Every so often, we rewatch Dan Pallotta’s TED talk where he expounds on how people misperceive five factors that prevent nonprofits from scaling to reach their potential. Our latest viewing inspired us to look closer at overhead, compensation, and marketing, and why public perception still drives some nonprofits to base operational decisions on overhead percentages, despite efforts to reduce the importance of this imprecise metric.Components of Overhead Percentage
- C-suite wages
- Employee wages
- Capital Equipment
- Marketing & Advertising
Do Good for the World, But Not for Yourself
The idea that people should not be doing well personally while doing good for the world has led to a toxic atmosphere at some nonprofits, creating unintended consequences that reduce their ability to improve lives or protect our planet. While Pallotta traces the origins of this thought process all the way back to the Puritan movement, more recent elements have also contributed to this mindset.
Fraud and Sabotage
In 1992, then CEO of United Way of America, William Aramony, resigned amidst allegations of fraud. He was eventually convicted of 25 felony counts and given a seven-year prison sentence for diverting $1.2M from the charity for personal use.
In 2005, an Email circulated widely claiming that executives at many large national and international nonprofits were paid excessively high salaries. These claims have been debunked, but the annual sharing of the Email has led to the ongoing perception that nonprofits overspend on overhead. According to an article published by Grey Matter Research & Consulting, “The average donor considers 19% spent on overhead to be a reasonable limit, but believes the typical charity spends 28%.”
As a result of scandals and false public perception, overhead faces intense scrutiny, and misinformed people still use it when deciding where to donate.
The Overhead Myth
The perception that a nonprofit’s overhead percentage should be the sole indicator of performance became so prevalent, that in 2013 GuideStar, BBB Wise Giving Alliance, and Charity Navigator all signed on to an open letter, and launched a campaign to put the Overhead Myth to rest.
Their efforts shifted perceptions toward using impact, rather than overhead as a better performance indicator. Yet, we found that the effects of the Overhead Myth are still being felt today.
A Reality Check on Wages
Well-spent overhead is critical to running any organization and it’s required to hire and retain talent. Like it or not, nonprofits are competing for talent. One of our core principles is that nonprofit organizations should act more like corporations. And this is evident in the area of compensation. There are two practical, business-based reasons to offer competitive wages—employee retention and organizational efficiency.
According to Charity Navigator, the American Red Cross’s total revenue for 2017 was $2,676,037,116. That’s the budget of a significant international corporation. It’s reasonable that the person or people running any organization of that size and complexity should be well compensated.
Yet, being paid a reasonable wage while working for a nonprofit is still generally looked down upon—even for the people on the front lines delivering services. That’s a double standard that’s disrespectful to the people dedicating their time and energy to making the world a better place. No one should have to make a choice between helping others and putting food on their own table, saving for retirement, or paying their rent.
The Lost Opportunity Costs of Hiring and Training
The Society for Human Resource Management (SHRM) estimates the average cost-per-hire of bringing on a new employee to be $4,129. Every time you hire a new employee or train a new volunteer you’re spending money that’s not going to your programs and losing productivity. SHRM estimates that the annual voluntary turnover rate in the profit-driven sector is 12%. According to Nonprofit Quarterly, the 2016 Nonprofit Employment Practices Survey indicated that the turnover rate among nonprofits was between 16% and 19%, while whole fields of nonprofits make up “Wage Ghettos” that offer less than living wages to their frontline workers.
One of the main drivers of business is efficiency. Think about every hour of training as a lost opportunity cost, not just for the new hire, but for the trainer as well. That kills efficiency and raises your overhead. It can take several months for a new employees to ‘get up to speed’, be truly productive, and begin contributing to the mission of your organization. Retaining staff through competitive compensation increases efficiency and enhances your ability to accomplish your goals. It’s clear to us that if compensation in the nonprofit sector was on par with its profit-driven counterparts, nonprofits would see an increase in employee retention, a decrease in training costs, improved efficiency, lower overhead, and therefore a more productive and impactful organization.
A Healthy Work Environment
We live and work next to silicon valley, where the stories of excessive work space spending are legendary. The pool tables, endless energy drinks, unlimited snacks and meals, rooms of crazy designer furniture, and other seeming excesses have one purpose—to attract and retain talent.
Your work environment doesn’t need to be extravagant, but it should measure up to the profit-driven businesses against which you compete for talent and dollars. Compensation alone won’t help you retain an employee (or volunteer) if they have to work in a cramped, run-down office with old, barely functioning office equipment.
Having antiquated computers, sketchy phone systems, and broken chairs produces inefficiencies. You need modern technology to figure out which campaign strategies are most effective and to learn if your website is converting. If you want to improve the world, you have to analyze and adjust your productivity, just like a profit-driven business.
Poor working conditions increase the likelihood that otherwise dedicated people will leave your organization for one that’s better equipped to achieve success.
The Overhead Bucket
For people with an insufficient understanding of nonprofit business practices, overhead can be perceived as anything that’s not providing the goods and/or services that fulfill an organization’s mission. As a result, Marketing, Advertising, and Fundraising are sometimes lumped in with overhead, which in turn, lumps them into the poor public perception that we referenced earlier.
But that’s wrongheaded. These activities are integral to accomplishing your mission and should be given the appropriate budgets—we’ll say this again—just like your profit-driven counterparts.
Fundraising is Fundamental
Thinking back on compensation for a moment, the best Fundraiser will go where they are most appreciated. While their salary is clearly overhead, the activity of fundraising should be thought of as work required to fulfill your mission objectives.
There’s no way to sugarcoat it. In order to accomplish your goals, you need money. Nonprofits acquire a large percentage of their operating capital through fundraising. Fundraising is inexorably tied to marketing. And marketing is ultimately about outreach and education.
Marketing is Essential
You must market and advertise in order to make people aware of your cause, teach them about its impact, tell them how you are addressing it, and ask them to support your efforts—ideally on an ongoing basis. Marketing and advertising keeps you connected to your donors, deepens their engagement, and prompts them to become ongoing contributors.
In Dan Pallotta’s TED talk, he points out the power of marketing by talking about the accomplishments his organization achieved. They launched the walks for breast cancer research and AidsRides in the 1990s. Over nine years they had 182,000 participants who raised $581M—more money, more quickly, than any event in history.
They got those volunteers by purchasing full page ads in the New York Times, the Boston Globe, and running primetime radio and TV spots. He asks the audience this rhetorical question, “Do you know how many people we would have gotten if we put up flyers in the laundromat?”
Marketing drove the efforts to create awareness and encourage volunteers to participate. When you set out to do your next campaign, act like a profit-driven business that’s marketing their latest product and market your cause to the max. Marketing is an impact multiplier. Move it out of your overhead budget and place it firmly in outreach and education.
Market Today and Every Day
The modern technological landscape has changed some of the core aspects of marketing for nonprofits. While campaigns are important and big fundraisers can garner important short-term attention, you need to think about marketing as something you do every day.Your website is a marketing tool that provides value 24/7/365. Get the most out of it. There’s a tendency for both profit-driven and nonprofit businesses to think of their websites as a static element, similar to a brochure. In fact, many marketing websites are referred to as “brochure” sites. But this shouldn’t be the case. Your website is a place to engage new people, extend your reach, raise funds, re-engage donors who have dropped away, and gain earned media.
Social media is another arrow in your marketing quiver. You should be using it to drive people to your website. Get their attention by publishing a new blog post, or in-depth article. Update your donors on your progress. Set up a realistic posting schedule that you can support, and stick to it.
Check out our article on The Power of Positive Messaging to get out take on the type of content that you should publish.
Market to New Audiences
One of the things we frequently hear from our nonprofit clients is how difficult it is to attract new donors, especially young people. If you limit your marketing efforts to your existing mailing list, how do you expect to attract anyone new? You need to get the attention of new audiences by marketing to them where they are—online.
Let’s face it, no one under 30 is going to read your printed annual report. But you can get their attention with a high-quality short video that points them to your digital annual report and/or modern website. Having a marketing approach that includes an online component is vital to building your donor base of the future.
If you don’t know anything about digital marketing, start by working with an outside firm that specializes in that area. They can help you get on the right track, assist you in developing a digital strategy, and work with you to extend your brand.
Refocus the Conversation
When a potential donor gets hung up on the idea of overhead percentage, one strategy is to shift the conversation to impact. People want to know that their donations are helping your cause. Dan Pallotta touches on this in his talk, expressing the idea that people want their money to go directly to helping people. The challenge is teaching donors that overhead and marketing contribute to impact.
For more on measuring impact, check out this GuideStar blog post Your Engine of Impact: Impact Evaluation.
Find the Right Balance
We want to be clear. We’re not suggesting that you dramatically expand your overhead. Like any responsible organization, you need to carefully manage your costs. You must strike the right balance between expenditures and returns.
What we are suggesting is that you stop thinking about overhead as detracting from your mission. Think about it the way that profit-driven businesses do. They invest in their people, in their work space, and in their marketing. They do this because these investments return value and help them accomplish their goals.
You can use these same principles to accomplish your goals and increase your impact. But to do that, you need to kill off your ideas around overhead and re-examine which of your efforts are placed in the overhead bucket.