Rethinking Payout: The Hidden Costs of Undervaluing Social Return

What We Miss When We Measure

Foundations typically make payout decisions using logic borrowed from finance. The underlying assumption is straightforward: over the long term, endowment assets generate reliable financial returns, while social returns are harder to see and quantify. The logic follows that to maximize impact, if the financial rate of return (Rf) exceeds the social rate of return (Rs), then it makes sense to preserve capital and limit annual payout to the IRS minimum.

Philanthropy often measures social return by translating outcomes into monetary terms, using financial-style frameworks like social return on investment, cost-benefit calculations, or projected economic gains. These models assume that social value can be expressed in dollars and evaluated on the same terms as financial performance. Consequently, social return is calculated through the narrow subset of outcomes that lend themselves to dollar conversion.

The problem with this is that the ways in which we estimate social return are built on financial methodologies that cannot capture the full value of social change. As a result, Rs is routinely measured as a floor rather than a ceiling, while Rf is treated as a dependable benchmark. This asymmetry has profound implications: in attempting to quantify social returns in a financial framework, we systematically understate Rs and under-allocate investment in philanthropy in favor of retaining it in financial instruments.

In other words, payout rates remain low as grantmaking institutions place a premium, often without realizing it, on accruing financial return over investing in impact.

The Exchange Rate Problem: Social Value Is Not a Financial Instrument

Finance works because everything shares a denominator. Social impact does not. Social value is produced through relationships, identity formation, community networks, and long-run changes in opportunity. This all unfolds in ways that cannot be meaningfully converted into dollars. Or otherwise said, there is no exchange rate between a thriving society and money.

This challenge is not unique to philanthropy; the legal system confronts it in torts cases like wrongful death: Juries must assign a number to the loss of companionship, potential, and unrealized influence. They do it because they must, but everyone understands the number is not the value. It is a symbolic placeholder for something that resists quantification.

Philanthropy often forgets this distinction. We generate ratios, assign financial proxies, and present clean dashboards. But these outputs reflect only the aspects of human flourishing that resemble economic activity. They do not capture the full texture of social change.

Proximal Outcomes Versus Ultimate Value: A Clarifying Distinction

A more nuanced way to think about social impact is to differentiate between proximal outcomes and ultimate value.

Proximal outcomes are concrete and measurable: improvements in wages, test scores, graduation rates, or program participation. These matter — they anchor our learning and help us understand whether a strategy is working as intended.

Ultimate value, however, lives elsewhere. It’s the dignity a person experiences when their voice is heard. It’s the sense of belonging created by a trusted community space. It’s the long-run shift in aspiration sparked by a mentor, a caring educator, or a library book pulled from a shelf at just the right moment. These are the effects that compound across years and across relationships, often in ways no logic model can fully describe.

RAND’s longitudinal study of summer learning programs offers evidence that traditional quantified outcomes (academic and social-emotional metrics) only approximate the full value generated by sustained enrichment.

Philanthropy needs to consider both types of understanding. But our payout strategies and long-term financial planning tend to lean heavily on what we can quantify rather than on what actually drives long-run social progress.

The Undervalued Power of Social Return (Rs > Rf)

Human beings are notoriously bad at recognizing the value of diffuse, long-term benefits. Behavioral economics has long shown that people systematically undervalue benefits that are low-salience, that accrue far into the future, that spill over to others, or that compound over time (Frederick, Loewenstein & O’Donoghue 2002; Thaler & Shefrin 1981; Kremer 2014).

Consider a public library. Traditional return-on-investment analyses can estimate the wage benefits of literacy or the productivity gains of education. The philanthropic field has gotten incredibly good at quantifying these proximal outcomes, but they leave much unaccounted for that a library provides: a safe place after school; intergenerational community; a refuge for people experiencing isolation; and the tiny moments of curiosity that accumulate into lifelong learning. These effects ripple outward for decades.

Even highly financialized programs illustrate the same dynamic. Social Security can be modeled to the penny in financial terms, yet the real value is the stability, dignity, and agency it gives to people who have been excluded from traditional labor markets, which is far larger than the redistribution tables suggest.

When we acknowledge these dynamics, it becomes clear that the true social rate of return (Rs) is almost certainly higher than the financial rate of return (Rf). Our tools simply aren’t built to see it.

What This Means for Payout: Under-Valuation Leads to Under-Deployment

If our models generate only lower bounds on social value, then making payout decisions on the basis of modeled returns inevitably leads to under-deployment of philanthropic capital. Conserving dollars because they will grow financially is rational only if we believe that financial return is the dominant form of return. But if the social return of deploying those dollars today far exceeds the financial return of holding them, then our current norms around payout begin to look more like a mispricing problem than a prudent strategy.

This argument is cause-agnostic — it does not suggest that philanthropy should shift toward any particular issue area. Traditional cause-prioritization models only evaluate proximal outcomes and not ultimate value. Consider areas like civic engagement, community organizing, or youth belonging: These domains often yield the highest ultimate values but are difficult to measure near-term proximal outcomes for.

Communities themselves are the arbiters of value, and philanthropy’s role is to resource the world we collectively hope to build. When we undervalue social return, we inadvertently under-resource that collective project.

A Better Frame: Measurement With Humility, Learning With Context

This is not an argument against measurement. Proximal outcomes can and should be measured. They help foundations learn, adjust strategy, and strengthen relationships with grantees. But the ultimate value of social investment must be assessed differently.

Qualitative data, narrative, lived experience, and community voice are not secondary forms of evidence; they are the primary ways we understand the kinds of impact that matter most. Effective philanthropy depends on forming judgments in partnership with those closest to the work, not on forcing every form of value into a financial denominator. Measurement remains indispensable, but humility must accompany it.

Freeing Philanthropy to Do What Only It Can Do

Philanthropy’s greatest strength is that it is not constrained by markets. It can invest in dignity, belonging, stability, joy, trust, and the conditions that allow people to flourish, even when those benefits resist quantification.

If we recognize that dollar-denominated models systematically undervalue the true impact of social investment, then deploying capital earlier, faster, and in deeper partnership with communities is not just an expression of generosity, it is a sound strategic choice. The society we build for tomorrow will reflect the choices we make today. And those choices should be guided not only by what we can measure, but by what we value.

Kendall Pettygrove is a senior financial analyst at the David and Lucile Packard Foundation. The views expressed here are his own.