We examine the effects of profit-based compensation on nonprofit objectives. A tension arises between focusing on profit versus nonprofit objectives when nonprofit organizations emphasize profitability in top management compensation contracts. Many nonprofit objectives, such as providing free care for the poor, decrease profits. We discuss factors that might lead nonprofit managers to focus on profit and nonprofit objectives. We then test whether profit-based compensation leads to an increase or decrease in nonprofit objectives. We find that profit-based compensation is positively associated with uncompensated care, breadth of hospital services, and nursing hours per patient day, and negatively correlated with hospital age. We then perform sensitivity analysis to provide insight into this relation and find evidence of better governance within hospitals that use profit-based compensation.  We conclude that when nonprofit managers are compensated based on profits, they do not focus solely on improving hospital financial performance, but also successfully emphasize nonprofit objectives.

RSVP by May 7, 2008 to Sylvia Fuchek or 220-3812

There is no cost to attend research seminars at the Haskayne School of Business.