CEOs of nonprofits who purposefully earn less than their peers tend to lead organizations with superior performance, according to a new study conducted by two Virginia Commonwealth University School of Business professors.
“Serving Others at the Expense of Self: The Relationship between Nonprofit CEO Compensation and Performance in Trade and Professional Associations,” co-authored by Christopher S. Reina, Ph.D., and Joseph E. Coombs, Ph.D., was published in the latest issue of the Journal of Public and Nonprofit Affairs.
“In the nonprofit sector where organizations face high pressure to keep operating costs low and be good stewards of public money, how much CEOs make sends a powerful signal to the marketplace,” Coombs said. “When CEOs have access to the salary information of their peers and vice-versa and can generally influence their own salary, an intriguing question is raised — namely, is there a ‘reward’ for CEOs who knowingly earn less than their peers in the form of greater financial and nonfinancial organizational performance?”
The study, co-conducted by Marina Saitgalina, Ph.D., an assistant professor at Old Dominion University, and Andrew A. Bennett, Ph.D., an alumnus of the VCU School of Business and an assistant professor at ODU, draws on theories from leadership and psychology. It focuses on the alignment between CEO and stakeholders in a nonprofit setting, where excessive compensation is generally frowned upon. The researchers focused on relative CEO compensation, using a framework drawing from social comparison and servant leadership, examining a sample of CEO compensation data from 154 organizations.
The study found that when CEOs earn less than their peers, their organizations serve more individuals in the community — a measure of nonfinancial performance. The effect is pronounced when organizations have smaller operating budgets. Further, organizations with CEOs who have higher relative pay tend to lead organizations with lower financial efficiency, especially when there is a small operating budget.
Control variables included organization budget, size, geographic scope and CEO tenure and gender.
“While it makes intuitive sense that an organization’s financial performance would improve if a CEO were paid less, our finding that CEOs who earn less than their peers might lead organizations to higher levels of nonfinancial performance in the form of the number of individuals served is an intriguing finding of our study,” Reina said. “In other words, when CEOs serve others at the expense of self by taking lower relative pay, we see that their organizations perform better when it comes to serving the public good, and they also do better in terms of organizational efficiency when operating with smaller budgets.”