Are Non-Profit Firms Simply For-Profits in Disguise? Evidence from Executive Compensation in the Nursing Home Industry

42 Pages Posted: 12 Nov 2004  

Anup Malani

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

Date Written: September 26, 2004

Abstract

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).

Keywords: non-profit, nursing home, tax, executive compensation

JEL Classification: H25, I11, J31, J33, K34, L31

Suggested Citation

Malani, Anup and Choi, Albert H., Are Non-Profit Firms Simply For-Profits in Disguise? Evidence from Executive Compensation in the Nursing Home Industry (September 26, 2004). Available at SSRN: https://ssrn.com/abstract=617362 or http://dx.doi.org/10.2139/ssrn.617362

Anup Malani (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9602 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/malani/

University of Chicago Pritzker School of Medicine

Chicago, IL 60637
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Albert H. Choi

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Paper statistics

Downloads
464
Rank
48,528
Abstract Views
4,015