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Foundation Expenses and Compensation

How Operating Characteristics Influence Spending

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Document date: February 03, 2006
Released online: February 03, 2006

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The text below is a portion of the complete document.


EXECUTIVE SUMMARY

Questions about how much U.S. grantmaking foundations spend on staff, trustees, overhead, and other administrative expenses—and how much is appropriate to spend—are at the forefront of current debates on foundation practices. Over the past several years, stories in the media have spotlighted foundations with questionably high compensation and expenses. In turn, this media scrutiny has prompted action by policymakers to address perceived improprieties. In the foundation field, it has sparked widespread discussion at the national and local levels about what constitutes appropriate practice. Missing from these debates has been adequate information about current practices across a wide spectrum of foundations. This report provides a comprehensive look at expense and compensation patterns of the 10,000 largest independent, corporate, and community foundations (by giving) and documents how major differences in foundations' operating characteristics have an impact on their expense levels. The findings shed light on what factors are tending to drive administrative and operating expenses. Understanding foundations' program strategies and characteristics is key to understanding how much they spend.

This research, generated by a partnership of the Urban Institute's Center on Nonprofits and Philanthropy, the Foundation Center, and GuideStar, uses circa 2001 financial and programmatic data as reported on Forms 990-PF and 990 supplemented by survey data from the Foundation Center. To examine trustee and executive compensation patterns, the study uses individual-level compensation data on more than 51,000 officers, trustees, and key paid staff reported by these same 10,000 foundations. These foundations represent 16 percent of all 61,810 active grantmaking foundations identified by the Foundation Center in 2001. They account for 78 percent of all foundation giving and 77 percent of all foundation assets.

U.S. foundations vary substantially in the ways they accomplish their work, and those variations have a measurable impact on their expense levels. Most of the 10,000 largest foundations report modest expenses; the vast majority are unstaffed, and many are run largely by unpaid trustees.Asmall number of foundations have high ratios of expenses to qualifying distributions and some have compensation levels that are well above the typical ranges for their cohort. The overall picture is one of diversity—this is a heterogeneous group of institutions that can only be understood by disaggregating the data along the dimensions of size, type, and staffing and program characteristics.

Independent, corporate, and community foundations, by definition, have different auspices, governance, and structural characteristics. This report documents how major differences in operating characteristics affect the expense levels of private and community foundations. These findings suggest that, along with type and size, the missions and goals of foundations that lead to different staffing levels and types of expenses are important characteristics to consider when assessing foundations' charitable expenditures.

Key Findings

Operating Characteristics and Expense Patterns

Of the 10,000 largest foundations, 30 percent report no charitable operating and administrative expenses. Community foundations, nearly all of which employ staff, are most likely to report operating expenses. Corporate foundations, which are often staffed by company employees, are least likely. Twenty-seven percent of independent foundations do not report expenses, and they are likely run by donors, family members, and unpaid trustees.

Staffing appears to be the most significant factor influencing charitable operating expenses. Employment of paid staff significantly raises operating costs for all types of foundations, and expense levels increase along with staff size.

Foundation size emerges as another important factor. Larger givers reported lower expense-to-distribution ratios for a number of operating characteristics, suggesting greater efficiency with size.

Among staffed independent foundations, charitable operating and administrative expenses range from less than 5 percent (for 41 percent) to 20 percent or more (for 14 percent); the median is 7 percent. By comparison, 84 percent of unstaffed foundations fall into the 0 to 5 percent range, with a median of less than 1 percent.

For staffed independent foundations, operating characteristics strongly associated with higher expense levels include international giving, direct charitable activities, and grants to individuals programs. The staff-intensive nature of these activities can boost a foundation's expense levels. In contrast, donor-family involvement and operating as a non-endowed, or "pass-through," foundation tend to lower charitable expenditure levels. The lower levels of expenses for staffed family foundations compared to non-family foundations suggest that family members help to hold staff-related costs down by providing additional volunteer or low-cost labor for administering grantmaking programs. They may also contribute office space and provide administrative support.

Compared with independent foundations, corporate foundations have lower expense-to-qualifying distribution ratios, and fewer operating characteristics show a clear relationship to expenses. The median expense-to-qualifying distribution ratio for staffed corporate foundations is less than 1 percent. Close ties between foundations and their parent companies make it difficult to determine actual expenses and staff costs, as companies often assume foundation expenses. Nevertheless, staff size, scope of grantmaking, and presence or absence of direct charitable activities appear to have an influence on expense levels. In fact, direct charitable activities comprise a bigger share of the charitable disbursements of a few large corporate foundations than grantmaking does.

Operating and administrative expense-to-charitable disbursement levels are more consistent across community foundations, nearly all of which are staffed, and large givers are less likely to benefit from economies of scale. The median ratio of expenses to qualifying distributions ranges from 5 percent for smaller foundations to more than 7 percent for larger foundations. Operating characteristics and activities that appear to have a substantial impact on community foundation expense levels include staff size, engagement in direct charitable activities, and foundation age.

The youngest community foundations have the highest ratios of charitable expenses to qualifying distributions. Possible explanations include the existence of high start-up costs and the tendency for new community foundations to do very little grantmaking in their early years of operation while they raise funds and build their endowments. As grantmaking programs ramp up, administrative expense ratios decrease.

Independent and community foundations with web sites have greater expense-to-qualifying distribution ratios than those without. While it is unlikely that web sites alone influence expense levels, it seems possible that foundations that invest in maintaining web sites have other cost factors (e.g., higher communications expenses, higher professional fees, and/or larger staff) that exert an upward pressure on expenses.

Compensation

Of the 10,000 largest U.S. foundations, 66 percent do not pay any compensation to staff or trustees for conducting grantmaking and other charitable activities. Among the nearly 3,400 that do, the median percentage of compensation to giving is higher for community and independent foundations (roughly 5 percent) and lower for corporate foundations (less than 2 percent). Roughly four in five foundations, regardless of type, compensate at less than 10 percent of giving.

The largest foundations tend to compensate at the highest amounts, yet their median percentages of compensation to giving are among the lowest. The median percentage of compensation to giving for independent foundations that give over $50 million is 3 percent, compared with roughly 5 percent for the smallest givers. The difference is even greater for community foundations—3 percent compared to over 10 percent.

Eighty-five percent of the more than 46,000 individual trustees serving foundations in the study receive no compensation. Most of the 7,132 compensated individual trustees are found in independent foundations. While most of the compensated independent foundation trustees received less than $10,000, a few received over $100,000. Only 3 percent of corporate foundation trustees and less than 1 percent of community foundation trustees were compensated compared with nearly 20 percent of independent foundation trustees. Collectively, all compensated individual trustees received $111.6 million in 2001.

Institutional trustees typically receive higher compensation than individual trustees. Institutional trustees, such as banks, law firms, and investment firms, often play important managerial roles in foundations. Of the 1,340 institutional trustees reported, 1,248 receive compensation, and most of these serve independent foundations. The largest category of independent foundation institutional trustees is paid in the $30,000 to $60,000 range.

Compensation of foundation executives is strongly influenced by foundation size. Of the 2,923 foundations reporting paid staff in 2001, 1,005 foundations list executive directors, presidents, or chief executive officers. While the median salary of executives overall was roughly $100,000 in 2001, the median executive compensation in foundations with over $200 million in assets was $200,000. The median executive in foundations with less than $10 million in assets received approximately $50,000.

RECOMMENDATIONS FOR CHANGES TO FORMS 990 AND 990-PF

While this study yields insights on how different operating styles can hike or curtail expenses, it also reveals shortcomings in the data and in the current reporting of foundation information to the IRS. For starters, foundations should be educated as to the importance of Forms 990-PF and 990 as the most visible summary of their finances. Changes in the forms themselves should be made to clarify information about expenses and compensation, especially related to certain categories of expenses, direct charitable activities, and individual trustee and staff compensation. Such changes will facilitate better understanding and more in-depth explorations of foundation practices.

Note: This report is available in its entirety in the Portable Document Format (PDF).



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