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Principals and Agents: An Investigation of Executive Compensation in Human Service Nonprofits

  • Milena Nikolova
OriginalPaper

Abstract

This study proposes a revised agency theory for the nonprofit sector, distinguishes between the extent of agency and the extent of monitoring, and compares the magnitudes of the two impacts. Using panel data for 1998–2003, the paper tests whether monitoring by principal-stakeholders such as donors, clients, the government, and the board reduces the opportunity for executive misconduct such as extravagant spending on compensation and perquisites. Given the theory, the findings show that two effects influence CEO salaries. First, while nonprofit endowments provide a fiscal cushion in tough financial situations, by offering “organizational slack” they also increase the CEO’s opportunity to steal or raise her compensation (i.e., agency effect). Second, donors utilize monitoring mechanisms such as auditing or direct observations, which limit the opportunity for misconduct and reduce executive pay (i.e., monitoring effect). In the final analysis, the monitoring effect is greater than the agency effect, which implies that even if agency problems are present, the monitoring that donors provide offsets them.

Keywords

Nonprofits Agency theory Monitoring CEO compensation 

Résumé

Cette étude propose d’appliquer une nouvelle théorie de l’agence au secteur à but non lucratif, établit une distinction entre la portée de l’agence et la portée du contrôle externe, et compare l’importance de l’impact de l’une et l’autre. En utilisant les données d’une recherche sur un échantillon pour les années 1998–2003, l’article cherche à établir si le contrôle exercé par les principales parties prenantes telles que les donateurs, les clients, le gouvernement et les conseils d’administration réduit les chances que la direction ne commette des fautes telles que des dépenses extravagantes sur les compensations financières et autres avantages. Sur la base de la théorie proposée, les résultats montrent que deux facteurs principaux influencent les salaires des dirigeants. En premier lieu, les dotations des organisations à but non lucratif offrent une marge de manœuvre budgétaire dans les situations financières difficiles, mais en permettant cette « flexibilité organisationnelle » elles offrent aussi aux dirigeants de plus grandes opportunités d’augmenter leur salaire (il s’agit là de l’effet d’agence). En second lieu, les donateurs utilisent des mécanismes de contrôle tels que l’audit ou l’observation directe, qui limitent les opportunités d’inconduite et réduisent les salaires des dirigeants (il s’agit là de l’effet de contrôle). En fin de compte, l’effet de contrôle l’emporte sur l’effet d’agence, ce qui signifie que même s’il existe des problèmes d’agence, ils sont compensés par le contrôle qu’exercent les donateurs.

Zusammenfassung

In dieser Studie werden eine überarbeitete Agency-Theorie für den gemeinnützigen Sektor vorgeschlagen, zwischen dem Ausmaß der Agency und dem Umfang der Überwachung unterschieden und die Auswirkungen beider verglichen. Unter Verwendung von Paneldaten für den Zeitraum von 1998 bis 2003 wird untersucht, ob eine Überwachung durch die Prinzipal-Stakeholder, zum Beispiel Spender, Auftraggeber, Regierung und Vorstand, die Möglichkeit für ein Fehlverhalten von Führungskräften, wie übermäßige Ausgaben für Vergütungen und Sonderzulagen, verringert. Im Hinblick auf die Theorie zeigen die Ergebnisse, dass sich zwei Einflussgrößen auf die Gehälter von Geschäftsführern auswirken. Erstens dienen gemeinnützige Zuwendungen in schwierigen finanziellen Situationen zwar als ein finanzielles Polster, doch durch eine mögliche „organisatorische Nachlässigkeit“bieten sie den Geschäftsführern auch eine bessere Gelegenheit, Gelder zu entwenden oder ihre Vergütung zu erhöhen (Agency-Effekt). Zweitens wenden Spender Überwachungsmechanismen an, wie Wirtschaftsprüfungen oder direkte Beobachtungen, die die Möglichkeit eines Fehlverhaltens beschränken und die Vergütung der Führungskräfte reduzieren (Überwachungseffekt). In der abschließenden Analyse ist der Überwachungseffekt größer als der Agency-Effekt, was darauf hinweist, dass selbst, wenn es Agency-Probleme gibt, diese durch die Überwachung der Spender aufgewogen werden.

Resumen

El presente estudio ofrece una teoría de la agencia revisada para el sector de las organizaciones sin ánimo de lucro, y distingue entre el alcance de la agencia y el alcance de la monitorización y compara las magnitudes de los dos impactos. Utilizando datos de panel para 1998–2003, el documento pone a prueba si la monitorización por las partes interesadas principales, tales como donantes, clientes, el gobierno, y el consejo, reduce la oportunidad de mala conducta de los ejecutivos tales como gasto extravagante en compensaciones y gratificaciones. Dada la teoría, los hallazgos muestran que dos efectos influyen en los salarios del CEO. En primer lugar, aunque las fundaciones sin ánimo de lucro proporcionan un cojín fiscal en situaciones financieras difíciles, al ofrecer “lasitud organizativa” aumentan también la oportunidad de que el CEO robe o aumente su compensación (es decir, el efecto de la agencia). En segundo lugar, los donantes utilizan mecanismos de monitorización, tales como auditorías u observaciones directas, que limitan la oportunidad de que surja una mala conducta y reducen el salario de los ejecutivos (es decir, el efecto de la monitorización). En el análisis final, el efecto de la monitorización es mayor que el efecto de la agencia, lo que implica que aunque haya problemas de agencia, la monitorización que proporcionan los donantes los compensa.

摘要

本篇研究论文为非营利部门提出修正的代理理论,区别代理范围与监督范围,对比这两种效应的程度。本篇论文运用1998–2003年的固定样本数据,评估主要主体(比如捐赠人、客户、政府及委员会)的监督是否会降低出现行政失当行为的可能性,比如提供过多的薪酬和津贴。基于这个理论,研究结果表明,有两个效应会影响 CEO 的工资。首先,一方面非营利捐赠在艰难的财务环境下能缓解财政困难,另一方面与之相关的“组织松弛”也增加了 CEO 盗取或提高薪酬的可能性(即代理效应)。其次,捐赠人运用监督机制(比如审计或直接观察)限制失当行为的可能性、降低管理人员的薪酬(即监督效应)。根据最后的分析结论,监督效应大于代理效应,这意味着,即便存在代理问题,捐赠人的监督也能产生抵消作用。

要約

本研究では非営利団体のセクターにおいて改訂された理論を提案するが、政府機関と監査の範囲を区別して、2つの効果の規模を比較する。資金提供者、クライアント、政府、委員会などの主要な利害関係者によるモニターによって、幹部社員が補償と特典への多額の支出などに対する不正行為を減少させるか否かに関わらず、本論文では1998年~2003年のパネルデータを使用して評価する。理論から考察すると、調査結果から2つの効果が最高経営責任者の給料に影響を及ぼすことが明らかになった。まず、非営利団体の寄付は厳しい財政状態における金融緩和を提供するが、「組織の不景気」の提供は、補償(すなわち政府機関効果)を上げるか流用するかという最高経営責任者の選択肢を増加させる。第二に、資金提供者は監査もしくは直接的な監視を行い、不正行為の機会を制限して、幹部社員の賃金(すなわちモニター効果)を抑制する。最終的な分析では、政府機関の問題が存在していても、資金提供者が提供するモニターを埋め合わせをすることを提示している。

ملخص

هذه الدراسة تقترح نظرية الوكالة المنقحة للقطاع الغير ربحي، تميز بين إمتداد الوكالة وإمتداد الرصد وتقارن أهمية الأثرين. بإستخدام بيانات متعددة الأبعاد للفترة ما بين 1998-2003، البحث يفحص ما إذا كان الرصد من قبل أصحاب المصلحة الرئيسيين، مثل المانحين، العملاء، الحكومة، والمجلس يقلل من فرصة سوء السلوك التنفيذي مثل الإنفاق ببذخ على تعويضات و علاوات إستثنائية. بإفتراض النظرية، النتائج تظهر أن التأثيرين يؤثرون على رواتب الرؤساء التنفيذيين(CEO). أولا˝، في حين أن الدعم المالي الغير ربحي من التبرعات يوفر حساب إحتياطي في الحالات المالية الصعبة، من خلال تقديم “ركود تنظيمي” كما أنه يزيد فرصة الرئيس التنفيذي للسرقة أو يزيد التعويضات لها (مثال٬ تأثير الوكالة). ثانيا˝، الجهات المانحة بإسعخدام آليات الرصد، مثل المراجعة أو الملاحظات المباشرة، التي تحد من الفرص لسوء السلوك و تقلل رواتب المسؤولين التنفيذيين (مثال٬ تأثير الرصد). في التحليل النهائي، تأثير الرصد أكبر من تأثير الوكالة، وهو ما يعني أنه حتى لو مشاكل الوكالة موجودة، الرصد الذي يقدمه المانح يعوض ذلك.

Notes

Acknowledgments

I would like to thank Dr. Ioana Petrescu for her invaluable guidance and advice throughout the revision process of this paper. I would also like to thank Dr. Carol Graham, as well as Dr. Madiha Afzal, Dr. Laura Langbein, and Zafar Imran for their helpful comments and edits. I thank Katie Roeger of NCCS for providing me with the NCCS data and for her guidance. I am also greatly indebted to the anonymous referees for their thoughtful and thorough feedback and for their helpful suggestions.

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Copyright information

© International Society for Third-Sector Research and The Johns Hopkins University 2013

Authors and Affiliations

  1. 1.School of Public PolicyUniversity of MarylandCollege ParkUSA
  2. 2.WashingtonUSA

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