Nonprofit Executive Incentive Pay

Abstract

We utilize information only recently disclosed on Form 990 to examine the use and consequences of incentive pay at nonprofit organizations. While not used as frequently as in for-profit firms, bonuses are common in nonprofits, as we observe them in approximately 44 percent of our firm-year observations. We find that bonuses are positively associated with profitability, competition, firm size, available cash, and use of compensation consultants and committees; while negatively related to board oversight and charitable nature. However, our results suggest that donors look unfavorably at the payment of bonuses, as donations are negatively associated with prior year bonuses. Nonetheless, we find evidence consistent with the payment of bonuses incentivizing nonprofit executives as, despite reduced contributions, future performance is positively associated with bonus compensation.

Keywords: nonprofit, executive pay, bonus pay