Donors Are Turned Off by Overhead Costs. Here’s What Charities Can Do

 
 
Elizabeth A. Keenan and colleagues find that charitable donors are willing to stomach the idea of overhead costs—as long as they know someone else’s donation is covering them. A field study helped one organization nearly triple its solicited donations.
 
 
by Carmen Nobel

Many of us would prefer to see our philanthropic donations go directly to an organization’s core mission, rather than to administrative expenses. If we give money to Save the Children, for instance, we hope the cash goes directly to those children.

“Despite the understanding that CEOs of nonprofits need to be paid, if given the choice of where their money would go, most people donating money wouldn’t choose to contribute to the salary of the organization’s CEO,” says Elizabeth A. Keenan, an assistant professor in the Marketing unit at Harvard Business School.

Hence, donors depend on recommendations from watchdogs like CharityWatch, which tend to give higher ratings to charities with low overhead costs. But that can lead to a harmful cycle in which charities keep their overhead costs unreasonably low in order to encourage future donations—even if cutting those costs actually hampers their ability to carry out core missions.

“Most people donating money wouldn’t choose to contribute to the salary of the organization’s CEO”

“As nonprofits try so hard to pare down their overhead expenses, they end up feeding the expectation that the overhead ratio can and should be very low,” Keenan says. “As donors see that overhead is low in one organization, they expect it to be low everywhere. Some refer to it as the ‘nonprofit starvation cycle.’”

How can nonprofits avoid that cycle? One possible solution is to figure out how to overcome the aversion donors have to paying for administrative expenses. Keenan and her colleagues have spent a lot of time researching ways to do that. Their initial findings indicate that donors are willing to stomach the idea of overhead—as long as they know someone else’s donation is covering it.

A SERIES OF EXPERIMENTS

Keenan’s research on the subject began as a doctoral student at the University of California, San Diego, where she conducted a series of laboratory and field experiments with UCSD’s Uri Gneezy, a professor of economics and strategy, and Ayelet Gneezy, an associate professor of behavioral sciences and marketing. (Their studies are detailed in the article Avoiding overhead aversion in charity, published in the October 2014 issue of Science magazine.)

Donors are more reluctant to contribute if they think their
money is paying for administrative overhead. ©iStock/Koinseb

In their first experiment, the team recruited 449 undergraduates to consider which of two charities should receive a $100 donation: Kids Korps USA, an organization aimed at engaging young people in volunteerism, or charity: water, which brings clean drinking water to people in developing nations.

The experiment tested how varying the level of overhead costs would affect participants’ willingness to donate. The goal: to see whether increasing the overhead associated with donations to charity: water would decrease the likelihood to choose it over Kids Korps. (Participants were told there was no overhead associated with donations to Kids Korps.)

The results showed that participants were turned off by overhead. The higher the level of overhead associated with a donation to charity: water, the lower the percentage of participants who chose to donate to it. When they learned that donations to both charities were overhead-free, 73.3 percent of participants chose to donate to charity: water instead of Kids Korps. When they learned that 50 percent of a donation to charity: water went toward overhead, only 49.43 percent chose charity: water. But a key question remained: Were participants turned off by the idea of overhead costs in general, believing that high overhead was a sign of inefficiency or even corruption? Or were they simply averse to the notion that their own donation might go toward overhead?

To find out, the researchers tested whether participants would be more likely to donate to a charity if the overhead costs had been covered by another contributor, such as a wealthy family or foundation. That made a huge difference, says Keenan. Even when participants were informed that there was 50 percent overhead associated with donations to charity: water, 71.43 percent chose to donate to the charity after learning that the overhead costs would be covered by someone else.

AN OVERHEAD-FREE OPTION PAYS OFF IN THE REAL WORLD

Continuing to pursue the efficacy of a dedicated overhead benefactor, Keenan and her colleagues took their research to the real world, conducting a field experiment with a large education foundation. The potential donors in this study: some 40,000 recipients of a donation request letter, which asked them to give $20, $50, or $100 toward a new project. The letter recipients were divided into four groups.

In the “control” group, recipients simply received information about the foundation’s new educational initiative. In the “seed” group, recipients were also told that a private donor had already seeded the new initiative with a $10,000 donation. In the “match” group, recipients were told that a donor had offered to match every dollar given to the project, up to a total of $20,000. Finally, in the “overhead-free” group, recipients were told that a donor had given a grant to cover all the overhead costs associated with raising money for the project.

The results were significant. In the control group, 336 out of 10,000 letter recipients (or 3.36 percent) donated to the foundation. In the seed group, the number increased to 4.75 percent. In the match treatment, 4.41 percent chose to donate. And in the overhead-free treatment, a comparatively whopping 8.55 percent gave money to the foundation. There was a substantial difference in total donated dollar amounts, too. With most donors opting to give $20 apiece, the control group donated $8,040; the seed group $13,220; and the match group $12,210. But the overhead-free treatment gave $23,120. In short, offering an overhead-free option nearly tripled the donation rate relative to the control group.

NEXT STEPS TO MITIGATE AVERSION TO OVERHEAD

Several organizations have adopted the idea of overhead-free donations, Keenan says, noting that charity: water is one of them. The organization depends largely on professional philanthropists to cover overhead costs through a companion program called The Well. All donations to the charity go directly toward clean water projects.

Still, Keenan acknowledges that many in the nonprofit sector worry that enabling overhead-free donations will perpetuate the idea that overhead is a bad thing. For example, activist Dan Pallotta argues in favor of overhead in his viral TED Talk, The Way We Think about Charity Is Dead Wrong.

“Charities work so hard to basically train or teach their donor base that overhead is important and necessary,” Keenan says. “They don’t want to spoil the pot.”

Acknowledging that administrative expenses are a necessary and critical component of a nonprofit’s success, Keenan and her research partners are investigating alternative ways to mitigate overhead aversion, partially through education campaigns such as Pallotta’s. “We’re trying to figure out if there are ways to make people feel OK about the idea that their own donation might go toward overhead,” Keenan says.

They’re not having a lot of luck so far. “We’ve been vague and subtle about it, and we’ve hit them over the head with it,” she says. “And people just don’t like it. They just don’t like overhead.”

About the Author

Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.

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