Administrative costs: a bad reason to donate

Many people I have spoken to in recent years share my desire to do as much good as possible with their charitable donations. They want to support a charity that uses its money well and helps as many people as possible.

Unfortunately, it is very time-consuming to compare the actual impact of social organisations with each other, especially if you compare it with the costs incurred. That is why no one in Germany has done this yet. Even the so-called "Spenden-TÜV" (Donation MOT)only checks that certain minimum standards are met, but does not try to find out which organisation does the best job. In the absence of good answers to this important question, over the years a seemingly more easily calculated indicator has been agreed upon: administrative costs. They are said to be a good indicator of whether an aid agency is doing a good job. The argument goes like this: If administrative costs are low, the charity will have a greater impact. After all, more money goes directly to the people you want to help. The level of administrative costs is therefore a good basis for your own donation decision. Of course, you can't do without them completely, but they shouldn't be more than 17%, according to a survey.

If I had to draw a Venn diagram illustrating the overlap between this statement and the truth, it would look like this:

A Venn diagram with two circles that have no points of contact or overlap. The left-hand circle shows: Administrative costs are an important criterion for the donation decision. The circle on the right says: Truth.

Not only is there no overlap, the two circles don't even touch. The statement simply could not be further from the truth. Administrative costs are neither easy to calculate, nor are they helpful in deciding whether or not to donate to an initiative.

The basic prerequisite for using administrative costs as a benchmark would be that they can be calculated easily and, above all, uniformly, i.e. that you are not comparing apples with pears. This is not the case. This becomes particularly clear when it comes to allocating personnel costs, which make up the largest portion of many aid organizations' budgets. What percentage of the workload is devoted to promotion and administration, and how much to actual project work? Is the production of a flyer de facto advertising, or is it educational work? Is it possible to be honest here? Of course you can. Even the German Central Institute for Social Issues states that if a person can be assigned at least 80% to an area, it can also be 100% for simplicity's sake (not a must). What about the costs on site? These are often booked in full as project costs, which the FAZ calls "Eyewash" because administrative costs are also incurred there. If you take all the margins and possible definitions together and combine this with the strong incentive of the donation organizations to present the donors with the lowest possible administrative costs, a healthy scepticism about the objectivity of these figures seems appropriate.

Much more important, however, is the obvious fact that there is no correlation between the administrative costs, even if they could be calculated uniformly and objectively, and the impact achieved per euro by a project. Many measures achieve no or even a negative effect. It doesn't help if the organization behind it is cutting back on administration. A particularly compelling argument for me in this regard is the comparison with the for-profit world. When I have to decide whether to buy a new smartphone or car, which restaurant to go to, which hairdresser to visit, or which supermarket to buy my groceries from, the administrative costs of the company in question are irrelevant. And why should it be? I have never heard anyone ask whether Apple or Samsung has higher administrative costs. And of course, this information would never be the basis for deciding which cell phone to buy. Does Daimler make better cars than BMW because the remuneration of the Chairman of the Management Board and thus the administrative costs are lower? Would Red Bull have been more successful if they hadn't invested so much in advertising? Do you get a "better deal" with an insurance company if it relies more on volunteers or interns in its accounting department?

In my opinion, the answer to all of these questions is a resounding "no." There is no correlation between the value of a product or the overall success of a business and the level of its administrative costs. Why should the nonprofit world be any different? Why should it make sense to cut staff? I have always found the resentment against high salaries in the social sector, or even salaries that are commensurate with qualifications, strange. It's like saying: "If you're going to try to make the world a better place as part of your job, you should at least be paid poorly for it. I also believe that low salaries (and thus low administrative costs) do no favors to the actual target group, i.e. the people you want to help. On the contrary. If you can't attract or retain experienced and qualified staff because your salary structure is too low, it will be difficult to fulfill your mission. Focusing on minimizing costs in certain areas can make an organization structurally unsustainable. Instead of focusing on maximizing its own impact, it focuses on reducing spending in areas that are not core to its work. The Maecenata Institute expresses this paradox in the essay "The administrative costs of non-profit organizations" as follows:

"On closer inspection, the public pressure to minimize is problematic, as it is not compatible with principles of effectiveness."

I agree with this statement. At effektiv-spenden.org, we believe that there are organizations that provide 100 times more aid per euro than others, not because they have particularly low administrative costs, but because they focus on identifying the most effective approaches worldwide and implementing them efficiently.

About the author

Sebastian Schwiecker Avatar

Co-Managing Director

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