Governance and CEO pay and performance in non‐profit organizations

Abstract

Purpose

The purpose of this paper is to analyze the pay and performance of chief executive officers (CEOs) in Portuguese, non‐profit organizations (NPOs), focusing on the role played by the economic performance of the organization, together with that played by the structure of the board and the individual characteristics of the manager. If the CEO can influence the board structure, agency problems arise, which in turn allow the CEO to extract rent and demand compensation in excess of the equilibrium level.

Design/methodology/approach

An ordinary least squares (OLS) model and an instrumental variable (IV) models are estimated for comparative purposes. The IV permits to account for endogenous variables in the regression.

Findings

It is concluded that governance is important in the Portuguese non‐profit sector. Several variables affect the CEO, namely, organization performance variables, board composition variables and individual variables. This result highlights the urgent need for a code of governance practice to be introduced in this sector. Moreover, the paper integrates human capital in the definition of the earnings, concluding that this also contributes to earnings.

Research limitations/implications

This paper has two limitations. The first is related to the data set and the second with the method adopted. With the reference to the data set, the span is limited and therefore the generalization of this result is questionable. A larger data span is needed to confirm the present results. Relative to the method, the OLS is unable to handle endogeneity variables in a regression. The instrumental variables (IV) can overcome this result, but some critics to this method have appear recently, when there are heterogeneous across subjects and local IV are needed.

Practical implication

A governance code should be adopted, involving NPO managers in their definition. A regulatory agency that will be the watch dog of the process should be implemented to enforce the modernization of Portuguese NPO.

Originality/value

This is the first paper analyzing governance issues on Portuguese NPO and the second paper at European level on NPO governance. It clarifies two issues, the absence of governance principles in Portuguese NPO and the need of a regulatory agency in this context.

Citation

Pestana Barros, C. and Nunes, F. (2007), "Governance and CEO pay and performance in non‐profit organizations", International Journal of Social Economics, Vol. 34 No. 11, pp. 811-827. https://doi.org/10.1108/03068290710826404