What Drives Foundation Expenses & Compensation?

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Abstract

This brief presents key findings from the latest report on the Foundation Expenses and Compensation Project – the first large-scale, long-term, systematic study of independent, corporate, and community foundations' expenses and compensation patterns and the factors behind them. It documents how differences in type, size, and operating activities of foundations affect their finances and charitable administrative expenses. This brief highlights the key findings of the full report, What Drives Foundation Expenses and Compensation?: Results of a Three-Year Study.

This brief presents key findings from the latest report of 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 less-staff-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 trustees are 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.

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