Are Non-Profit Firms Simply For-Profits in Disguise? Evidence from Executive Compensation in the Nursing Home Industry
University of Chicago - Law School; University of Chicago Pritzker School of Medicine; Resources for the Future; National Bureau of Economic Research (NBER)
Albert H. Choi
University of Virginia School of Law
September 26, 2004
It is well-established that non-profit hospitals employ performance bonuses with much lower frequency than for-profit hospitals. Weisbrod (1999, 2003a, 2003b) suggest that this implies that principals of non-profit and for-profit firms have different objectives or purposes. Brickley and Van Horn (2002) dispute the different-objectives hypothesis. They present evidence that the salaries and turnover of executives at non-profit hospitals reward financial performance but not altruistic activities. Employing a unique data set of executive compensation at 2,700 nursing homes in 2001 and 2002, this paper improves on Brickley and Van Horn's analysis in three important ways. First, we provide an explanation for how non-profit firms and for-profit firms may both seek to reward financial performance but write different executive compensation contracts. This explanation relies upon tax penalties on the use of financial rewards for executives by non-profit firms. Second, we introduce direct comparisons of wages at non-profit and for-profit facilities as well as superior controls for quality of patient care and the risk profile of patients. Third, we consider the implications of observed patterns in executive compensation for alternative theories of non-profit behavior, such as quality/quantity maximization. We conclude that executive compensation at non-profit firms supports that the hypothesis that principals at non-profit firms either care about profits just like principals at for-profit firms (the strong version of the for-profit-in-disguise model) or behave as if they do (the weak version).
Number of Pages in PDF File: 42
Keywords: non-profit, nursing home, tax, executive compensation
JEL Classification: H25, I11, J31, J33, K34, L31
Date posted: November 12, 2004
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