Nonprofit overhead: In defense of CEO salaries and shopping locally

Tivoni Devor’s “Getting Good Done” column focuses on new models of enacting impact.

The general definition of nonprofit overhead is waste — money that nonprofits do not use to further their mission.

Donors and funders hate it and try to limit it, journalists love it because it’s a lazy way to “get” nonprofits, and nonprofits starve themselves to death denying that it is needed cost to accomplish their mission.

The real truth is that every dollar a nonprofit spends on the public good is not waste; every dollar that a nonprofit spends that creates a measurable outcome for the public good is not a wasted dollar. Nonprofits need to be better and more transparent about how every dollar is spent and how every dollar they spend creates impact.

First, let’s talk about nonprofit salaries. Nonprofits salaries exist in a paradox of where it is expected that you will be paid less than your for-profit colleagues, yet nonprofit CEOs are always attacked for making too much money. Most nonprofit CEOs are not working a regular 40 hours a week — most are working double that.

Many who work in health and human services are essentially on call 24/7, and many CEOs who are making six or seven figures are managing enterprise-level nonprofit corporations that provide critical services to the city and are simply “too big to fail.”

For example, consider the big one, University of Pennsylvania. Its president, Dr. Amy Gutmann, earns over $3.5 million per year. Penn is the largest employer in the city, employing over 39,000 people (including at its health system), with $23.1 billion in assets in the 2016-2017 fiscal year. Her pay is a minuscule percentage of the revenue she is responsible for.

The average salary at Penn is $81,000, according to PayScale — meaning Penn’s CEO pay ratio is about 43:1. In the corporate world it’s over 300:1.

When funders are reviewing the budgets of grant submissions, they should be checking to see if the staff is earning a fair wage. Nonprofits should be transparent and proud to answer these questions.

At the other end of the scale, minimum wage in Pennsylvania is $7.25. Do you really want to be paying people on the front lines fighting poverty poverty wages? While this lowers “overhead,” it perpetuates the problem. Nonprofits that work for the city are mandated to pay a minimum wage of $12.20. While this is better, organization can do get waivers to pay under this amount. This low pay scale keeps people in poverty, especially if they have children.

Funders and donors should not be asking, “How low is your overhead?” They should be asking, “What is your organization’s CEO-to-average-employee pay ratio?” They should be asking, “Does the organization has a living wage policy?”

When funders are reviewing the budgets of grant submissions, they should be checking to see if the staff is earning a fair wage. Nonprofits should be transparent and proud to answer these questions.

Another area that is lumped into overhead is various professional services, consultants, supplies, etc. This supposed weakness can also be a strength. Nonprofits could save a lot on overhead by being low-price-driven, getting everything they can from Walmart and Amazon (and getting that sweet, sweet Amazon Smile giveback) — but this is how nonprofits start to starve their missions.

Consider this: What is the public good of shopping at these places? Doesn’t supporting these types of businesses run counter to the goals of your organization, and the overall concept of a just society? Wouldn’t your donors be happier knowing that their dollars are being spent on local- and minority owned-businesses then going to the Waltons or Jeff Bezos?

Nonprofits should be shouting about how much of their spending happens at locally owned, minority-owned, women-owned, veteran-owned or disabled-owned businesses. There is a multiplier effect in spending locally that shows that for every $100 spent at a locally owned business, $45 of that is re-spent locally, while national chains only spend $14 of that sale locally.

So instead of talking about your overhead rate and how small you can make it, I propose using these three metrics that show how your organization is maximizing the public good with every dollar you receive:

• CEO-to-average-salary ratio
• Commitment to fair wages and benefits (i.e. keeping your lowest wage earners above the poverty line)
• Amount of money spent on local businesses owned by minorities, by women, etc.

I believe that donors and funders are becoming more sophisticated in who they give to and what they are looking for. Being transparent about how their money is spent, even if more of it goes to things like salaries and locally sourced products and services, will give your benefactors more faith in your organization’s ability to do good.