The Nonprofit FAQ

Pay special attention to three figures: percent spent on fundraising,
total assets and salaries. Also examine percent spent on management
and general expenses and look for unusual activity in the notes.

It is important to compare apples with apples and oranges with
oranges. Compare one organization's assets to other organizations
in the same field. For example, organizations which run camps
for children tend to own more assets than your typical nonprofit
because they like to own the buildings, land, and physical structures
necessary for operating a camp and like to have endowments which
can provide them with a secure financial future and smooth out
income fluctuations. New organizations often have higher start
up costs than more mature organizations, so one should take this
into account in evaluating their management and fundraising expenses.
Again, compare new groups with other new groups.

The National Charities Information Bureau (NCIB) requires organizations
to spend at least 60% of the annual budget on program activities.
A rule of thumb is that fundraising expenses should not exceed
25%. The economist Richard Steinberg argues that donors should
completely ignore average fundraising expenses, on the grounds
that average fundraising costs do not reflect marginal fundraising
costs. However, Steinberg's view is in the minority and ignores
the fact that by giving to organizations with low average fundraising
expenses, donors can provide incentives to organizations not to
waste money competing against each other for greater market share.

NCIB also requires organizations not to keep assets higher than
twice annual operating expenses. The justification for this requirement
is that contributors generally wish their donations to go to work
immediately, funding programs today, not invested for a rainy
day tomorrow. Charities always have the option of starting an
endowment funded only by gifts that donors have specified for
that purpose. Obviously, if an organization invested all of their
funds and *never* spent any on current programs, no one would
ever benefit from the donor's generosity.

[NCIB and the Donor Advisory Service of the Better Business Bureau merged in 2001 to form the Wise Giving Alliance -- http://www.give.org. --Ed.]

Comparing apples with apples is equally important when looking
at executive salaries. Anyone who has ever worked for a nonprofit
will probably tell you that most people working in the field are
underpaid. A few top executives of very large organizations do
enjoy salaries that are sometimes over $100,000. However, compare
their salaries to what managers of for-profit corporations of
equal size, with similar responsibilities, make. Some of the highest
salaries go to the top managers of health organizations or hospitals;
typically, these organizations must offer compensation generous
enough to attract talented doctors who can command even higher
salaries in the private sector.

However, encouraging slightly lower than private market salaries
is a good tradition for the nonprofit sector. Lower salaries insure
that the people who fill these positions are there because they
care about the organization's mission, and not just for the money.
Nonprofits perform services which are difficult for donors to
evaluate, so the people responsible for delivering these goods
and services must be especially trustworthy. Lower salaries is
one way to screen out individuals with less than noble motives.

Cliff Landesman

September, 1994

Internet NonProfit Center