Executive Compensation and Regulation-Imposed Governance: Evidence from the California Nonprofit Integrity Act of 2004

Abstract

This study examines the impact of the California Nonprofit Integrity Act of 2004 on CEO compensation costs in affected organizations. Contrary to the stated objective of the Act that executive compensation is “just and reasonable,” we find that CEO compensation costs for affected nonprofits during the post-regulation periods have increased by about 6.3 percent when compared with a control group of comparable unaffected nonprofits. In addition, the relative increase in CEO compensation appears to come from nonprofits that have experienced greater regulatory cost increases. We do not find evidence that the Act resulted in a change in CEO pay performance sensitivity. The observed CEO pay increase is not systematically different across nonprofits that underpaid versus those that overpaid their CEOs during pre-Act periods. Overall, this paper highlights the unintended consequences of regulatory attempts to enhance governance in the not-for-profit sector.

CEO compensation and performance in US private foundations

“…For example, Dhole et al. () report coefficients that indicate CEO Compensation is on average 4.5% higher for public charities that are twice as large. These findings provide evidence that size is an especially important determinant of CEO compensation in private foundations.…”

“…Dhole et al. (, p. 447) states that the California Nonprofit Integrity Act of 2004 is “a watershed event in attempts to regulate governance and compensation practices in the not‐for‐profit sector with SOX‐like regulation” and provides evidence that the Act increases CEO compensation costs due to greater regulatory costs . Therefore, we include a control variable that is coded 1 if a foundation is subject to the California Nonprofit Integrity Act of 2004, and 0 otherwise.…”

“…Additionally, the magnitude of the coefficient on total assets for our sample foundations is much larger than that found in prior public charity studies. For example, Dhole et al (2015) report coefficients that indicate CEO Compensation is on average 4.5% higher for public charities that are twice as large. These findings provide evidence that size is an especially important determinant of CEO compensation in private foundations.…”

“…Some prior public charity research (Dhole, Khumawala, Mishra, & Ranasinghe, ; Hallock, ) have also used contemporaneous (unlagged) independent variables in their levels models for examining pay–performance associations. For our sample, results (unreported) are qualitatively similar to the primary analysis when using both lagged and unlagged independent variables.…”

Executive Remuneration: Achieving Accountability through Disclosure

“…In examining the impact of the introduction of stronger governance mechanisms, Dhole, Khumawala, Mishra and Ranasinghe (2015) found that many firms experienced greater regulatory costs and CEO compensation increased. In Germany, where new executive compensation regulation required more disclosure of pay contracts and implemented caps on bonus pay, Hitz and Muller-Bloch (2015) find evidence of a negative economic impact from the introduction of the regulation.…”