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The Price of Doing Good: Executive Compensation in Nonprofit Organizations (WP-02-11)

Peter Frumkin and Elizabeth K. Keating

This article examines whether nonprofit executive pay patterns are consistent with the espoused social mission of these organizations. We find that nonprofit CEOs are paid a significant fixed component, and many CEOs also receive additional pay associated with managing larger sized organizations. Our analysis indicates that nonprofit executive compensation is not significantly related to CEO performance, as measured either by improved fund-raising results or better administrative efficiency. This weak pay-for-performance link may be due in part to nonprofits' concern about violating the non-distribution constraint in the sector, which prohibits the distribution of excess earnings. While nonprofits may not be breaching the letter of the law, some organizations appear to be challenging its spirit: We present evidence that CEO compensation is significantly higher in organizations where free cash flows are present, as measured by commercial revenues, liquid assets, and investment portfolios.

Peter Frumkin, Kennedy School of Government, Harvard University

Elizabeth K. Keating, Kellogg Graduate School of Management, Northwestern University

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