Career concerns and accounting performance measures in nonprofit organizations

Abstract

Many in the nonprofit sector view accounting-based performance measures to be overly influential and counterproductive in the evaluation of charities and their leaders. The contention is that such measures are imperfect and often biased, leading to dysfunctional rationing of fundraising and administrative infrastructure. To examine these concerns and the broader question of nonprofit executive incentives, we develop a model of nonprofit executives who are concerned with influencing external perceptions. In doing so, we demonstrate that accounting-based performance measures alter executive incentives in critical ways. In particular, disclosure of the functional classification of nonprofits’ expenses can reduce incentives to overinvest in fundraising and restore investments in programs; at the same time, it also comes with the potential downside of undermining key investments in long-term infrastructure.