Nonprofit organizations suffer from agency problems that are similar to or perhaps even more severe than those observed at for-profit companies. As a result, one might expect the executive pay setting process in the two sectors to reflect similar deficiencies. This Article explains why the managerial power theory that was developed to help explain for-profit executive pay is plausibly applicable to nonprofits. More importantly, this Article offers new evidence based on data from a large panel of colleges and universities collected across a nine year period that supports the idea that potential stakeholder outrage plays a role in limiting nonprofit executive pay. For example, we find for the first time evidence of an otherwise counter-intuitive negative association between the fraction of university revenue provided by current donations and president compensation. We also are the first to find that excess executive pay reduces donations. These findings support the hypothesis that donors with less leverage suffer from significant agency costs in setting president pay. We discuss the implications of these findings for the regulation of nonprofits and for a broader understanding of the pay-setting process at for-profit as well as nonprofit organizations. For example, we note that our results are consistent with the view that, absent reforms, presidents may have self-interested incentives to increase tuition.
Brian D. Galle and David I. Walker. "The Problem of Nonprofit Executive Pay?: Evidence from U.S. Colleges and Universities." ExpressO (2015).