Artwork by Anton Pizarro

Canadians pride themselves on giving back; however, did you know Canadians are as good at giving as they are at producing energy? The charitable and nonprofit sector contributes an average of 8.1% of total Canadian GDP, which is just under the 10.4% contribution of mining, oil, and gas extraction. Today, there are roughly 170,000 nonprofit and charitable organizations in Canada, supporting a wide variety of initiatives in health, education, and beyond. In 2018, Canadians donated nearly 10 billion dollars to charitable causes.

Yet, Canada’s nonprofit sector is facing a funding crisis. Over the past ten years, donations across all age groups have declined. In fact, the amount Canadians donate to charity has just hit a 20-year low, with Canadians giving just 0.54% of their income to charitable causes. In comparison, American tax-filers donated nearly three times as much at 1.52%.

This presents a problem for both Canadian nonprofits and the initiatives they serve. The charitable sector represents a critical component of society and employs nearly 2 million Canadians. In order to prolong the giving narrative in Canada, nonprofits must innovate to serve the community and reach their donor base. 

Designed by Emily Nold. Source: Canada Helps Giving Report
Designed by Emily Nold. Source: Canada Helps Giving Report

The Relationship of Government, Business, and Nonprofits

Both charities and nonprofit organizations operate on a not-for-profit basis; however, there are a few key distinctions. 

Source: Imagine Canada, Sector Source


Although there are a few differing factors, “nonprofit” is an inclusive term that can pertain to both charities and nonprofits. Therefore, the analysis in this article will not exclusively pertain to one or the other. 

Modern nonprofits operate alongside the for-profit sector and the government under a complex, multi-faceted, hierarchical system that is all-encompassing. The Government often outsources certain social work to grassroots organizations who may have the resources to better tackle specific issues. Similarly, corporations partner with charities to develop Environmental, Social and Governance (ESG) focused initiatives and donate to fulfil corporate social responsibility obligations. Additionally, large, independent charities often donate to other smaller nonprofits in the forms of grants and bursaries to expand their reach. 

However, this model is starting to burst at the seams: demand for services have increased, technology has disrupted the industry, and charitable giving is in decline. Nonprofits are becoming increasingly dependent on the government and have little space to innovate. Moreover, organizations do not have the luxury to rapidly evolve like their for-profit counterparts to respond to changing consumer tastes. Risk taking that is often rewarded in the business sector cannot be easily replicated by nonprofits whose mission could be jeopardized if they run out of funds trying to innovate.

Artwork by Anton Pizarro

The Root of the Problem

The single standard that evaluates the effectiveness of giving—or the efficiency of the organization—is through the expense ratio, or more commonly referred to as overhead. The overhead percentage measures the amount of money that does not directly support recipients. It consists of management, fundraising, and other general expenses. The general consensus is that the lower the overhead percentage, the more “effective” a nonprofit is at using funds to effect change. Yet, this single measure of success has been the primary reason why nonprofits have been inhibited from growth. 

This phenomenon was described by Stanford researchers as the “nonprofit starvation cycle” after completing an in depth analysis of four national nonprofits that serve youth in the United States. They uncovered a vicious cycle: 

  1. Funders’ have unrealistic expectations about how much it costs to run a nonprofit
  2. Nonprofits feel pressure to conform to funder’s expectations
  3. Nonprofits spend too little on overhead to minimize their expense ratio
  4. Underspending perpetuates funder’s unrealistic expectations 

As a result, nonprofits are forced to push down their overhead costs to appease their funder base which makes it difficult for them to serve their mission.The outdated norms of detrimentally low overhead ratios have severely limited nonprofits’ ability to acquire and retain talent and innovate. 

Companies that build a strong infrastructure ― with up to date IT systems, sturdy financial platforms, and continuous skill training ― are most likely to succeed. Why would nonprofits be held to a different standard? 

Two Ways to Reevaluate Overhead

Salaries: 

In Canada, the median compensation of a CEO of a nonprofit organization is CA$103k, whereas the median compensation for a CEO of a for-profit is CA$147k ― top 100 CEOs in Canada make an average of $10.4 million. I am not suggesting we pay nonprofit executives in the millions; however, nonprofits lack access to top talent because they cannot provide competitive compensation. Moreover, CEO compensation only represents a fraction of the salaries that need to be paid: there are over 2 million Canadians employed in the nonprofit industry and turnover is a huge problem. The average turnover rate in the nonprofit sector is 19% – compared to the all-industry average of 12%. The top two reasons for this are low wages and the lack of upward mobility. Although it’s generally expected that those who work in the industry take a pay cut, the current salary differences are incomparably vast. This makes it difficult for employees to make ends meet. In terms of upward mobility, nonprofits spend significantly less on training, planning, and evaluation, all of which inhibits employees from growing in their role and blocking them off from future promotional opportunities. Training is highly valued; a nationwide survey found that 70% of workers claimed that job related training and development influenced their decision to stay at their job. If nonprofits directed funds into improving training for their current employees, they could offset turnover costs that eat into overhead. For jobs that pay less than $50,000 a year it costs 20% of the position’s annual salary to fill those vacancies and for positions that pay less than $30,000 it costs 16%. Ultimately, a nonprofit could save these costs by implementing a robust training system that drives down turnover. That being said, with the national decline in donor support, nonprofits may find it difficult to justify an increase in spending in salary, training, and development. However, spending on talent may be the very thing needed to reinvigorate donor engagement. By offering competitive compensation and training benefits to prospective employees, nonprofits could attract the leadership necessary to disrupt the industry, engage donors, and expand impact. This, paired with low turnover, could result in future cost savings and increased funds raised. 

Technology: 

Over the past decade, technological innovation has transformed the non profit sector. Cloud computing systems, social media, and mobile technology have drastically affected service quality, internal communications, and information storage. However, many nonprofits are working with old technology and cannot afford to innovate as fast as their for-profit counterparts. Purchasing new technology is a significant investment for nonprofits and can be hard to justify when donors focus solely on the yearly overhead rate. That being said, the high upfront cost of a technology is often rewarded by future savings. For example, New Story is a nonprofit that uses 3-D printing to provide adequate housing for those without access. The upfront spending made by New Story to develop a large-scale 3-D printer has enabled the organization to build entire homes in less than 24 hours for a fraction of the cost of a traditional building. The organization’s solution is faster and cheaper ― a common result of big tech investments. However, not all can afford to invest as heavily as New Story. To mitigate the initial costs, nonprofits could seek partnerships with companies whose social values align with their cause. For example, Direct Relief is a humanitarian aid organization that delivers medical aid and support after natural disasters. During the California forest fires, Direct Relief worked with Facebook to use anonymized location information to determine the movement and location of people fleeing dangerous areas. This guided how the organization distributed N-95 breathing masks to protect the public from smoke inhalation. Whether technology can improve day to day operations or literally save lives, nonprofits should not be deterred from this investment because of the impact it might have on their yearly overhead. By adopting a forward looking mindset, nonprofits can harness technology to help people better than they ever have before. 

Donate on Impact

The narrative around the nonprofit industry needs to change, starting with arbitrarily imposed overhead ratios. The current nonprofit overhead across sectors is 37%, while the average donor believes it should be 23%. There exists an underlying hypocrisy to charitable giving: we admire those who sacrifice financial gain in favour of social reform, but concurrently doubt the same group of people with managing our money. How can we expect nonprofits to grow if we deprive them of the cash necessary to do so? Instead of monitoring overhead, why not evaluate impact?

Nonprofits are established to have a positive impact. We should holistically evaluate them on their ability to do so, not on their ability to cut costs. We need to empower nonprofits to take innovative approaches so we create a new nonprofit cycle, one that perpetuates impact and growth for nonprofits rather than starvation. By focusing our attention on impact, nonprofits can be empowered to invest in their employees and innovate. Organizations like GiveWell, a nonprofit evaluator, have adopted this approach. Instead of focusing solely on overhead, GiveWell searches for charities that save or improve lives the most per dollar. This enables nonprofits to invest in infrastructure, provide competitive compensation, and explore tech solutions to better fulfill their mission. Let’s give nonprofits a chance to blossom by shifting the paradigm of expectation away from low overhead ratios to the good they produce in the world.      ‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎

Artwork by Anton Pizarro