Imagine a car company advertising as follows: “90c of any dollar you pay for your car goes directly to building cars. Only 10% of our expenses go into planning, designing, and advertising them.” Such a campaign strategy would seem patently bizarre; when buying a product few of us are interested in how much went into administration, all we care about is what we get for our money. Overhead ratio (the proportion of money going into administration) is irrelevant; only cost-effectiveness matters.
This common sense approach to purchasing goods or services does not seem to translate into the non-profit sector, however. Consider the following advertisement by the organisation CARE: “More than 90 percent of our expended resources – among the highest of all philanthropic organisations – support our poverty-fighting projects around the world. Less than 10 percent of expended resources go toward administrative and fundraising costs.”
CARE campaign strategy is quite common for a non-profit. Many charities attempt to win donors by emphasising their low overhead ratio. Perhaps they are right to so do, as more than a third of US citizens believe that charities should spend much less on administration. Further, lab studies have shown that people tend to donate more to charities with low overhead ratios. Consequently, in order to fulfil donors’ expectations charities are forced to keep their overheads small as illustrated in Dan Pallotta’s TED talk.
Few donors are able to identify the irrelevance of overhead ratio to effective giving. The interventions of some charities are far more cost-effective than others, so that even if only a small percentage of donated money reaches the destination, the overall impact will be much more beneficial than a larger percentage of donations for a less effective intervention.
The views, opinions and positions expressed by these authors and blogs are theirs and do not necessarily represent that of the Bioethics Research Library and Kennedy Institute of Ethics or Georgetown University.