Problems with Using 'Second-Best' Measures to Evaluate Nonprofit Performance

Donors and other stakeholders in nonprofit organizations often judge them by two measures. One is the percent of their spending that goes to programs, rather than towards the “overhead” fundraising or management and general functions. The second is their fundraising efficiency, defined as fundraising expenses as a fraction of donations raised. This article synthesizes prior literature and explains why these two measures are poor metrics for judging nonprofit performance and legitimacy. Academic research shows that donors do in fact use these ratios, and that managers react to donor “overhead aversion” by a combination of lobbying for looser rules, cutting overhead costs, distorting accounting, and pushing back against the use of these ratios by monitors and donors. It also reviews some current efforts to educate donors and to change charity monitor rating practices