Charitable Organizations’ Cost Disclosure Mitigates Overhead Aversion

Abstract

Charities face common problems in which donors tend to avoid charities with high overhead rates. This overhead aversion phenomenon forces charities to suppress their overhead spending, which impedes them from performing as best as they can. Substantial research has attempted to mitigate overhead aversion by eliminating the need to cover overhead expenses by donors. The present work takes a different approach and presents a method to reduce overhead aversion and to improve the attitude toward the charity by providing donors with details of the overhead costs. Study 1 demonstrates that disclosing the overhead cost improves donors’ attitude toward the charity. Moreover, the effect is mediated by the donor’s attitude toward the overhead. Study 2 shows that presenting cost information is more effective than the methods proposed by the existing literature (e.g., presenting a message that addresses the importance of overhead). The research contributes to the literature by demonstrating how to communicate with donors to increase their evaluations of the charity.

1. Introduction

Donation money is a charity’s major source of income and is used to cover programs and overhead. The donors expect that the impact (i.e., helping the cause) of their donation is as great as possible, which results in donors preferring that the donated money be used more for the program and less for the overhead coverage. Therefore, whenever donors learn that a charity has a high rate of overhead, donors tend to avoid the charity. Past research on overhead aversion has proposed several ways to reduce overhead aversion, including informing donors that a third party has already covered the overhead or presenting donors the message that reminds the importance of overhead spending [1,2,3,4]. However, some proposed approaches are practically difficult to implement for all donation campaigns.

This research presents a simple and effective way to overcome overhead aversion by disclosing the details of a charity’s overhead costs at the point of donation to convince donors. This research is theoretically and practically useful. The current research not only presents the positive influence of charities’ cost disclosure but also tests the underlying process that is mediated by perceptions about the overhead. We also test the boundary conditions (e.g., overhead ratio levels) of the cost disclosure effect. This research also presents implications for nonprofit organizations that have been struggling to reduce their overhead expenditure by presenting a hands-on method to change and foster donors’ attitudes toward the charity and mitigate overhead aversion tendencies.

2. Theoretical Background

2.1. Attitude toward the Charity

The attitude toward a charitable organization is one of the key factors that affect donors’ charity selection and donation intentions [5,6,7]. The attitude toward the charity is defined as the enduring evaluation of the nonprofit charitable organization [8]. Previous research has shown that the attitude toward a charity is affected by various factors, such as the overall image, credibility, management efficiency, and outcomes of operations [5,8,9,10]. Given the recognition of the importance of attitude toward charities, previous research has suggested various ways to assess and manage charity attitudes, such as the development of a measurement scale [8] and the factors that influence a charity’s brand personality or image [7,11].

One factor that also has a strong influence on the attitude toward a charity is the overhead ratio, which is defined as the percentage of administrative and fundraising costs over the charity’s total spending. The overhead ratio is commonly used as a proxy of operation efficiency because a lower (higher) overhead ratio entails that much (less) of the raised fund is used to help the cause [12,13]. Previous research has demonstrated that people tend to evaluate charities with a low (high) overhead ratio more (less) positively [14]. The focus of donors, the public, and charities on the overhead is at least in part because the overhead ratio is used as an important index in evaluating nonprofit organizations. For instance, third-party charity evaluation service providers, such as CharityWatch and Charity Navigators, use a charity’s overhead ratio as one of the most important criteria in evaluating and recommending charitable organizations [15]. The public media has also expressed concern for nonprofit organizations’ high overhead ratios [16]. Therefore, donors and the general public consider the overhead ratio as an important factor in evaluating charitable organizations.

2.2. Overhead Aversion

Charitable organizations spend their collected funds for two main purposes. One spending category is for helping the cause, whereas the other category is for the charity’s own operations. The first category, which is called the program cost, is the amount that the charity spends to help those who are in need of support. Therefore, the program cost is the expenditure for the organization’s mission. The second category is called the overhead, which is the charitable organization’s spending for its administrative expenses and fundraising costs.

The overhead ratio refers to the percentage of the overhead expenditure out of the total spending. Donors tend to respond negatively to a charity’s high overhead ratio, which is a phenomenon known as overhead aversion [1]. People’s tendency to avoid charities with high overhead can result in various types of adverse perception and behaviors, such as attitude toward the charity [14], preference (or choice) of charity [4,17], donation intention and amount [2,12,18,19]. For instance, research results have consistently revealed that donors prefer to donate to charities with low overhead percentages and are reluctant to donate to charities with high overhead ratios [1,2,20].

Overhead aversion is explained by donors’ concern about the reduced impact of their donations [1]. Although operational expenses are essential for the charity’s ongoing operations, donors tend to perceive overhead spending as a kind of waste of their donated money, which diminishes the amount of money being spent on helping others.

2.3. Overcoming Overhead Aversion

Although the overhead ratio is one of the indexes for evaluating a charity’s operation efficiency, some concerns have also emerged on excessively negative attitudes toward a charity’s overhead [4,12,21]. Such negative responses can cause adverse consequences, such as the nonprofit starvation cycle [22,23]. The nonprofit starvation cycle refers to the phenomenon in which nonprofits are under pressure to spend less on overhead, which can cause negative consequences, such as reduced efficiency or misreporting on a charity’s spending on overhead and programs.

Previous research on overhead aversion has proposed several ways to reduce overhead aversion. These methods change donation impacts and/or donor perceptions about the overhead. Gneezy, Keenan, and Gneezy [1] showed that donation intention was higher when donors are informed that a third party has already covered the overhead cost. This approach is effective because this “overhead-free” situation means that all the donors’ donations can be used to help the cause, thus resulting in a maximum impact of their donation. Although this type of third-party contribution to the overhead costs should be highly desirable to reduce overhead aversion, this method is practically difficult to implement for all donation campaigns.

Another way to mitigate overhead aversion is changing the process of allocating the donation amount for overhead. Keenan, Saccardo, and Gneezy [3] tested a method that gives donors the authority to make decisions about the overhead percentage. The participants were more willing to donate when they were offered the authority to decide the overhead percentage rather than when they were offered a fixed and predetermined percentage.

Lastly, the most germane method to our research is changing donors’ perception of overhead by reminding them of its importance for the charity’s missions. Keenan and Gneezy [2] showed that the presentation of the message that explains the necessity and benefits of the charity’s overhead to donors mitigates overhead aversion. Another similar way to reduce overhead aversion is using framing. Given the negative connotation of the term “overhead”, Qu and Daniel [4] demonstrated that either refraining from using the term or presenting the purpose of the overhead for building a charity’s long-term organization capacity reduces overhead aversion.

2.4. Cost Disclosure and Overhead Aversion

We propose a simple way to reduce overhead aversion and improve donor attitudes toward the charity, which is by disclosing the details of the overhead cost to potential donors. Previous research on the consumer evaluation of profit institutes (e.g., companies) shows the positive influences of disclosing the company’s costs. Mohan, Biell, and John [24] showed that informing consumers of the cost of the product or service fosters consumers’ intention to purchase the firm’s product and that the effect is mediated by the trustworthiness of the firm. The findings by Mohan et al. [24] imply that although cost disclosure is seldom used in the profit domain, it can be an effective way to improve the attitude toward the company and change downstream behavioral consequences, such as product purchase intention.

In an analogy comparing nonprofit institutes (e.g., charities) with profit institutes (e.g., companies), overhead costs are similar to the company’s management, operations, and marketing costs for offering the core benefits (e.g., the program or the product) to customers, whereas the program for helping the cause is analogous to a product in that it offers the core benefits to donors or consumers. Given that a charity’s overhead is considered the cost of offering help to the cause, we expect that the presentation of the (overhead) cost information to donors can also have a positive effect on the donors’ attitude toward the charity.

In the profit business domain, a company seldom discloses its cost structure. Therefore, most people are not aware of the cost of the product. Nonprofit organizations, however, usually disclose their overhead spending in a more transparent manner through, for example, annual reports on their income and spending. However, the cost information is not openly presented to donors at the moment of donation, thus causing donors to have difficulty understanding how the donated money is spent for overhead unless donors actively search for the information before their donation decisions.

We posit that the influence of the presentation of the overhead cost information lies on the changes in perception about the overhead. Presenting cost information expects to increase donors’ understanding of the charity’s operating expenses. Examining the items for a charity’s spending, such as administrative costs and fundraising costs, can make donors realize the necessity of the overhead in accomplishing the mission of the charity to help people in need. We further expect that cost information disclosure also has a positive effect on attitudes toward the charity, which is mediated by the perception of the charity’s overhead spending. This reasoning is in line with the existing literature that donor perception about charity’s overhead spending is an important factor that affects the attitude toward the charity [4,14,17].

Hypothesis 1 (H1).

Disclosure about overhead costs has a positive influence on the attitude toward the charity.

Hypothesis 2 (H2).

The positive influence of overhead cost disclosure on the attitude toward the charity is mediated by the positive perception about the overhead (e.g., attitude toward overhead or perception of fair overhead).

2.5. Overhead Percentage and Cost Disclosure Effect

Our discussion about the influence of cost disclosure is expected to hold for a moderate level overhead percentage. According to surveys among Americans, people believe that the typical overhead ratio is approximately 23% to 28% [4,25]. For a typical overhead percentage of approximately 25%, we expect a significant overhead disclosure effect because of its influence on the perceptions about overhead spending. However, we expect that the influence of cost disclosure diminishes when the overhead rate is either too low or too high, as suggested by previous research [18]. Such research has found that the effects of the remedies for overhead aversion (e.g., covering overhead by the third party) depend on the charity’s overhead ratio. When the overhead ratio is low (e.g., 10%), people will believe that the charity’s management of the raised funds is highly efficient [2]. Therefore, the additional influence of overhead cost disclosure on the perception of the charity’s overhead spending is expected to be weaker. In contrast, when the overhead ratio is too high, people have the impression that the charity may waste the raised funds [2]. When the cost information is presented, the detailed information may confirm donors’ perceptions that the money is wasted, thus also mitigating the cost disclosure effect. Our reasoning is in line with Keenan and Gneezy [2] who found that the message supporting overhead spending did not improve donation intention when the overhead rate is too low (e.g., 5%) or too high (e.g., 55%).

Hypothesis 3 (H3).

The influence of overhead cost disclosure is moderated by the charity’s overhead percentage. The influence of overhead cost disclosure on attitude is positive only for moderate level overhead but diminishes for the overhead percentage that is either too low or too high.

However, the positive influence of overhead cost disclosure may also hold regardless of the overhead percentage, thus implying a hypothesis alternative to H3. Regardless of the overhead ratio of the charity, presenting information on the cost can justify how the charity spends the donated money for its operations, which subsequently leads to a positive influence on the perceptions of overhead spending and the attitude toward the charity. Therefore, an alternative hypothesis for H3 is proposed below:

Hypothesis 3 (H3_ALT).

The influence of overhead cost disclosure is not moderated by the charity’s overhead percentage. The influence of the overhead cost disclosure on the attitude toward the charity is positive regardless of the overhead percentage levels.

3. Study 1

Study 1 tests H1 and H2, which predict that the attitude toward the charity is more favorable when it discloses overhead spending information in a transparent way and the effect is mediated by the attitude toward the overhead. Study 1 also tests H3 (and H3_ALT), which pertains to the influence of the charity’s overhead ratio by including the low (i.e., 10%) and the high (i.e., 40%) overhead ratio conditions, in addition to the typical moderate (i.e., 25%) overhead ratio condition.

3.1. Materials and Methods

A total of 362 participants from Prolific Academic (61.6% female, M_age = 36.69) participated in a 3 (overhead rate: 10% vs. 25% vs. 40%) × 2 (cost information: absent vs. present) between-subjects design. The participants were asked to imagine a situation in which they donated $50 to a charity’s campaign for helping disabled children in an Asian country. Then, the participants were presented with information about the charity’s overhead ratio and program ratio (i.e., 1 − overhead ratio). The baseline moderate overhead ratio was 25% (i.e., program ratio of 75%), which was determined on the basis of the percentage that American donors believed to be the typical overhead ratio [4,25]. The lower and higher overhead ratios were 10% and 40%, respectively, which were 15% lower or higher than the moderate level overhead. The participants were presented with a paragraph that explained the charity’s overhead and program ratios. For example, in the 25% overhead ratio condition, the description was presented as follows:

According to the charity’s last year’s annual report, the charity’s overhead rate was 25%. This means that about 25% of the raised fund is used for the charity’s overhead (i.e., operating expenses) and the other 75% is used for the program (helping the disabled kids).

Then, the information about the charity’s spending of the raised funds was presented in terms of the spending categories. Specifically, the participants were presented with two spending categories, namely, the program total and the overhead total. The overhead total category was also presented as two subcategories, which were (1) management and general administrative expenses and (2) fundraising costs [17]. Their specific examples are shown in

Table 1. Cost information presented in the 25% overhead ratio and cost information present condition in Study 1.

Program (helping the cause)	$75
Overhead total	$25
Management and general administrative expenses (salary of supporting staff, information technology expenditures, legal services, insurance, etc.)	$10
Fundraising cost (fundraising campaigns, soliciting bequests and grants, etc.)	$15

.

The details of the cost information differed between the cost absent and cost present conditions. In the cost information present conditions, the participants were presented with the details on the charity’s spending per $100 raised fund. Specifically, the program cost and overhead cost (separately for management and general administrative expenses and fundraising costs) were presented. Table 1 shows the information presented in the cost present and moderate (25%) overhead ratio conditions. The detailed overhead cost figures decreased or increased proportionally for the 10% (i.e., low) and the 40% (i.e., high) overhead ratio conditions. In the cost absent conditions, the presented message was the same as that of the cost present condition, except that the cost information in terms of $100 spending was not presented.

Then, dependent variables were measured. The attitude toward the charity was measured using two questions (“like this charity organization” and “prefer a charity that operates this way”; α = 94). The attitude toward the overhead was measured using three questions (“essential for helping the cause”, “helpful”, and “also beneficial for the cause”; α = 0.94). We also measured participants’ experience in donation using a seven-point scale (1 = not at all, 7 = very much).

3.2. Results

3.2.1. Attitude toward the Charity

A 3 (overhead ratio) × 2 (cost information) analysis of covariance (ANCOVA) on the attitude toward the charity was conducted, and the participant’s donation experience was included as a covariate (F(1, 355) = 5.23, p = 0.019). The result revealed that the main effects of overhead ratio (F(2, 355) = 43.52, p < 0.001) and cost information (F(1, 355) = 5.69, p = 0.018) were significant. In addition, the interaction between overhead ratio and cost information was not significant (F(2, 355) = 0.95, p = 0.389). The significant main effect of the overhead ratio showed that the evaluation of the charity was more favorable as the charity’s overhead ratio was lower (M_10% = 5.35 vs. M_25% = 4.82 vs. M_40% = 3.38), with all differences being significant (p < 0.004). This result was consistent with the overhead aversion phenomenon. The significant main effect of the cost information yielded that the attitude toward the charity was more favorable when the cost information was present (M = 4.71) than absent (M = 4.32). This result supported H1.

Separate analyses for each overhead ratio condition showed that the difference by cost information was significant in the moderate (25%) overhead ratio condition (M_absent = 4.49 vs. M_present = 5.15; F(1, 356) = 6.60, p = 0.011). However, the difference between cost information absent and present conditions was not significant when either the overhead ratio was lower (i.e., 10%) (M_absent = 5.18 vs. M_present = 5.52; F(1, 356) = 1.75, p = 0.187) or higher (i.e., 40%) (M_absent = 3.29 vs. M_present = 3.47; F(1, 356) = 0.49, p = 0.484) than the moderate level. Figure 1a presents the results.

3.2.2. Attitude toward Overhead

A 3 x 2 ANCOVA on the attitude toward the overhead also showed that the main effect of the overhead ratio was significant (M_10% = 5.43 vs. M_25% = 5.12 vs. M_40% = 4.26; F(2, 356) = 17.13, p < 0.001), thus indicating that the evaluation about the overhead was more positive (negative) for lower (higher) rates. The main effect of cost presentation was also significant (F(1, 356) = 5.22, p = 0.023), thus indicating that the attitude for the overhead was higher when the charity presented the cost information than not (M_present = 5.11 vs. M_absent = 4.76). The interaction between the overhead ratio and the cost information was not significant (F(1, 356) = 0.95, p = 0.387). Separate tests for each overhead ratio condition showed that the cost disclosure effect was significant for the 25% overhead ratio (M_absent = 4.85 vs. M_present = 5.39; F(1, 356) = 4.88, p = 0.028) and the 10% overhead ratio (M_absent = 5.19 vs. M_present = 5.67; F(1, 356) = 3.85, p = 0.050) conditions. However, the difference was not significant in the 40% overhead condition (M_absent = 4.23 vs. M_present = 4.28; F(1, 356) = 0.04, p = 0.838). The results are presented in Figure 1b.

3.2.3. Mediation Test

We tested the mediating role of the attitude toward the overhead in the influence of cost information on the attitude toward the charity using the Hayes [26] method (Model 4). We conducted mediation tests separately for each of the overhead ratio conditions. In the moderate overhead ratio condition, the result showed that the influence of the attitude toward the overhead on the attitude toward the charity was significant (b = 0.65, SE = 0.06, t = 10.58, p < 0.001). The test on the mediating effect demonstrated that the indirect effect of the cost information on the attitude toward the charity via the attitude toward the overhead was significant (indirect effect = 0.19, 95% CI [0.08, 0.32]). The direct effect of the cost information on the attitude toward charity was not significant (b = 0.15, SE = 0.08, t = 1.84, p = 0.067). The mediation test result is shown in Figure 2a.

We also conducted mediation tests separately for the low and high overhead ratio conditions. The mediation tests did not show significant indirect effects for the low overhead condition (indirect effect = 0.12, 95% CI [−0.05, 0.27]) and the high overhead condition (indirect effect = 0.05, 95% CI [−0.19, 0.32]). The results for the low and high overhead ratio conditions with regression coefficients are presented in Figure 2b,c.

3.3. Discussion

The results of Study 1 supported H1 and H2. Disclosing the overhead cost improves the attitude toward the charity, and this effect is mediated by the attitude toward the overhead. However, this positive influence of presenting the cost information was significant only when the overhead percentage is moderate (i.e., 25%). The cost disclosure effect disappears when the overhead rate is lower (i.e., 15%) and higher (i.e., 40%) than the typical level of the overhead rate. This trend might be because, in a lower overhead rate, people are already comforted by the fact that the rate is low. Hence, the cost information does not present an impactful additional message to the donors. Meanwhile, the higher rate can be interpreted as a situation in which the cost information does not dilute the impression that the charity tends to waste the donated money. These findings that the effect of the cost information presentation is stronger for the moderate overhead percentage supported H3 but did not support H3_ALT.

4. Study 2

Study 2 intends to extend the findings of Study 1 by testing the influence of the presentation of the message addressing the importance of the overhead, in addition to the presentation of the cost information. Keenan and Gneezy [2] demonstrated that presenting an explanation about the importance and benefits of overhead can mitigate donors’ overhead aversion. Their findings revealed that when the donors are presented with a message addressing the importance of the overhead for a charity’s successful accomplishment of its mission, the donors are more willing to donate to the charity.

Study 2 examines the interplay between the presentation of the cost information and the presentation of the message addressing the importance of the overhead. In Study 2, the overhead rate is fixed at 25%, in which the cost presentation effect was significant in Study 1. Based on the finding that cost disclosure has a positive influence on the attitude toward the charity for a moderate overhead ratio, several possible effects of the 2 (cost information: absent vs. present) × 2 (importance information: absent vs. present) factorial design are examined in Study 2. First, a synergy effect of presenting both the cost information and the message addressing the importance of the overhead may exist. Then, we expect a significant interaction with the pattern of the result that the effect is most positive when the cost information and the importance message are presented at the same time. Second, the influences of the cost presentation and the importance message may exist independently. Then, two main effects will be significant, without significant interaction. Third, one effect may be much greater than the other. In this case, the result may present one method as more effective in the positive influence on attitudes than the other. To this end, Study 2 independently manipulates the presentations of the information on cost and importance.

4.1. Materials and Methods

A total of 359 respondents (45.4% female, M_age = 36.64) recruited from Amazon Mechanical Turk participated in a 2 (cost information: absent vs. present) × 2 (importance message: absent vs. present) between-subjects design. As in Study 1, the participants were presented with a scenario in which they donated $50 to a charity with an overhead ratio of 25%. Unlike in Study 1 where we manipulated the overhead ratio levels, we used only the moderate 25% overhead ratio in Study 2. The study procedure was similar to that of Study 1 except for the types of information about the charity that was presented. The cost information was manipulated by whether or not the detailed information about the charity’s overhead spending was presented, as we did in Study 1. The importance of the overhead message was manipulated by whether a short description that addressed the importance of overhead was presented. The message was adopted from Keenan and Gneezy [2]:

Most donors prefer their donations to be used directly on programming costs. What these individuals do not understand, however, is that in order for a charity to successfully fulfill its mission it must also incur administrative and fundraising costs, making donations spent on overhead also meaningful and significant.

Consequently, the four experimental conditions differed in terms of which additional information about the charity’s overhead was presented. As dependent variables, we measured the attitude toward the charity (α = 0.90) using the same scale used in Study 1. The donor’s evaluation of the charity’s overhead was measured as the perceived fair percentage of the charity’s overhead on a sliding scale ranging from 0% to 100% instead of the subjective attitude toward the overhead that we used in Study 1. We expected that the fair percentage of the overhead of the charity is an alternative but a more objective measure for donors’ perceptions of the overhead. In addition, we measured the donation experience and the demographic variables.

4.2. Results

4.2.1. Attitude toward the Charity

A 2 × 2 ANCOVA on the attitude toward the charity showed that only the main effect of the cost information (F(1, 354) = 7.57, p = 0.006) was significant. In addition, the donation experience covariate was significant (F(1, 354) = 105.25, p < 0.001), thus indicating that the attitude was more positive when one had more donation experiences. The significant main effect of the cost information showed that the attitude toward the charity was more favorable when the information about the charity’s overhead cost was present (M = 5.30) than absent (M = 4.94). This result supported H1. Neither the main effect of the importance message (M_absent = 5.09 vs. M_present = 5.16; F(1, 354) = 0.28, p = 0.595) nor its interaction with the cost information (F(1, 354) = 1.70, p = 0.193) was significant. This result showed that simply emphasizing the importance of overhead cost did not have a significant influence on the attitude toward the charity. The results are presented in Figure 3a.

As a follow-up analysis, we conducted planned contrasts to test the difference among the four conditions in the attitude toward the charity. The results are presented in

Table 2. Results of Study 2.

	Cost: Absent Importance: Absent	Cost: Absent Importance: Present	Cost: Present Importance: Absent	Cost: Present Importance: Present
Attitude toward charity	4.82 B (1.52)	5.06 AB (1.51)	5.36 A (1.38)	5.25 A (1.14)
Fair overhead (%)	41.91 B (29.25)	42.59 B (28.73)	50.98 A (28.11)	46.25 AB (26.79)

Within each row, the two cell means that do not share the same superscripts are significantly different (p < 0.05).

. The attitude toward charity scores in the cost-present and importance-present (M = 5.25) and in the cost-present and importance-absent (M = 5.36) conditions were significantly higher than that in the cost-absent and importance-absent condition (M = 4.82; F(1, 354) > 5.50, p < 0.020). The attitude in the cost-absent and importance-present condition (M = 5.06) was not significantly different from any of the other three conditions (F(1, 354) < 2.54, p > 0.112).

4.2.2. Fair Overhead Percentage

A 2 × 2 ANCOVA on fair overhead percentage also showed that only the main effect of the cost information (F(1, 354) = 6.41, p = 0.012) and the donation experience covariate (F(1, 354) = 155.78, p < 0.001) were significant. The significant main effect of the cost information showed that the participants judged that the fair overhead percentage was higher in the cost present (M = 48.62) than the cost absent (M = 42.25) condition. The significant donation experience covariate indicated that the perceived fair overhead was higher for people with more experience. The main effect of the overhead importance message (F(1, 354) = 0.66, p = 0.418) and its interaction with the cost information (F(1, 354) = 1.16, p = 0.282) were not significant. The results are presented in Figure 3b. Planned contrast showed that the fair percentage in the cost-present and importance-absent condition (M = 50.98) was significantly higher than those in the cost-absent and importance-absent (M = 41.91) and in the cost-absent and importance-present (M = 42.59) conditions (F(1, 354) > 5.70, p < 0.017). The average in the cost-present and importance-absent condition (M = 46.25) was not significantly different from other conditions (F(1, 354) < 1.81, p > 0.179).

We also tested the mediating role of the perceived fair overhead percentage in the influence of the cost information on the attitude toward the charity using the Hayes [26] method. The results showed that the indirect effect of the fair percentage was significant (indirect effect = 0.06, 95% CI [0.01, 0.11]). The direct effect of the cost information on the attitude toward the charity also remained significant (b = 0.12, SE = 0.06, t(354) = 1.98, p = 0.049). This result supports that the perceived fair overhead percentage mediated the influence of the cost information on the attitude toward the charity.

4.3. Discussion

Study 2 replicated the result of Study 1 and showed that the cost information increased the positive attitude toward the charity and that the effect was mediated by the perception about fair overhead percentage, thus supporting H1 and H2. Study 2 also tested the influence of the importance message. The results did not show the significant influence of the effects on the attitude toward the charity or the perceived fair overhead. One potential reason for the weak influence of the importance message was the overhead percentage level used in our study. We included only the moderate overhead percentage condition, and the influence of the importance message could be more pronounced for either low or high overhead percentages.

5. General Discussion

Previous research in the context of the profit organization shows that presenting a company’s cost information has positive influences such that the company is perceived to be transparent and trustworthy, which in turn increases consumers’ willingness to purchase the company’s products [24]. This research examines the influence of the presentation of the nonprofit organizations’ overhead cost in the donation context. The results of two empirical studies showed that the presentation of the overhead cost information of the nonprofit charitable organization improves the attitude toward the charity (H1), and the effect is due to a more positive perception about the overhead (H2). However, this positive influence is not universal. It is more salient for the moderate level overhead percentage, but the effect is weaker or not significant for very high or low overhead ratios.

This research contributes to the donation research area by presenting a simple but effective way to reduce overhead aversion. Previous research has proposed several methods to mitigate donors’ overhead aversion. These methods include a third party’s contribution to overhead [1], giving donors the authority to determine the overhead percentage [3], and informing on the usefulness of the overhead spending [2,4]. Adding to the existing literature, the results of this research present ample evidence that the transparent presentation about the overhead cost is an effective way to avoid overhead aversion and increases donors’ attitudes toward the charity. Therefore, this research presents a hands-on practical implication for nonprofit organizations. For instance, when communicating to potential donors, charities could add sentences into the introduction part containing information on the charity’s overhead rate and detailed past or expected costs for the subcategories of the overhead. This should increase potential donors’ attitudes towards the charity and the overhead. In addition, this research presents the important role of donors’ perceptions about the charities’ overhead. Under the recognition of the increased donors’ concern about overhead, numerous charitable organizations attempt to reduce overhead costs, which can have a detrimental influence on the charity’s impactful contribution to society. The findings of this research reveal that the perceptions about overhead, rather than the actual overhead percentage, can have a significant influence on the attitude toward the charity. Lastly, this research presents the boundary conditions (i.e., moderate overhead percentage) of the proposed cost presentation effect. Given that a majority of charitable organizations’ overhead ratios fall within the moderate range, the cost presentation method can be applied by a large number of charities. Another implication of this research is educating donors to change their perception about the charity’s overhead. Donors tend to be negative toward overhead because they believe that the donated money is being wasted [1]. However, donors’ perceptions about overhead spending is not necessarily correct, because it is not possible for charities to do their missions without overhead expenditures. Therefore, programs for educating people about the necessity of overhead spending can be a way to facilitate donations. The findings of this research suggest that the education program can be more effective if it informs the donors on the detailed cost structure of the overhead spending.

This study provides several directions for future research. A limitation of our research is that it used a hypothetical situation. Moreover, this study did not empirically test whether cost disclosure can change real donation behavior, thus warranting future research. It also did not test the influence of cost presentation on longer-term impacts. A desirable effect is that its influence on attitude has longer-term effects, such as intention to donate to the charity, repeat donation, and satisfaction about donation. Future studies that extend the current research are expected to broaden our understating of donation behavior and provide abundant practical implications.