If Someone Else Pays for Overhead, Do Donors Still Care?

• Author: Cleopatra Charles,Margaret F. Sloan,Peter Schubert
• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1177/0275074020913989
• Subject Matter: Articles

https://doi.org/10.1177/0275074020913989

American Review of Public Administration

2020, Vol. 50(4-5) 415 –427

© The Author(s) 2020

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DOI: 10.1177/0275074020913989

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Article

Introduction

The overhead ratio, measured by the proportion of a non-

profit organization’s expenses devoted to administration and

fundraising, that is, resources not being spent to direct mis-

sion-related work, has emerged over the years as an impor-

tant efficiency indicator for nonprofit organizations.

Although the overhead ratio provides a concise snapshot of

an organization’s short-term financial position, the indicator

is regularly criticized on various grounds, such as its inabil-

ity to comprehensively capture financial health (Knowlton,

2016), efficiency (Coupet & Berrett, 2019), effectiveness

(Gregory & Howard, 2009), or its inaccuracy due to deliber-

ate manipulation (Krishnan et al., 2006). Despite such criti-

cism, some nonprofit stakeholders continue to strongly focus

on overhead ratios. For instance, charity watchdog agencies,

such as Charity Navigator and CharityWatch, assign ratings

to charities based largely on their relative spending on over-

head. Some federated giving campaigns even provide lists of

donor information including solely the names of the organi-

zation along with its overhead ratio, making claims like,

“every dollar you donate goes directly to ____________ (fill

in the blank with whatever program they offer).” A recent

study also finds that many governmental agencies continue

to use flat-rate indirect cost policies, whereby project grants

only allow for reimbursement of administrative costs

between 0% and 10% of the entire grant (Eckhart-Queenan

et al., 2019). Similarly, nonprofit organizations themselves

promote their fiscal soundness in donor communication by

touting low overhead ratios.

First and foremost, however, nonprofit scholars have long

explored the relationship between overhead ratios and giving

decisions among private donors. Although a comprehensive

stream in the literature provides evidence of a negative rela-

tionship between overhead and donation revenue based on

archival financial data (Greenlee & Brown, 1999; Tinkelman,

1999; Weisbrod & Dominguez, 1986), scholars have in

recent years turned to experimental research methods to

clearly isolate a causal effect between cost reporting and giv-

ing behavior (Gneezy et al., 2014; Newman et al., 2019;

Portillo & Stinn, 2018; Ryazanov & Christenfeld, 2018).

In a seminal contribution to this literature, Gneezy et al.

(2014) found in a laboratory experiment that participating

students gave significantly less frequently to organizations

with a high overhead ratio, but that this effect disappeared

once participants were informed that overhead would be cov-

ered by an anonymous donor. Based on their findings, the

913989ARPXXX10.1177/0275074020913989The American Review of Public AdministrationCharles et al.

research-article2020

1Rutgers University–Newark, NJ, USA

2James Madison University, Harrisonburg, VA, USA

3Universität Hamburg, Germany

Corresponding Author:

Cleopatra Charles, Associate Professor, School of Public Affairs and

Administration, Rutgers University–Newark, 111 Washington Street,

Newark, NJ 07102, USA.

Email: cleopatra.charles@rutgers.edu

If Someone Else Pays for Overhead, Do

Donors Still Care?

Cleopatra Charles1, Margaret F. Sloan2, and Peter Schubert3

Abstract

To better evaluate the effectiveness of overhead-free donations on giving behavior, we seek to further investigate the

robustness of the findings from Gneezy etal. using a nonstudent population. In an online experiment, we test whether (a)

the level of overhead costs affects giving decisions and whether (b) overhead aversion disappears once donors are informed

that an anonymous donor has already covered all overhead costs. Results show that donations decrease as overhead

spending increases when donors have to pay for overhead. However, unlike the original article, we find mixed results when

someone else covered overhead costs. Participants exposed to a nonprofit with a 33% overhead ratio where overhead was

already covered still displayed overhead aversion. However, this aversion disappeared at a high overhead ratio of 67%. The

overall results remain unchanged after controlling for demographics. Our results hold important implications for nonprofit

organizations who must find a careful balance between appealing to donors for short-term financial gain and addressing the

need to alter skewed donor expectations toward financial efficiency in the long run.

Keywords

nonprofit, philanthropy, overhead, experiment, donations