Episode 44: Regulating CEO Pay

When the Nonprofit Revitalization Act passed in 2013, it was the first major overhaul of nonprofit regulations in New York State in 40 years. The legislation modernized rules around nonprofit boards and committees and, among other things, prohibited nonprofit officers from being present at meetings where their pay is discussed.

Ilona Babenka

In the years since, a trio of researchers has examined the effect that one regulation had on executive compensation, becoming the basis for Regulating CEO Pay: Evidence from the Nonprofit Revitalization Act. The 67-page paper was written by Ilona Babenka, associate professor in the Department of Finance in the W.P. Carey School of Business at Arizona State University; Rik Sen, associate professor in the School of Banking and Finance at the University of New South Wales, and Benjamin Bennett of Tulane University’s A.B. Freeman School of Business.

They examined tax data for almost 1,700 nonprofits in New York State and found that from 2009 to 2017, average compensation for the chief executive officer (CEO) dropped by 2% to 3% after the act went into effect. Despite earning less than they might have expected, CEOs spent 2% more time working without additional turnover, according to the research.

Rik Sen

At the same time, nonprofit performance improved in terms of larger contributions, more volunteers and bigger revenues. Nonprofits also were more likely to set up a compensation committee, perform independent compensation review, or adjust pay to be in line with peer organizations. The legislation, authors argue, reduced the fraction of “compromised boards” among New York’s nonprofits.

Overall, our results suggest that regulation that targets the pay-setting process can be effective at improving organizational outcomes at nonprofits.

The average nonprofit in the research has seven executives, reports $265 million in total assets and $129 million in revenue and some 600 volunteers. Average CEO pay was an estimated $600,000 while median CEO compensation was $350,000.