Paying Enough but not Paying too Much When There is no Third-Party Endorsement: Executive Compensation and Individual Donations for Nonprofit Organizations

Abstract

We examine whether third-party endorsement and institutional trust can mitigate the potential negative effects of higher levels of executive compensation on the likelihood of future donations to a nonprofit organization. Using an experimental design, we find support for prior expectations that paying higher executive compensation reduces the likelihood of future individual donations. We also find that this negative effect is only significant in the absence of a third-party endorsement so that individual donations significantly decrease when the nonprofit pay is high relative to moderate executive compensation levels. Finally, the likelihood of future individual donations is higher when institutional trust is high. However, high institutional trust does not validate the payment of higher levels of executive compensation. Our results have theoretical and practical implications by showing that nonprofits are better off paying moderate executive compensation levels but not paying too much if they have not attracted respectable third-party endorsers.