Is Nonprofit Overhead Too High?

How high can nonprofit overhead really go?

How high is too high?
Some rights reserved by marktollerman

In 1997, GLAAD offered me the job as their new Executive Director. They proposed a starting salary of $80,000 and I nearly plotzed. I politely turned the position down. At the time, I was making a very good living as a VP at Showtime (with a salary that was, let’s just say, a LOT more than what they had offered.)

They came back with a slightly higher offer. I signed the contract. I guess I REALLY wanted to change the world. I certainly had thought I had made a major sacrifice – more than a 50% pay cut – in what would become a win-win situation.

At the time I came on board, the organization was in a major financial crisis. I had a great team and we were able to right the ship quickly and grow substantially in both scope and impact.

Fast-forward eight years, and things were rocking. We had a boatload of major successes under our belt. As the financial situation improved over those eight years, I had gotten raises. By this point, my salary had gotten back into the general range of where I had been before I started at GLAAD.

Out comes a media “expose” about the ridiculous salaries of Executive Directors of LGBT organizations. I became Public Enemy #1 and the GLAAD board had a media crisis on its hands.

My salary fell into the dreaded category of “overhead.” And we all know that nonprofits should keep overhead as low as possible. Right?

Maybe they had a point…

According to a 2012 study by Grey Matter Research, the average American adult thinks it’s perfectly OK for nonprofits to devote 23% of total expenses to overhead (things like fundraising and administration.) These same Americans believe that nonprofits actually spend 37% on overhead. And they don’t like it.

Whatever the actual overhead percentage is for your nonprofit, this perception has an impact, particularly for fundraising. A recent Nielsen Norman Group study found that one of the biggest deterrents for people when considering an online donation is an unclear explanation of how donations are used.

So this stuff does make a difference. Overhead really should be as low as possible so people know that their contributions are going to actual programs that are directly helping people? Right?

No so fast…

NONPROFIT OVERHEAD IS A FOUR LETTER WORD

Donors and funders treat it like a four letter word. It’s not. As my friend Dan Palotta notes in his very powerful TED talk, donors don’t want to fund “overhead;” they want to fund services.

It’s all about how little a nonprofit can spend rather than what it can achieve.

PUH lease.

Riddle me these, Batmen and women. Can you effectively offer services without a top notch CEO? When you “save” $15,000 on your development director, do you not get what you pay for?

When you pay a secretary salary to the Assistant to the President, you get a secretary and not a professional assistant who can manage your board and serve as the first point of contact with the organization’s most valuable stakeholders. Then, when your data entry is so bad, you keep trying to contact a donor that has been dead for years (been there, done that).

How in the world can this be a good thing? Certainly profit-based businesses don’t abide by this double standard.

YOUR MISSION, SHOULD YOU CHOOSE TO ACCEPT IT

I want to give you a mission. Let’s change the perception of overhead. I know this is a big uphill battle.

One of my clients recently got a bunch of flak for spending “too much” on their major fundraising event. After all, they spent $2 MILLION DOLLARS!!!

But here’s the thing. They raised $6 million in the process. There’s just no way they could have put on an event of this magnitude without spending a lot of money.

But if you can show me a public company that can consistently turn $2 million into $6 million year after year, well… let me know. I want to buy that company’s Penny Stocks.

Now, without question, there’s good overhead and bad overhead.

Good overhead = Hiring an amazing development director or spending a lot on a major event that brings in a multiple of that expense.

Just like a for-profit company, nonprofits shouldn’t be wasteful. Money should be spent efficiently with a focus on value. Otherwise, it’s bad overhead.

So how can we, as a group of nonprofit leaders, start to convince the public that not all overhead is created equal?

Let’s start with our own boards.

3 WAYS TO CHANGE YOUR BOARD’S PERCEPTION OF OVERHEAD

1) Tell them how valuable it is: Yes, it’s really that simple. You do presentations at your board meetings about your program areas, right? You remind your board just how important the work is, right? Consider a presentation at an upcoming meeting that highlights the power and value of what is considered overhead.  Change their perspective. Let those folks who fall into that ‘nasty’ category find their way into the spotlight for a change.

What do I mean?

How about bringing in someone who sits at the front desk of your community center or your Y? Let them tell a few stories about clients and what that center means to the folks who come in every day. It’s time to bring “overhead” out of the closet and let the value of that work be seen and heard. And valued.

2) Don’t add to overhead in a piecemeal fashion. Oftentimes, organizations spend time talking about how overworked the staff is. And of course it’s true.  Equally as often, we wait until someone has reached the breaking point (meaning something of note has fallen through the cracks) and then we reconfigure the budget in some fashion so we can add an admin person.

Take a different approach. In your next strategic planning process, don’t just budget for the new program work but budget for increases in overhead that will pass funder muster (one more note on that at the end).

What do I mean?

If you want to grow, you need to invest. I presented a strategic plan to our board that brought my organization into new territory. They loved it. It was a three-year road map. It assumed growth. It assumed new hires. But there was something unique about it.

In year one, we added only to overhead. I mean it. Just fundraising staff. How could I possibly grow the organization without new money? That’s just plain counterintuitive.

With a great plan in hand, that recommendation made all the sense in the world to my board and that is exactly what we did. And we were “open” with our funders about this. And we raised the money and successfully executed the vision of the plan.

We explained what we were doing and why. And we brought the organization’s destination to life for them. They knew we had a plan.

3) Consider a time audit of your program staff.  OK, so this will frighten / intimidate your staff until you explain it further. Ask key staff to fill out time sheets for two weeks as if they were hotshot lawyers. In 15-minute increments, note their activities. Whether it is “found housing for homeless client,” or “opened every single door of the printer three times to try to fix the paper jam,” have them just write it down. 

Next, find a volunteer or donor that works for a management consulting firm.  Ask her/him to spend three hours of time looking at the time sheets. Ask her/him to render an opinion about how people are spending their time.

I guarantee you, the analysis will be clear. Your program staff is spending an inordinate amount of time on administrative tasks. These tasks have to be done by somebody. They are critical. But is this the best use of time for the program staff? Shouldn’t they be focusing on, oh I don’t know, programming work?

See? Your organization would be more effective, more valuable, if it had MORE overhead!

Use this analysis. Present it to your board several months before they have to approve a budget. It could really re-frame an Audit and Finance Committee discussion in a way that could enable you to pass a budget that allows you to add overhead.

WHAT ELSE CAN WE DO?

As I wrote before, changing the public perception of overhead is a big uphill battle. But I think it’s a really important one.

I’d LOVE to hear your ideas. Please add them below in the comments!

Let’s share with each other and see if we can make a real difference together.