Management Accounting Section Midyear Meeting

The Effects of Nonprofit Pay and Market Pay Transparency on Donor Trust and Nonprofit Governance

• In Event: Management Control in Nonprofit Organizations

Abstract

We examine how two trends in the nonprofit sector – rising manager pay levels and increasing transparency of their pay relative to market – affect managers’ costly investment in governance for their nonprofit. Using an experiment, we find that when market pay transparency is low, donors cannot distinguish managers’ type based on their pay level and therefore trust them equally. Anticipating donor’s high trust, high pay and low pay managers similarly choose not to invest in strong governance to save costs. However, high pay managers are more likely than low pay managers to exploit their discretion under weak governance by allocating more donations to themselves rather than advance the nonprofit mission. When market pay transparency increases and donors can infer managers’ type accordingly, more high pay managers invest in strong governance that limits their discretion to restore donors’ trust, while low pay managers have less need to invest in governance. These findings provide new theory and evidence on the environmental and psychological factors that drive nonprofit governance.

Authors

• Eric W. Chan, The University of Texas at Austin

• Xinyu Zhang, Cornell University