The overhead myth and why it persists

Here is a claim you have heard, and possibly repeated: a good charity spends almost everything on programs and almost nothing on overhead. A great one keeps overhead under ten percent. If you want to know whether an organization deserves your money, check the ratio.

Every part of that is wrong, and the strange thing is that nearly everyone who works in the sector knows it's wrong. The watchdogs know. The researchers know. The foundations know. In 2013, the heads of GuideStar, Charity Navigator, and the BBB Wise Giving Alliance—the three organizations most responsible for putting the ratio in front of donors—published an open letter titled "The Overhead Myth" asking donors to stop using it as a measure of charity quality. That was more than a decade ago. The myth outlived the letter.

If you lead a small nonprofit or a church, this isn't an abstract debate. It shapes how your board budgets, how your donors judge you, and how honestly you can talk about what your work costs. So it's worth understanding where the myth came from, why it's wrong, why it survives anyway, and—most practically—what to say when a donor asks about your overhead. We'll get to the actual words.

Where the ratio obsession came from

Nobody sat down and decided that overhead ratios should define charitable worth. The ratio won by default, because it was the only number available.

Every US nonprofit above a modest size files a Form 990, and the 990 sorts expenses into three functional categories: program services, management and general, and fundraising. Those categories are public, standardized, and comparable across organizations. When the charity-rating sites emerged, they built their evaluations largely on those filings—not because expense ratios measure impact, but because expense ratios were what the paperwork made visible. You can't rate a hundred thousand organizations on outcomes nobody reports. You can rate them on a ratio everyone files.

Donors, for their part, wanted a shorthand, and this one felt intuitive. "More money to the mission" sounds like exactly what a careful giver should want. The ratio compressed a hard question—is this organization any good?—into a single number that felt like an answer. Charities noticed what donors rewarded and started advertising their own low ratios, which taught the next wave of donors that the ratio was the thing to check. The loop closed, and it has been running ever since.

Why it's wrong

Start with what "overhead" actually is: an accounting category. Management and general plus fundraising, as allocated on a tax form. It is not a measure of waste, and it is certainly not a measure of virtue. The bookkeeper who makes sure gifts are receipted correctly is overhead. The insurance that lets your volunteers serve safely is overhead. The audit that proves you're trustworthy is overhead. So is the salary of the person answering donor questions—including, note the irony, questions about overhead.

Treating that category as a moral failing produces predictable damage. An organization terrified of its ratio underpays staff until the good ones leave, runs on donated laptops and unpaid interns, skips the database, and starves the one function—fundraising—that brings in the money the mission runs on. Researchers writing in the Stanford Social Innovation Review named this pattern the nonprofit starvation cycle back in 2009: funders expect unrealistically low overhead, nonprofits underinvest to comply, the underinvestment degrades the work, and the degraded work confirms the funders' belief that spending on infrastructure is waste. A charity with 8% overhead and a burned-out staff of three isn't more effective than one with 25% overhead and systems that work. It's usually less.

There's a second problem, quieter and worse: the ratio is soft. Allocating expenses across those three categories involves judgment—is the executive director's Tuesday "program" or "management"?—and organizations under ratio pressure learn to shade their judgment. Two identical charities can report meaningfully different overhead figures based on nothing but allocation choices. Which means the ratio doesn't even measure what it claims to measure. It measures accounting aggressiveness, and it rewards the organizations most willing to stretch.

And the deepest problem is the one Dan Pallotta made famous in his 2013 TED talk: frugality is not the same thing as effectiveness. A charity is not good because it spends little on itself. It's good because it accomplishes something. The ratio can't see that, and no amount of refining it will teach it to.

Why it persists anyway

If the myth is this wrong, and the sector's own watchdogs disowned it over a decade ago, why are you still fielding questions about it?

Because it's legible. Outcomes are hard to measure, harder to compare, and different for every mission. A percentage is none of those things. One number, every charity, instantly rankable. Bad measures beat good ones whenever the bad measure is easier to read.

Because it feels like diligence. A donor who checks the ratio has done something before giving—compared, evaluated, exercised care. The feeling of due diligence is real even when the diligence isn't. Asking about overhead is how a thoughtful donor performs thoughtfulness, and there's no equally easy replacement ritual on offer.

Because it's safe. Nobody ever got criticized for citing the overhead ratio. A board member who asks "what's our overhead?" sounds prudent. A grant officer who caps indirect costs sounds rigorous. The incentives all run one direction: repeating the myth costs nothing, while challenging it requires an explanation most people haven't rehearsed. So it gets repeated.

And because charities keep feeding it. Every organization that brags "95 cents of every dollar goes to programs" buys a short-term fundraising advantage by reinforcing the exact standard that starves the sector—and quietly indicts every honest organization whose real number is higher. The myth persists in part because it's still being advertised, by us.

What honest stewardship signaling looks like

You can't fix the donor public. You can decide what your organization signals, and there's a better option than competing on a number you'd have to game to win.

Lead with outcomes. Not activity—outcomes. What changed because your organization exists this year? How many people, what happened for them, and how do you know? A small org's outcome report can be one honest page. That page does more for donor trust than any ratio, because it answers the question the ratio only pretends to answer.

Be transparent about what things cost. Real transparency isn't a low number; it's an explained one. Publish a budget a donor can actually read. Say what the bookkeeper costs and what the bookkeeper prevents. If you spend real money on fundraising, say so and say what it returns. This applies to small costs too. Platform and processing fees quietly take a percentage of every online gift, and most organizations have never calculated what that adds up to—our donation fee calculator will tell you in about a minute. Knowing your real costs, and being willing to name them, is the substance the ratio counterfeits.

Explain your budget with a straight face. This is the courage part. When your overhead runs 25% because you finally pay a livable salary and bought a donor database that works, the stewardship move is not to allocate your way down to 15%. It's to stand behind the 25% and explain what it buys. Donors can absorb an honest number with a reason attached. What erodes trust is the number that turns out to have been massaged.

When a donor asks about overhead

Someone will ask. Often it's your most engaged donor, trying to be responsible with the only tool anyone ever handed them. Don't get defensive, and don't recite the ratio and change the subject. Answer the question underneath the question—can I trust you with my money?—which is the one they actually care about.

Here are words you can use, adjusted to your numbers:

"It's around 22% this year, and I'd rather tell you what's in it than just give you the number. It's our bookkeeper, our insurance, our audit, and part of my salary—the things that make sure your gift goes where we said it would and that we're still here next year. I know the old advice says to look for a low ratio. The watchdog groups themselves—Charity Navigator, GuideStar, the BBB—actually published a letter asking donors to stop using it that way, because it punishes organizations for paying staff fairly and keeping decent systems. What I'd rather show you is what your gift accomplished. Can I walk you through what changed for the people we serve last year?"

Four moves, and each one is doing work: give the real number without flinching, translate it into concrete things the donor already believes in, gently retire the myth with the sector's own authority rather than your opinion, and pivot to outcomes—the answer to the question they were really asking.

If the donor pushes back, don't fight. Some people hold the ratio the way people hold any shorthand they've trusted for thirty years, and you won't argue them out of it in one conversation. You'll persuade them the way trust is always built: by being the organization whose numbers, whenever they look, mean what they appear to mean.

Our position, since we hold one: the overhead ratio measures allocation choices, not stewardship, and a small organization should stop competing on it—answer it honestly when asked, then signal trust with outcomes and an explained budget instead. The ratio survives because it's easy. You're not in the easy business.

This piece is part of our Why People Give pillar, on what actually moves donors—and trust, not arithmetic, is most of it.