The overhead myth: are we strangling the charities we love?

Eleanor Cater
CEO
29 January 2026

Community foundations work with hundreds of Kiwis who want to create positive change in their communities. We love the passion with which local people care about the work of community-led change, and in many cases the long-term commitment to enabling that change. However, there is a statement that we hear all too often:

"I'm happy to pay for the work of the charity, but not the salary and overhead costs."

We get it. We all want our hard-earned dollars to help people and planet, not pay for notepads, laptops or salaries. We imagine our donation going directly to those who need it, not towards rent or electricity bills.

But here's the truth: salary and overhead costs are the work of the charity. They fuel everything. They are what make the work possible; paying the people, keeping the lights on, funding the technology and systems that enable the work to begin, to continue, to have lasting impact.

It’s an international thing

This reluctance to fund core costs isn't unique to New Zealand. It's a global phenomenon that's known to be quietly strangling the very organisations that drive change in the world. And it's based on a fundamental misunderstanding of how change actually happens.

In his groundbreaking TED talk, "The way we think about charity is dead wrong," Dan Pallotta exposes a troubling reality: we judge nonprofits and for-profit businesses by completely different standards.

Consider this: A tech company can spend millions on advertising, recruit top talent with top salaries, and take years to become profitable while burning through investor capital. But when a charity invests in marketing to reach more donors, pays competitive salaries to attract skilled professionals, or takes calculated risks on new programmes, we call it wasteful. We become suspicious of their work.

As Pallotta puts it, society sends a clear message: "You want to make $50 million selling violent video games to kids, go for it, we'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself."

The starvation cycle

This obsession with low overhead creates what is called the "starvation cycle." Charities, keen to please donors fixated on overhead ratios, chronically underinvest in the very things that could multiply their impact, such as talent, marketing and fundraising, innovation and infrastructure. They launch projects that might not be central to their core mission but that satisfy donor’s needs.

Following Pallotta's famous TEDtalk, something interesting happened. Three major charity watchdog organisations: GuideStar, Charity Navigator, and the Better Business Bureau's Wise Giving Alliance issued a joint statement denouncing the overhead ratio as a measure of nonprofit performance, urging donors to focus instead on transparency, governance, leadership, and actual results. It was a seismic shift in perceptions at a moment in time.

But I’ve been wondering of late, has this shift been forgotten and are we slowly drifting back to a place where it’s easy to judge nonprofits on what they spend and not on the change that they enable in the world?

Vu Le’s bakery - absurdity in action

Nonprofit writer Vu Le brilliantly illustrated this absurdity in his now-famous “cake analogy.” Imagine a bakery where a customer orders a chocolate cake for $100, but only pays $20, telling the baker to “find the other $80 elsewhere.” When other customers agree to pitch in, each comes with their own restrictions: “You can’t spend my $20 on sugar; only on chocolate and up to one egg.” Another says, “I’ll pay for anything except flour.” A third says, “My money can only be used to buy eggs, sugar, or butter, but not the full amount of any of them.”

The baker tries to make it work, piecing together funding from multiple sources with conflicting restrictions. When the cake turns out poorly - too dense, not sweet enough - customers complain. The baker explains: “One customer said he would pay for sugar, but not butter. Another said she would pay for chocolate, but we already had you paying for chocolate, so we asked her if she would pay for butter, and she said no.”

This is the daily reality for nonprofits trying to deliver services while juggling multiple restricted funding sources, each with their own rules about what can and cannot be funded. And, as Le points out in his writing, no other industry operates this way. When you hire a plumber to fix your broken pipes and pay $250 for the job, do you care how much of your money goes into insurance for his van, or his lunch, or his wrench? No, you most likely care whether he does a good job fixing the pipes. Yet with nonprofits, we often insist on managing every dollar spent.

Funding core costs - the best gift you can give

Those working in the charity sector know that funding core costs is the best gift you can give to a charity whose work you want to support. Community foundations across New Zealand proudly champion this message; they understand how tough it is out there for charities trying to cobble together project funding while their core infrastructure crumbles beneath them.

We understand that when we invest in core costs, we are giving nonprofits the breathing room to think strategically, to plan for the future, to invest in their people, and ultimately, to achieve greater impact. This doesn't mean giving blindly or accepting poor performance. It means investing in this work by looking at strategy, execution, leadership, impact, and potential for growth.

None of us donate to make charities small and ensure they are frugal. We donate to create change in the world. Let’s build on doing that, together.

Watch Dan Pallotta's full TED talk "The way we think about charity is dead wrong" to dive deeper into his argument for reimagining the nonprofit sector and read Vu Le’s brilliant writing at Nonprofit Funding: Buying a cake and restricting it too – both of these are from 2013 but are sadly just as relevant today!