(Illustration by Eric Nyquist)
Stakeholders of private foundations regularly call for improvements to grantmaking. Grantees have long lamented the power imbalance between foundations and their partners. Critics of philanthropy insist on more accountability, raising concerns about the idiosyncratic pursuits of wealthy benefactors. And while beneficiaries are often unable to make their voices heard, leaders in the field have called for foundations to do more to listen to them.
To satisfy these stakeholders, we argue that foundations should substantially increase investments in internal staff capacity, defined as the number and quality of grantmaking staff.
Any discussion of grantmaking staff should start with the following data point: Foundations spend shockingly low amounts on them. When we examined electronically filed 990-PFs—the forms that US private foundations file with the Internal Revenue Service—we found 13,882 nonoperating private foundations (foundations that do not operate their own direct charitable programs) with greater than $1 million in assets, more than $100,000 in grants disbursed, and more than 10 grants given in their most recent filing. Of those, a staggering 9,569—69 percent—reported no charitable wage expense at all, measured by compensation paid to officers, other staff wages, and pension/employee benefits paid for charitable purposes.
With no reported staff, these foundations made an aggregate $11.6 billion in grants in their most recent year. For the 4,313 foundations that did pay some charitable wage expense, the median foundation paid just $0.08 in wages for every $1 of grants made and $1,505 in wage expense for each grant decision.
By contrast, when we limited our attention to the largest 100 foundations in our sample, we found that 16 paid no charitable wage expense and the median foundation paid $0.06 in charitable wage expense for each $1 of grants made and $9,538 in charitable wage expense for each grant decision. The largest foundation in our sample, the Bill & Melinda Gates Foundation, reported spending approximately $0.10 on staff wages for every $1 of grants made and approximately $89,000 for each grant decision in 2019.
Some might argue that it makes sense for these foundations to spend more on their decisions because their grants are correspondingly larger. What matters, according to this line of reasoning, is the amount of wage expense per $1 spent, not the total per grant decision. And by that metric, smaller foundations are already spending more than larger ones on their decision-making.
However, if spending more per grant decision improves the process for grantees and the outcomes for beneficiaries, then it makes sense to spend more per grant decision. The goal of philanthropy isn’t to minimize costs; it’s to improve lives as much as possible for each dollar spent.
Moreover, while many factors may explain the differences in spending between smaller and larger foundations, larger foundations aren’t obviously overspending, which is enough to raise the question of whether the rest of our sample is underspending.
The Benefits Can Be Worth the Costs
Let’s consider ways that grantmaking can be improved through additional staff. The trust-based philanthropy (TBP) movement argues that the dramatic power imbalance between funders and their grantees can be reduced via a series of best practices. TBP advocates suggest that funders take the time to learn about the philanthropic landscape in which they work, simplify and streamline their application and reporting processes, and find ways to support grantees in more ways than just money. TBP supporters also argue that closed application processes reduce equality of opportunity in philanthropy and recommend open letter-of-interest (LOI) policies that enable nonprofits to introduce themselves to funders. Investments in internal staff capacity such as the hiring of subject-matter experts can help foundations better implement these TBP practices.
The recommendations of trust-based philanthropy and the pursuit of effectiveness have a cost: sufficient high-quality internal staff.
TBP aside, a robust grantmaking process involves conducting due diligence and impact assessments of grant opportunities. Due diligence helps foundations avoid embarrassing incidents that could lead to scrutiny by media or the IRS. And impact assessments can help foundations find the most effective means of achieving their goals, as evidence suggests that some grants do much more good than others. Suppose, for instance, that a foundation measures its impact in terms of graduation rates for at-risk students in local high schools. Shifting resources away from costly and ineffective interventions (like purchasing new technology for students) to highly cost-effective interventions (like providing structured pedagogical materials to teachers) could be the difference between having almost no impact and having a substantial impact on the relevant metric. Finding more effective grants can result in major differences to beneficiaries. However, finding such grants takes time and expertise. Foundations can improve their effectiveness, therefore, by investing in staff with the bandwidth and background required to identify mission-aligned opportunities.
It’s plausible, therefore, that many foundations can improve their grantmaking in significant ways, thereby treating grantees more respectfully and helping more people. However, as we’ve already noted, the recommendations of TBP and the pursuit of effectiveness have a cost: sufficient high-quality internal staff. Is that cost justified?
Understandably, many foundations have concerns about investing in staff. In general, donors respond negatively to overhead and prefer that their donations go strictly to programs. Moreover, nonprofit overhead is rarely discussed favorably in the popular press, suggesting that foundations run a reputational risk when they invest in staff.
Experts, by contrast, have lamented this aversion to overhead, arguing that it is a flawed measure of nonprofit performance. While the sector widely recognizes the importance of overhead in building sustainable and successful nonprofits, someone might doubt that the same holds for private foundations. After all, private foundations don’t typically administer programs directly, instead distributing grants to nonprofits. So, isn’t it reasonable to expect private foundations to have no or very little overhead?
Not necessarily. Again, if it’s important to treat grantees with respect by improving the experience of applying for and receiving financial support, then staff are important. Indeed, by investing in grantmaking, foundations also signal to grantees that they understand the value of overhead. And if it’s possible to do greater good for beneficiaries by investing more in grantmaking decisions, then additional staff can arguably pay for themselves.
Again, suppose that a foundation measures its impact in terms of graduation rates for at-risk students in local high schools. If a foundation had been willing to donate $250,000 for a very small change to graduation rates, then surely it should be willing to donate less to get an even larger return, spending the balance on a program officer with experience in education interventions. If additional staff can make that kind of difference, then they will be well worth the expense.
Our Advice
While we contend that foundations are probably underinvesting in staff, we don’t mean to suggest that there is a single optimal amount that foundations should be spending on staff wages. In fact, some foundations plausibly don’t need paid staff. They may have boards that are sufficiently active in making grant decisions; alternatively, some foundations may have a scope that’s narrow enough not to require complex grant assessments. Our goal here is simply to encourage foundations to start the conversation internally—guided by careful cost-benefit analyses—and make changes when additional staffing enables the foundation to be more trust-based and impactful.
To facilitate these conversations, we offer a few questions that foundation boards could use to discuss the best ways of allocating their resources. To begin, what is the foundation’s current level of staff spending? How much is spent for each grant dollar and each grant? Do these amounts appear high or low? How do they compare with peer funders? These questions can help the board set a baseline for assessment.
Digging deeper, boards can ask: Would greater internal staff capacity enable the foundation to be more trust-based? This might occur through an open LOI process, providing feedback to rejected applicants, implementing TBP-recommended practices, or any number of other measures. Likewise, would greater internal staff capacity allow the foundation to be more impactful? This might occur through research into the best ways of achieving philanthropic priorities, a more thorough grant decision process, meaningful learning and evaluation at the grant level, and portfolio-level analysis, to name a few options.
We hope that these questions can prompt fruitful discussions among board members, helping them think critically about how best to achieve their aims.
Read more stories by Kyle A. Smith & Bob Fischer.