Many in the nonprofit sector have embraced the growing "overhead myth" campaign that seeks to reduce the emphasis on the overhead ratio (i.e., the percentage of expenses not directed toward programs). As I have mentioned here before, though the campaign has intuitive appeal and is boosted by compelling anecdotes, there is surprisingly little broad-based empirical evidence either supporting or negating it.
With this in mind, I note that a new study by Karen Sedatole (Michigan State University), Amy Swaney (Michigan State University), Michelle Yetman (University of California, Davis), and Robert Yetman (University of California, Davis) sheds some light on the topic (as well as on other topics). Their research paper, titled "Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations" looks at a large sample of nonprofits and tracks both their performance and their executives' pay across time. It does not look at whether the low overhead nonprofits are actually "better" or even whether the overhead ratio should be emphasized. But, it does speak to whether there is such an overemphasis on overhead. By examining how pay changes with performance, the paper provides large-sample and statistically-significant evidence of the pressures placed on nonprofit executives. The entire paper is available here, but here are a few notable takeaways:
- There is strong evidence that nonprofit executives are rewarded for higher revenues, but little evidence that they are rewarded for lower administrative costs (i.e., revenues are more important than "overhead").
- Nonprofit executives are incentivized to expend, rather than accumulate, revenues; how they spend such revenues is less important.
- The rewards accrued to executives for generating revenues are lowest for taxable revenues and highest for program revenues.
This represents promising research that goes a long way in helping us understand what pressures and incentives nonprofits face.