The Mission Matters: Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations

43 Pages Posted: 24 Sep 2012 Last revised: 18 Jun 2018

See all articles by Karen Sedatole

Karen Sedatole

Goizueta Business School

Amy Swaney

Central Michigan University

Michelle Yetman

University of California, Davis - Graduate School of Management

Robert J. Yetman

University of California, Davis - Graduate School of Management

Date Written: June 1, 2018

Abstract

This study examines CEO compensation incentive weights on revenue and net profit accounting-based performance metrics in the nonprofit setting. We show that the institutional features of the nonprofit setting alter the incentive compensation role of accounting metrics in interesting and unique ways. We first document that, parallel to the theoretic predictions of analytic agency theory where incentive weights are greater for measures more congruent with the creation of firm financial value, larger revenue incentive weights for nonprofits organizations are placed on more mission-congruent revenues. We next examine whether the for-profit role of net income as a measure of net resources to be maximized for residual claimants shifts to a more nuanced role in which nonprofits must trade-off the financial health benefits of higher profits against spending more on the charitable mission. We find a significant negative incentive weight on net profit, suggesting that nonprofits are willing to forgo improving their fiscal health in order to provide more charitable output. Together our results show that fulfillment of the nonprofit mission is the primary driver of incentive compensation weights in the nonprofit setting.

Keywords: nonprofit organizations, pay-for-performance, executive compensation

JEL Classification: J33, M12, M41, M52

Suggested Citation

Sedatole, Karen and Swaney, Amy and Yetman, Michelle and Yetman, Robert, The Mission Matters: Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=2151326 or http://dx.doi.org/10.2139/ssrn.2151326

Karen Sedatole (Contact Author)

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Amy Swaney

Central Michigan University ( email )

Mt. Pleasant, MI 48858
United States

Michelle Yetman

University of California, Davis - Graduate School of Management ( email )

128 AOB IV
One Shields Avenue
Davis, CA 95616
United States
530-754-7808 (Phone)
530-752-2924 (Fax)

Robert Yetman

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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