Board Structure and Executive Compensation in Nonprofit Organizations: Evidence from Hospitals

Abstract

Draft: October, 1 2003 Preliminary -Please do not quote without the authors' permission.In contrast to managers of for-profit corporations, nonprofit (NP) managers do not face disciplinary pressures from hostile takeovers, concentrated shareholders, or equity-based compensation plans. Past authors have argued that the lack of alternative control mechanisms implies that NP boards should contain few, if any, managers as voting members. This study finds that when NP hospital CEOs are voting members of their boards, their compensation is about 10 percent higher than when they are ex officio members or simply staff (controlling for a rich set of economic factors that are expected to produce crosssectional variation in CEO compensation). The results are consistent with the hypothesis that NP boards are more effective at controlling managerial agency problems when they do not contain internal managers as voting members. While this interpretation is subject to the usual caveats about potential omitted variables and endogeneity biases, these problems are arguably less severe in this study than in related studies from the for-profit sector.

Governance in non-for-profit hospitals: Effects of board members’ remuneration and expertise on CEO compensation

“…If, however, variations on both variables are indicative for the effectiveness of CEO monitoring, contracts may be suboptimal and CEOs may extract rents above what is reasonable according to economic determinants of a hospital. Under the alternative hypothesis, such variables affect CEO's pay [9,10,19] and as such they may be representative for the effectiveness of a hospital's board structure.…”

“…In boards where CEOs are chairman of the board, or where a lot of outside directors are appointed by the CEO, independence is lower and CEOs then extract rents through higher compensation. Only Brickley et al [10] study governance issues and CEO compensation in non-for-profit hospitals. They also show that CEOs with voting rights in a board obtain on average a higher compensation.…”

“…supervisory board) are separated. As mentioned, prior work [9,10] has focused heavily of the power of the CEO in one-tier board contexts. The power of the CEO is, however, assumed to be lower in a two-tier context [4].…”

“…I use data on the total compensation, including the employer's contributions to pension plans, bonuses and allowances for expenses for the sample year 2005 [9,10]. Following Brickley et al [10], I further include comparable full year compensation levels for 19 cases involving a CEO change 5 . These compensation levels are not different from those for the rest of the sample (p > .45).…”

“…If boards are independent of a CEO, one may expect that the board establishes a pay package that reflects the underlying responsibilities of a CEO, which are affected by size, complexity and performance indicators of the hospital. Differences in board effectiveness, however, can arise when, besides a range of economic controls for CEO pay, variations in board structure variables are also informative for CEO pay [9,10]. It would mean that certain boards are less effective in aligning the CEO pay to the economic determinants of pay.…”