Managerial Incentives in Nonprofit Organizations: Evidence from Hospitals

Abstract

This paper examines the incentives of chief executive officers (CEOs) in a large sample of nonprofit hospitals. The evidence indicates that both turnover and compensation of these CEOs are significantly related to financial performance (return on assets). We find no evidence that nonprofit hospitals provide explicit incentives for their CEOs to focus on altruistic activities. The turnover/performance relation appears stronger in nonprofit hospitals than in for‐profit hospitals and other for‐profit corporations (our data do not allow us to compare compensation incentives). Past research suggests that there is little distinction between the outputs and behaviors of private nonprofit and for‐profit hospitals. Consistent with these findings, our study suggests that managers face incentives to concentrate on financial performance in both types of organizations.