The Mission Matters: Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations
43 Pages Posted: 24 Sep 2012 Last revised: 18 Jun 2018
Date Written: June 1, 2018
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: Suggested Citation