Overhead cost ratios are a poor metric for judging the effectiveness of charities and often lead charities to underinvest in skilled labour and necessary infrastructure, according to a report published on IZA World of Labor.
The report, Are Overhead Costs a Good Guide for Charitable Giving, is by economist Jonathan Meer (pictured) from Texas A&M University. It states that while donors often focus on overhead costs when deciding where to give, there appears to be a little connection between this metric and a charity’s effectiveness.
In fact, the report finds, too great a focus on overhead costs can lead to counterproductive outcomes for charities, such as underinvestment in infrastructure, staff, and administrative support in an attempt to keep costs down, which then hampers their effectiveness.
The report therefore suggests that charities first examine whether donors care about overhead costs, whether they are good measures of charity effectiveness, and the effects a focus on overhead costs has on charities.
“This focus [on overhead] hurts non-profit organisations’ effectiveness by limiting their ability to compete in the labour market and by altering their administrative structure in a counterproductive way. Alternative measures based on the true impact of a charity’s activities would be far more useful.”