Chapter

Objective Functions and Compensation Structures in Nonprofit and For-Profit Organizations

Edited by Burcay Erus and Burton A. Weisbrod

in The Governance of Not-for-Profit Organizations

Published by University of Chicago Press

Published in print August 2003 | ISBN: 9780226297859
Published online February 2013 | e-ISBN: 9780226297866 | DOI: http://dx.doi.org/10.7208/chicago/9780226297866.003.0005
Objective Functions and Compensation Structures in Nonprofit and For-Profit Organizations

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This chapter examines the behavior of two forms of nonprofit organizations: religious nonprofit and secular nonprofit, as well as that of private for-profit (FP) firms, when they coexist in a mixed industry: hospitals. In an attempt to determine whether each type of nonprofit organization can be characterized by the same objective function as a for-profit firm, but recognizing the difficulty of observing objective functions, the reflections of objective functions in employee compensation structures are studied. The following hypotheses are tested: (a) NP organizations use weaker incentives than FPs when compensating their CEOs; (b) there are no differences—or, at most, smaller differences—in the incentive structures at FP and NP organizations for workers down the job ladder (middle managers and technical workers); and (c) exogenous tightening of fiscal constraints cause nonprofits to alter incentive structures to become more like for-profit firms. Overall, the findings are broadly consistent with the four hypotheses.

Keywords: nonprofit organizations; religious nonprofit; secular nonprofit; private for-profit; hospitals; employee compensation; incentives

Chapter.  10372 words. 

Subjects: Financial Markets

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