Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations

Abstract

This study examines pay-for-performance relations in the nonprofit setting. Beginning with the premise that nonprofits seek to maximize charitable spending, we examine whether CEO compensation is based on metrics that capture the amount of charitable spending resources generated by the CEO. First, we find that changes in resource-based performance metrics, namely revenue metrics, are positively associated with changes in CEO compensation. Second, consistent with compensation theory, we find stronger pay-for-performance incentive weights for performance metrics that are more congruent with the charitable mission and less noisy as an indicator of resources generated. Finally, we examine whether variations in the incentive weight on net profit are consistent with the cost-benefit tradeoff uniquely faced by nonprofits seeking to balance fiscal health with the fundamental objective of maximal spending toward the mission. We find a significant negative relation between compensation and net profit, on average, suggesting that fulfillment of the nonprofit objective is the dominant force in the aforementioned tradeoff. However, further investigation reveals that this result is driven by traditional nonprofits and that commercial nonprofits place positive incentive weights on net profit. We find that net profit is less negatively incentivized in traditional nonprofits that experienced a net loss in the prior year, that have low expendable net assets, and that do not receive government grants. Overall, our results indicate that nonprofit pay-for-performance systems are fairly sophisticated, with variations in incentive weights that are consistent with compensation theory, but that also reflect the rich and unique institutional features of the nonprofit setting.