Nonprofit Pay, Market Pay Transparency, and Governance

• In Event: Investment and Resource Allocation Decisions

Abstract

We experimentally examine how nonprofit managers’ selected pay level and transparency of their pay relative to the market affect managers’ investment in governance. When market pay transparency is low, results indicate that high pay and low pay managers similarly choose not to invest in strong governance as donors’ trust is high. However, high pay managers are more likely to exploit their discretion under weak governance by allocating more donations to themselves rather than the nonprofit mission. When market pay transparency increases, high pay managers increase their costly investment in governance that limits their discretion to restore donors’ trust, while low pay managers decrease such investment to save costs. Supplemental analyses suggest that managers correctly anticipate the effect of market pay transparency on donors’ trust based on inferences donors make about the manager’s type. Finally, evidence suggests that greater market pay transparency increases the total donations spent on the nonprofit mission.
Keywords: Nonprofit, market pay transparency, wage level, governance
JEL Classification:

Authors

• Xinyu Zhang, Cornell University

• Eric W Chan, The University of Texas at Austin