A lot of charitable watchdogs, such as Charity Navigator, divide the ways charities spend money into “program expenses” and “overhead.” Program expenses are money that the charity spends on its actual program: it’s the money that goes to buy malaria nets, stock the shelves with canned food, or pay the veterinarians who help the cute puppies with rare diseases. Overhead includes administrative and fundraising expenses. Administrative expenses are those associated with management and general operations.
It makes sense that people would care about overhead. In general, scam charities tend to spend very little on program expenses and a lot on overhead. If a charity claims to help cure rare diseases in cute puppies, and they’ve spend ten dollars on antibiotics for puppies, ten million dollars on fundraising, and twenty million dollars on the CEO’s salary and team-building trips to Tahiti, this is probably not a real charity.
However, concentrating too much on overhead can actually lead to charities becoming less efficient. Certain kinds of charities spend more on administration and fundraising than other kinds of charities do. For example, Charity Navigator notes, a food bank that takes donated canned goods will not spend very much on administration at all. Conversely, a charity that gives people cash might spend more money on administration, because they have to do accounting to keep track of all the cash. But it’s totally possible that the latter charity does better at helping poor people eat.
If charities are focusing on getting their overhead expenses as low as possible, it can lead to the charity actually being less efficient. For example, the office staff at a domestic violence shelter might use computers from 2008 because replacing the computers would count as overhead. Or they might underpay their managers, which means the managers burn out, quit, and take a bunch of institutional knowledge with them. Or they might avoid hiring an administrative assistant, which means that social workers spend time filling out forms instead of helping people.
Imagine that you were trying to buy a pair of shoes. You might look at how expensive the shoes are, or how well-made they are, or how good the conditions in the factory were for the employees, or whether they are fashionable; these are all reasonable things to take into account when you’re buying shoes. What you would not do is say “wow, I’m going to buy these shoes, the CEO only makes $13,000 a year and all the HR was done by unpaid interns and the office staff are all using out-of-date computers.” That is just totally uncorrelated with whether the shoes are good. Maybe it means the shoes are worse, because HR is actually kind of important in making a good pair of shoes, and you are unlikely to get good HR from a bunch of unpaid interns.
The same thing is true when you think about how to donate to charity. You should donate to a charity that, as best as you can tell, improves the world as much as possible, whatever that phrase means to you– just like you should buy the pair of shoes that fits the best. “Overhead ratio” is a good way of filtering out outright scams, but it is not a good way of separating the okay charities from the great charities. For that, you need to look at outcomes.
Thing of Things 
Maybe it means the shoes are worse, because HR is actually kind of important in making a good pair of shoes,
On a concrete level, HR isn’t important in the creation of any product or the provision of any service. It’s an almost perfect definition of non-value added.
On a more abstract level, it’s another production truism that once a Key Performance Indicator becomes a target, it’s no longer a good KPI. It’s the kernel of truth at the core of the complaint about teachers “teaching to the test,” though I am generally dismissive of that complaint. But the whole reason we have these proxies (such as overhead ratio) is because the right thing to do (measuring the outcome) is difficult or impossible.
On an even more abstract level, that is the problem with utilitarianism as a whole.
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in re: KPIs becoming targets–
http://reason.com/blog/2018/12/27/it-sure-looks-like-this-obamacare-progra
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Thanks for writing this – it puts into words nicely something that’s been annoying me a lot in debates on charity recently.
Does advertising typically count as overhead? Imagine some charity gets one million for The Cause. In one world they spend it all on The Cause, zero overhead, net effect one million donated. In another world they spend half on The Cause and the other half on an advertising campaign. If that brings in an extra million in donations, on the books it’s a 33% overhead but the net effect is now that 1.5 million is going to The Cause.
It’s the time of year when TV is full of tearjerking ads asking you to donate for everything from puppies to cancer to refugees, and I don’t believe that so many charities would be doing this if it didn’t, on average, bring in more in donations than it costs to produce the ads in the first place.
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it’s 1.5 million going to The Cause, negative 1 million to Other Causes, and 0.5 million going to advertising agencies. Ofc, if your charity is “Save the Unemployed Ad Execs” then it’s actually net +2 million to The Cause.
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Advertising is a type of fundraising, and it does count as overhead.
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@darkorchidpurple
As Fisher already explains a bit, this can very easily turn into the appearance of being beneficial, while actually being harmful overall.
Firstly, charities only tend to see the effect of their campaigns on themselves, while the effect on other charities is an externality that tends to be invisible to them (and often even to those other charities). The benefits of a fundraising campaign are focused on one charity, so the effects are fairly large. Also, the link with the campaign tends to be obvious.
In contrast, the effect on other charities is spread out and thus far more diffuse. Also, because there are very many charities that often run campaigns, you have a constant suppressive effect on charities caused by the campaigns of other charities.
So all in all, it is very easy for charities to ignore the harm their campaigns do to other charities and merely count the benefits to themselves.
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Incentives and biases also play a role. People who work at charities are mere humans, who tend to like being employed and to feel useful. So they have a fairly strong incentive to want their own charity to be big, so they get to play with puppies/refugees/cancer, even at the expense of other charities or the efficacy of their own charity.
Having visible campaigns also raises the personal status and life experience of the charity employees. It feels better to tell people what you do and have them respond with appreciation and understanding right away than to have to explain yourself and even then to be met by wariness, as other people are still unsure how serious and ‘real’ your charity work actually is.
In the absence of holding charities to account for their efficacy, it is very easy for them to become very focused on maximizing their income, even when most of this has to pay for the cost of the fundraising.
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For example, imagine a fundraising campaign where the charity spends 90 cents to get a dollar of income. Then 2 more cents goes to other overhead and 8 cents goes to the actual cause.
This only works out if 92% of each additional dollar of income comes from people diverting money from, say, their entertainment budget to charity, but not if many simply have a (fairly) fixed charity budget and merely pick who to donate to. Then the campaign is cannibalizing other charities and funneling that money mostly into fundraising costs, resulting in less money overall going to the actual causes.
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You also run the risk of having charity super stimuli, where a fake or very shitty charity is far more appealing to donors. You see all kinds of manipulations by which charities gloss up their product to make it much more appealing than the actual thing, or exploit human nature.
Furthermore, there is the same issue as for perfect markets, where all income goes to satisfying the customers and there is zero profit. In a perfect charity market, the charities that end up winning would logically be those who maximize making the people who donate feel good about their donation, which, given how people tend to be, can mean that very ineffective charities satisfy the donors far more.
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So that’s why it’s important for more rational people to take a step back and point out what people are actually doing, not what they believe they are doing.
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But when a charity deluges me with lots of annoying fundraising stuff (like lots of them tend to do this time of year, clogging my paper and electronic mailboxes)… like what I really need is yet another batch of address labels to add to the drawer full of them… and stop trying to call me, I never answer stuff with caller-id from anyone but people I know… then, in addition to the annoyingness itself, I also think of how if I actually give to them, it’ll go not to helping anybody, but to pay all the expenses of doing this annoying fundraising stuff.
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Are there other reputable organizations one can look to for effectiveness evaluations, if givewell doesn’t cover all one’s areas or metrics of interest?
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For causes that fall under the EA umbrella, it’s a good idea to look at Animal Charity Evaluators’ recommendations and at the Open Phil recommendations for individual donors. Unfortunately, I’m not aware of any non-EA charity evaluators that pay as much attention as EAs do to outcomes.
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