What it looks like
A familiar question about a gift is how much goes “to the cause.” A low overhead ratio became a badge of virtue and a high one a warning sign. In 2013 the leaders of GuideStar, Charity Navigator and the BBB Wise Giving Alliance, three sources of charity information, published an open letter telling donors that overhead is a poor measure of a charity’s performance and asking them to look at transparency, governance, leadership and results instead.
Why it happens
Overhead is printed on a tax form. A cost ratio does not report impact. Gregory and Howard describe a pattern in which expectations of low overhead put pressure on organizations to underinvest in infrastructure and underreport costs. Their evidence does not show that every charity responds this way. Ann Goggins Gregory and Don Howard called this loop “the nonprofit starvation cycle.”
A ratio of costs does not by itself establish results. A charity can spend almost nothing on overhead and achieve nothing. Another can invest heavily in good systems and change thousands of lives.
No one is to blame
Asking where your money goes is a responsible instinct. The measure people reach for just can’t answer the question they are asking.
What we don’t know yet
What simple public measure could replace the overhead ratio as the default way donors judge a charity, without being gamed? That is Open Problem 6, the Overhead Replacement. The data to start from already exists: Charity Impact Media publishes sourced Form 990 spending, with no ratings attached.
Donors judge a charity by what it achieves per dollar, and fund the staff, systems and evaluation that results depend on.