What Drives Foundation Expenses and Compensation?

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.

The text below is an excerpt from the complete document. Read the full paper in PDF format.

Abstract

This study presents the findings of a three-year study to analyze the expense and compensation patterns of the 10,000 largest foundations in the United States. It finds characteristics such as foundation type, size, and operating activities are important factors for understanding differences in foundation finances. Despite the economic downturn and the volatility of the stock market during the study years (2001 to 2003), the patterns of foundation expenses and compensation are clear and consistent over time. This is the first large-scale, long-term, and systematic study of independent, corporate, and community foundations’ expenses and compensation patterns and the factors behind them.

Introduction

This report presents final results from the Foundation Expenses and Compensation Project—the first large-scale, long-term, systematic study of independent, corporate, and community foundations’ expense and compensation patterns and the factors behind them. Documenting the varying characteristics of the 10,000 largest U.S. grantmaking foundations, the study finds these differences—including foundation type, size, and operating activities—essential for understanding foundation finances. Not surprisingly, hiring staff and taking on staff-intensive activities raise charitable administrative expenditures relative to charitable distributions, while relying on unpaid board and family members and engaging in lessstaff- intensive activities lower them. Most foundation operations, however, are somewhere between these poles.

The study focuses on 2001, 2002, and 2003, the latest years for which data were available when the research was initiated. Despite the economic downturn and the volatility of the stock market during these years, the patterns of foundation expenses and compensation are clear and consistent over time. A longer time frame would have been preferable, of course, but this three-year study is the most robust analysis to date of nonprofit finances, and it confirms and extends the findings based on 2001 data, as reported in Foundation Expenses and Compensation: How Operating Characteristics Influence Spending (2006).

The study’s goals are to inform public policy debates and foundation practices by documenting administrative expenses reported by foundations for their grants and other charitable activities, examining compensation levels of their executive staff and board members, and assessing the factors that drive both types of expenditures. The focus is specifically on charitable administrative expenses, those expenses that relate exclusively to programs and count as qualifying distributions toward the 5 percent payout requirement for private foundations. Expenditures for investment-related activities are not part of this study, except insofar as compensation levels of individual staff and trusteesare based on total compensation, and are not broken down by functions.

For years, discussions of appropriate levels of foundation expenses and compensation have been hampered by insufficient empirical data. This study is large and rigorous enough to answer basic questions about existing practices. The hope is that this report will inform government oversight, sector self-regulation, and individual foundation administration. In particular, foundation managers and board members can use the data to compare their expense levels over several years with those of similar foundations.

(End of excerpt. The entire paper is available in PDF format.)

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.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.