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The Top 5 Nonprofit Management Myths That Need to Die

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Misinformation is everywhere. While the internet has provided many tools to connect people across the globe (including donors and nonprofit managers using nonprofit software), the ease of distribution of false information is also a concern.

While many myths are harmless, such as the “eight glasses of water a day” myth, others have negative consequences that affect a great many people. One industry that has been negatively impacted by widespread myths is the nonprofit industry. Myths of “evil” profit, misguided notions surrounding altruism, and budgeting decisions have had an adverse effect on the efficiency of nonprofits.

Unfortunately it’s not just ordinary people that are falling prey to such myths, but also the leaders of nonprofit organizations themselves. The acceptance of these myths is harmful to health of the nonprofit sector and therefore they must be dispelled.

Five Nonprofit Management Myths

1. Overhead is a bad thing

Somewhere along the line, donors and nonprofits alike developed the idea that if nonprofits starved themselves enough of overhead costs and funneled every cent possible into programs, this would determine the effectiveness and dedication of said nonprofit. This idea has led to countless misguided crusades against beneficial organizations, such as the Wounded Warrior Project, who were criticized over their overhead costs.

While transparency metrics help root out fraud and abuse, it is important for donors not to get hung up on overhead alone and neither should your nonprofit. Nonprofit accountability sites like Charity Navigator do wonderful work keeping these organizations honest. However to the untrained eye, overhead costs without the context of impact and success rates leads donors to make incorrect assumptions about the effectiveness of a nonprofit.

Unfortunately nonprofit executives and board members have fallen into this trap as well, according to fundraising consultant, Amy Eisenstein:

“I’ve been at more than one board meeting where board members and staff members take pride in their low overhead costs. Not to mention nonprofit leaders bragging about zero percent of donor contributions going to fundraising costs. What a fabrication!”

Administration, office infrastructure, fundraising, and salaries are all crucial to motivating and equipping nonprofit professionals to best handle the causes they fight for. Our perceived ethical notions about what a nonprofit ought to be will starve nonprofits to the point of complete inefficiency.

When we focus on overhead as the sole metric by which we judge nonprofits, we perpetuate a side effect known as the “Nonprofit Starvation Cycle:”

“Among their many dismaying findings: non-functioning computers, staff members who lacked the training needed for their positions, and, in one instance, furniture so old and beaten down that the movers refused to move it. The effects of such limited overhead investment are felt far beyond the office: non-functioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries.”

– Anna Gregory and Don Howard, Stanford Social Innovation Review

Overhead is a good thing (to a certain extent, of course) and if the biggest talking point you have to throw at your donors is your low overhead costs, you should reassess where your priorities lie.

2. Nonprofits cannot profit from their work

Perhaps the word “nonprofit” is misleading, but the name does not mean that nonprofits cannot and should not profit from the efforts they provide. In order to become a nonprofit, an organization must make their mission to fulfill specific goals laid out by the federal government: charity, religious work, scientific advancements or advocacy, or education.

Profit is not the primary focus of a nonprofit, but that does not mean it cannot be a byproduct of their main goals and this is not a bad thing. In fact, nonprofits may earn a profit on activities not related to their stated goals, but any profits of this kind are subject to taxation under corporate tax laws.

In order for a nonprofit to make an income which is tax-exempt, it must fall within the scope of their stated goals and those profits must be reinvested into its own operating expenses, including salaries. These profits are important to ensure talented employees are hired and trained, organizational needs are met, and potential expansions are considered in order to benefit more people in the long run.

Although we treat “profit” as a dirty word, it should not be thought of as such when discussing nonprofits and organizations shouldn’t shy away from activities that draw in more revenue, so long as those revenue streams don’t compromise their stated goals.

3. Nonprofit leaders and executives are paid too much

This myth stems from the misguided notion that nonprofits (and those working for them) ought not make money off of their efforts to help others. Any time the subject of nonprofit executive pay is brought up, you can feel the uncomfortable tension the moment someone steps up to defend relatively “high” salaries of these executives. Just ask anyone reading this piece right now, because I’m about to defend executive pay.

Our sense of ethics and morality is what guides us to cooperate in a humane manner with other members of society, yet sometimes these ethics are taken to far to the point that they are harmful.

In fact, fundraising expert Dan Pallotta gave a fantastic TED talk on the subject:

The video is almost twenty minutes long, but Pallotta does a fantastic job of summing up his challenge to the notion that paying nonprofit executives higher salaries is either “greedy” or “wrong:”

“Businessweek did a survey, looked at the compensation packages for MBAs 10 years out of business school. And the median compensation for a Stanford MBA, with bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was 232,000 dollars, and for a hunger charity, 84,000 dollars. Now, there’s no way you’re going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.

Some people say, “Well, that’s just because those MBA types are greedy.” Not necessarily. They might be smart. It’s cheaper for that person to donate 100,000 dollars every year to the hunger charity; save 50,000 dollars on their taxes — so still be roughly 270,000 dollars a year ahead of the game — now be called a philanthropist because they donated 100,000 dollars to charity; probably sit on the board of the hunger charity; indeed, probably supervise the poor SOB who decided to become the CEO of the hunger charity;”

Pallotta makes a fantastic point. Why would a rational actor, who would otherwise make more in a different position, take a 2/3rds pay cut in order to run a charity? The point is that our ethical view of executive pay is disincentivizing talented individuals from managing beneficial organizations, potentially to even greater heights. In the end, if that individual decides they won’t stay involved on the board to manage the current CEO, that nonprofit may have gained a temporary donation, but lost a whole lot more in terms of invaluable talent.

Does this mean that executive pay ought to be swallowing up the budget of a nonprofit? Of course not. What this does mean is that donors and nonprofits alike ought to reconsider “starving” their CEOs.

4. Big donors are more important than the smaller ones

One of the best lessons I’ve ever learned about nonprofit fundraising from a friend in a competitive D.C. nonprofit. He explained to me what had happened to several prominent organizations that had been flourishing for years, but because their focus had rested mainly on large donors.

Once one of those donors pulled the carpet out from underneath them, their operation had to make significant cuts to compensate for the sudden loss in funding. Job openings disappeared, staff was cut, and programs were scaled back all because this one donor decided he was finished funding this organization for whatever reason.

Placing a priority on on large donors rather than small donors is a common mistake. That’s not to say that one donor is more important than another, but rather than small donors are just as important as large ones. If you lose a few smaller donors, your fundraising will take a far smaller hit than if a large donor pulls the plug.

Never neglect your smaller donors in favor of larger donors, because everyone wants to feel like their contributions are appreciated by the organization they give their hard earned money to.

5. Acquisition is the most important aspect of fundraising

Is it easier to keep friends or constantly be on the lookout for new ones?

Referencing my friend again, as I have in the past regarding fundraising and donor retention, it is far easier and less expensive to retain donors than it is to go searching for new benefactors.

While donor acquisition is an important part of fundraising for your nonprofit, it is harder to build trust with new donors than it is to maintain trust with those you already have on your side.

Think of it like a relationship.

Are you more willing to go above and beyond for someone you’ve known for months or someone you just met off of the street? Unless you have an unbelievable knack for trusting people off the cuff, chances are you will go out of your way to help someone you know versus someone you just met.

Donors work the same way. It is harder to build a trusting relationship with a new donor than it is to facilitate help from someone else who has just been introduced to your organization and your mission.

If you want more tips on donor retention strategies, be sure to read 5 Donor Retention Strategies to Supercharge Your Fundraising.

What next?

Now that you know what nonprofit management myths to avoid and how to combat them, here are some other useful resources to boost your nonprofit fundraising:

Have you encountered any of these myths in your professional network? Are there any myths that I’ve missed? Be sure to let me know in the comment section below.

Looking for Nonprofit software? Check out Capterra's list of the best Nonprofit software solutions.

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About the Author

Nick Morpus

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Nick Morpus is a Content Writer for Capterra, a free resource that matches buyers and sellers of business software. He has a background in politics, economics, and journalism, which he dedicates his off-time to contributing his thoughts to other political sites. In his free-time he enjoys reading, playing guitar, writing, cooking, and dominating the world of video games.

Comments

Your article is spot on. Just one comment about salaries. It’s not just CEO salaries, it’s salaries in the nonprofit field. For example some of the staff at hunger charities using local pantries because their pay isn’t enough to make ends meet. Salaries in nonprofits need to reflect equity and not just for CEOs , COOs and any member of the executive team.

Great article. Why do Americans feel that teachers and non-profit staff should take a vow of poverty? If only people who are willing to work for a low wage fill these positions the talent pool is reduced. Smart workers are a good return on investment.

Also to your point about small donors, you’ll never know when a small donor may turn into a big donor. There are many stories about small donors bequeathing large gifts in their wills. Relationships matter!

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