The Fallacy of the Administration Cost as a Charity Evaluation Tool

Sandra Dunham

Administrative (and fundraising) costs have long been touted as a method of evaluating the effectiveness of a charity. However, without significant understanding of a) what is considered administrative, b) how charities allocate expenses, and c) unintended consequences of this evaluation mechanism, you might be making a serious mistake. Have you ever checked out the administrative costs of an organization to determine whether you should donate to them? How deeply have you dug into these costs? Read on to find out why you may be wasting your time.

What is an administrative expense? There are a few expenses that can only be categorized as administrative, such as insurance and financial management costs (e.g., bookkeeping and auditing). Most other expenses can creatively fit into program categories, whether they belong there or not. A good financial manager will find ways of moving administrative costs into another budget line, to avoid the administration cost issue. 

Consider staffing. Some charities include all of the salary of their senior staff members (e.g., Executive Director) as administrative, where a more creative bookkeeper may allocate a significant portion of this expense to a program line, by claiming that the staff plays two roles within the agency.

Or consider a direct-mail fundraising appeal. One would think that the costs would all fall under the category of fundraising. However, if that appeal letter includes some “useful information” such as a health tip, the charity may call it education and you may not find it under administrative expenses. In fact, there is no universally accepted process for allocating funds between program and administration. And if there were, there is no universal process in place for checking on whether the charity is following the rules.

Some people specifically hone in on the rate of pay of the senior staff member. Is this a better way to evaluate the spending of your charity of choice? There are challenges with using this information to evaluate a charity as well. One of the major issues with this is that sometimes the reported salaries are misinformation.

It is also important to consider whether low charity salaries are consistent with your personal values. Do you believe that people who work for charities are entitled to a living wage? Since most people working for charities are female, do you support creating a low-paying, pink-collared ghetto? Do you believe that charities deserve well-educated, highly qualified staff? Can they recruit these staff members while maintaining bargain-basement salaries? Sometimes you get what you pay for. If you insist that your charity underpay their executive, you may find that the charity suffers in other ways. 

One other challenge with this evaluation method is that the smallest charities often have exceptionally high administrative costs because they have no other costs. A charity with no staffing — one in which a committed team of volunteers not only gives their time, but purchases many of the supplies with their own money — may have few expenses other than financial and insurance costs (both almost impossible to categorize as anything other than administration). Their administration costs may look exceptionally high as a proportion of their budget. However, if you look closely at how much they do with very little money, you may be pleasantly surprised.

The push to reduce administrative costs also means that many larger organizations are starving themselves to make this budget line smaller. They may be sacrificing the future by failing to pay their administrator a living wage or not purchasing necessary office supplies. Or they may be making wasteful and unnecessary programming expenses to offset their admin costs. 

If you want to select a charity, the best course of action is to look at how much work they do with the money they spend and ensure that that work is in alignment with your personal goals. Next time someone suggests that a charity spends too much on administration, stop and ask yourself a few questions.

Do you have a method for choosing your charity? You may have your own pet peeve about giving. If so, please let us know so that we can share it and/or provide a different framework for you to consider. 

• What is included (and excluded) from the reported administration costs?
• What is an appropriate level of remuneration for a person running an organization of the size and scope of the one you are evaluating?
• What are your values with regards to paying a living wage?
• Are the salaries enough to attract the talent required?
• How much value does the organization add to the service system compared to the money it spends?

However you give, we know that Canada’s safety net is well subsidized by donors and volunteers and that your contributions are integral to keeping that safety net afloat. We hope that you will choose to volunteer and give, alone or in a group, to show your support for World Humanist Day.  Don’t forget to tell us about it and invite others to join in by registering your World Humanist Day activities.