounded Warrior Project spends donations compared to other long-respected charities.  For example, Disabled American Veterans Charitable Service Trust spends 96 percent of its budget on vets. Fisher House devotes 91 percent. But according to public records reported by “Charity Navigator,” the Wounded Warrior Project spends 60 percent on vets.  Where is the money is going?”

Thus, Charity Navigator may talk about the problem of the overhead myth, but it’s a problem that they help keep alive.

It should be noted that days after it contributed to the CBS News hit job on Wounded Warrior Project, Charity Navigator launched on its site and email to its constituents a new piece on “finding charities that support our troops.”  A quote:

“Donors can be confident that contributions made to the higher rated charities will be spent efficiently as these charities have low overhead and fundraising costs enabling them to use more of their resources in carrying out their mission.”

But Charity Navigator abhors the overhead myth.

And Brutus is an honorable man.

Going one step further, another thing that decries is the myth that charity CEOs are overpaid.  Here’s a snippet from their FAQ:

“This question gets at the heart of one of the most common misconceptions about overhead: that employee and executive salaries are considered “overhead” expenses. In reality, compensated staff members carry out all of the organization’s functions. Specifically, the applicable portion of employee and executive salary expense are recognized or “allocated” to three functional expense categories based on the estimated time staff members devote to carrying out each of these functions: program service activities, administration, and fundraising. While there are some paid staff (such as accounting and human resource personnel) that usually devote all their time to overhead responsibilities, the vast majority of paid staff members cumulatively devote most of their time to carrying out program service activities.

As for the question of extreme salaries, our data indicate that these circumstances are relatively rare. Rather, it is far more of a problem that mid- and lower-paid direct service nonprofit employees are underpaid than overpaid. As a matter of law, tax-exempt organizations are required to ensure that the salaries and benefits they pay their executives meet the IRS’s definition of “fair and reasonable.” That definition varies from nonprofit to nonprofit; to determine what is “fair and reasonable” for a position at a specific organization, you must research what people in comparable jobs earn at nonprofits that are of similar size and that have similar missions and programs.”

Remember, Charity Navigator signed on to this.  Thus, Charity Navigator should be talking about a holistic view of executive pay, right?  They would never conflate executive pay and overhead rates, imply that CEO salaries are all overhead, or use overhead as one simple criterion for valuing a charity…

Not really.  Their page on “10 Highly-Rated Charities with Low Paid CEOssays:

The leaders of these 10 organizations run highly-rated charities, yet they earn far less than the average compensation of $150,000 reported by the over 7,000 charities rated by Charity Navigator. The low salaries help these charities, which have earned at least two consecutive 4-star ratings, devote more than 80% of their budgets to their programs and services. That means that less than 20% of your dollars are going to such costs as fundraising and administration, including the salary of the CEO.”

Not only are they looking at executive pay in a vacuum, but they are also tying it directly to — you guessed it — the overhead rate.


Image credit here

One hopes that in the long-term, Charity Navigator will either change to meet its purported beliefs, or that they are exposed for what they are: ambulance chasers if ambulance chasers also helped cause the crashes.

So if you are going to crow about your Charity Navigator ranking, please make sure it’s only the part that matters: the Accountability and Transparency sections that, other than their idiocy on privacy policies, are benign at worst and actively positive in many cases.

Because a high score on their Financial section of Charity Navigator means that you are starving yourself.  And I know that’s true because I read it from Charity Navigator.

Charity Navigator and the overhead myth

Please share your thoughts.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s