Executive Compensation in Nonprofit Organizations: Evaluating Texas Independent School Districts Using Structural Equation Modeling

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ABSTRACT.

The purpose of this paper is to model the determinants of executive compensation of school district superintendents using structural equation models (SEM). These chief executives have unique characteristics and function in a complex environment, due in part to the political nature of the position. SEM has not been used widely to test archival data using economic theory. The complex environment of superintendent salaries is a test case for the viability of the SEM approach. The success of SEM depends on the development of a strong theoretical base. The theory developed assumes that compensation should be based, in part, on fiscal and academic performance, indicating that accounting-related information including performance measures should be important in this context. In this case, a complex theoretical structure was reduced to a relatively simple model: superintendent salary can be best explained with three direct effects (enrollment, teacher salary, and the local tax percentage) plus indirect effects by including two additional factors (white percentage and percent economically disadvantaged). Performance did not influence salary, suggesting that future superintendent compensation contracts should consider financial- and education-based performance measures.

INTRODUCTION

Executive compensation is a significant area of concern, especially for chief executive officers (CEOs) in corporations and other entities. Compensation structure has been linked to the corporate excesses of the last decade, including most corporate scandals. However, the executive compensation structure of nonprofit CEOs has been generally overlooked. . What is the incentive structure of these CEOs and how does it impact on executive performance? Since nonprofit organizations represent some 40% of gross domestic product, the performance of CEOs is important.

This paper looks at one group of nonprofit CEOs, superintendents of Texas independent school districts (ISDs). These are CEOs of highly structured and regulated nonprofit organizations, considered vital to the public interest. Superintendents are public servants appointed by elected school boards and subject to review both directly by the school boards and state regulators and indirectly by the public. Despite the high degree of government regulations of school districts, the evaluation of hiring procedures for superintendents, annual performance evaluation, and compensation are handled locally with little regulation involved. This is in stark contrast to the comparable decisions on teachers and other school district administrators regarding both performance evaluation and compensation

Examining executive compensation in nonprofit organizations is important for several reasons. First, the relationship of the governing board to the CEO is highly political. The school board members are elected by the public and may have unique agendas (e.g., religious-based). In this case, what the school board expects may or may not be in the best interests of the school district. Second, the governing board can reward CEOs generously or terminate them almost immediately. Considerable flexibility exists on CEO policy and reward structures. Third, the role of the CEO and the relationship to the board can result in disastrous consequences under some circumstances, usually because of poor corporate governance practices. Therefore, the compensation of the CEO in nonprofit organizations and the impact of the performance of these organizations may be similar to corporate counterparts in some respects.

Base compensation of superintendents should be related to performance measures. Standard performance measures are likely associated with district size and wealth, student performance (such as attendance, testing results, and graduation rates), and relative financial health and stability of the district. The purpose of this paper is to evaluate superintendent salaries in the context of these performance categories. …