Philanthropy Action

News & Commentary


The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio. The ratio is a measure of how much of each dollar donated goes to “programs” versus other costs like executive salaries and fundraising. It’s understandable that many donors want as much money as possible to go to people in need.

But donors who use overhead ratios to evaluate charities are doing more harm than good.

There are plenty of reasons that overhead ratios are meaningless as a measure of effective charities:

• It tells you nothing about the impact the charity has on people it’s trying to help
• The rules for determining overhead costs are vague and every charity interprets them differently
• Accounting experts estimate that 75% of charities calculate their overhead ratio incorrectly
• It discourages charities from investing in tools and expertise that would make them more effective

In short, picking a charity based on the lowest overhead ratio is like buying the cheapest car that money can buy. You might spend less in the short run but it’s inevitably going to let you down.

That of course doesn’t mean that all financial data about a charity should be ignored. Smart donors should consider a charity’s finances when making a decision. But the question donors should be asking is, “How much of your budget are you spending on making sure your programs are effective?“

Until the new year we’ll be writing at least once a week about the harm that the use of overhead ratios does. We’re joining with a number of organizations to put a stop to donors’ reliance on overhead ratios. Together, Philanthropy Action, Charity Navigator, GiveWell (Note: I serve on GiveWell’s board), Great Nonprofits, Guidestar and Philanthropedia have issued a press release today explaining why you shouldn’t use overhead ratios and what some alternatives are.

We hope you’ll join us by blogging, tweeting, facebooking, emailing, and of course, talking to your friends, neighbors and co-workers. Tell them that overhead ratios are the worst way to pick a charity this year.

You can download the press release here.