New Report Identifies Characteristics That
Drive Foundation Spending Patterns
Findings Based on the First Long-Term Study
of Foundation Expenses and Compensation
New York, NY — February 7, 2008. Foundation type, size, staffing patterns, and operating activities are the key factors that consistently drive foundation expense and compensation patterns, according to a new report issued jointly by the Urban Institute, the Foundation Center, and GuideStar. Moreover, even under changing or volatile economic conditions, the administrative expense and compensation patterns of U.S. foundations are consistent and predictable, the new report shows.
The report, What Drives Foundation Expenses and Compensation? Results of a Three-Year Study, presents final results from the first large-scale, long-term study of independent, corporate, and community foundations' expenses and compensation. It is based on information from 2001 through 2003, the latest years for which data were available when the study began.
The study looks at characteristics and activities of the 10,000 largest grantmaking foundations and documents how differences in these factors affect foundations' spending patterns. It focuses specifically on charitable administrative expenses, those expenses that relate exclusively to programs and count toward the federal government's 5 percent minimum payout requirement for private foundations. The new report confirms and extends findings from an initial report published in 2006, Foundation Expenses and Compensation: How Operating Characteristics Influence Spending.
The latest study fills a long-standing data gap by providing information and analyses about foundation administrative expenses, compensation levels of executive staff and board members, and the factors that determine both types of expenditures. Its ultimate goal is to inform foundation practice, public policy debates, government oversight, and sector self-regulation.
"With current assets of roughly $600 billion dollars and annual grants surpassing $40 billion, the nation's foundations are essential engines of civil progress," said Elizabeth Boris, the study's coauthor and director of the Urban Institute's Center on Nonprofits and Philanthropy. "Understanding the factors that propel their expenses and being able to compare foundations with similar characteristics is a huge step forward for foundation managers, trustees, and policymakers. The study's detailed data and findings show how expense ratios vary and reveal in stark terms the wisdom of avoiding one-size-fits-all thinking about foundation expenses."
The report points to the need for improvements to IRS Forms 990 and 990-PF, the main sources of data for the study. "The forms don't allow for adequate reporting of new types of foundation expenses, such as technology, communications, and evaluation, or non-grantmaking activities, in-kind gifts, and donated labor, which makes it difficult to fully assess foundations' administrative costs and to provide a complete picture to stakeholders and the public," said coauthor Loren Renz, senior researcher for special projects at the Foundation Center.
The tax forms also fail to distinguish board members who serve as paid staff from those who are involved mainly in governance, leading to confusion over foundation compensation patterns. "For the first time, the field has a multi-year picture of compensation patterns for foundation executives and for the small proportion of non-staff board members who are compensated," said Chuck McLean, GuideStar's vice president for research and quality. "One of the main contributions of the new report is to separate staff members from board members."
Key findings include the following:
- Foundations differ greatly in their structures, resources, and operating characteristics and these differences significantly affect their expense levels. Even among foundations of the same type, differences in assets, giving levels, work styles, geographic reach, and program type vary dramatically and account for wide variations in expense and compensation patterns.
- Employment of staff is the single most important factor affecting expense levels, followed by staff size and level of program activities. Of the 10,000 foundations studied, only 2,938 have paid staff. The minority with staff incur significantly higher charitable administrative expense-to-qualifying distribution ratios than those without staff, and expense ratios increase along with staff size. Engaging in complex activities, such as direct charitable activities, international grantmaking, and program-related investments, also tends to increase cost ratios.
- Foundation scale influences cost ratios. Foundations with more resources tend to employ more staff, engage in complex activities, and pay their chief executives more. At the same time, the largest foundations also enjoy some economies of scale, so they can achieve lower cost ratios for certain activities.
- Most foundations do not compensate board members; those that do are most often staffed and independent. Of the 10,000 foundations, 2,571 compensated individual non-staff board members. Corporate and community foundations rarely compensate board members. Larger independent foundations, especially those with more complex program activities, tend to provide higher levels of compensation to board members than smaller or mid-sized foundations.
- There is relatively little year-to-year change in the factors that drive expense ratios and in how foundations allocate their charitable administrative expenses. While some annual fluctuations occur, the underlying patterns remain consistent. This finding holds for all foundation types.
- The status of the economy and the stock market affect assets and giving levels, which in turn affect the charitable administrative expense portion of qualifying distributions. Independent foundations are particularly sensitive to economic trends because their mandated charitable distribution levels (payout) are based on their net assets. In general, sharp declines in the stock market reduce foundation assets and giving. Foundations may be slower to adjust their program-related expenses. Institutional infrastructure — especially staff size and multi-year program commitments — cannot be easily changed as assets fluctuate from year to year.
GuideStar provided financial, expense, and compensation data from IRS Forms 990 and 990-PF. The Foundation Center provided financial data and information on operating characteristics gathered from foundation reports and an annual survey. The Urban Institute obtained missing data and created the study dataset. The Foundation Center and the Urban Institute analyzed the data and wrote the report.
This research was made possible through major grants from the Charles Stewart Mott Foundation and the Ford Foundation and through additional support from the California HealthCare Foundation, the W.K. Kellogg Foundation, and the Rockefeller Foundation.
What Drives Foundation Expenses and Compensation? Results of a Three-Year Study is available for free download at the web sites of the Foundation Center, the Urban Institute, and GuideStar.
The Foundation Center strengthens the nonprofit sector by advancing knowledge about U.S. philanthropy.
The Urban Institute is a nonprofit, nonpartisan research and educational organization that examines the social, economic, and governance challenges facing the nation.
GuideStar offers information about the programs and finances of more than 1.7 million IRS-recognized organizations.
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