Not-for-Profit Hospital CEO Performance and Pay: Some Evidence from Connecticut
Kramer, Jeffrey, Santerre, Rexford E., Inquiry
This paper uses observations from a panel data set of 35 chief executive officers (CEOs) from 29 not-for-profit hospitals in Connecticut over the period 1998 to 2006 to investigate the relationship between CEO performance and pay. Both economic and charity performance measures are specified in the empirical model. The multiple regression results reveal that not-for-profit hospital CEOs, at least in Connecticut, are driven at the margin to increase the occupancy rate of privately insured patients at the expense of uncompensated care and public-pay patients. This type of behavior on the part of not-for-profit hospital CEOs calls into question the desirability o fallowing these hospitals a tax exemption on earned income, property, and purchases.
Executive compensation has always captured a considerable amount of attention from the media and general public. The attention surrounding these compensation issues was particularly exacerbated last year as both legislators and the public seriously questioned the huge bonuses many major corporations paid their chief executive officers (CEOs) while being bailed out by the federal government. It has always been unclear, however, whether these concerns over CEO compensation have been driven by valid interests in economic efficiency, subjective notions of fairness, or a simple collective matter of envy. Regardless of the specific reason, we know that CEOs are paid much more than the typical worker and this gap continues to grow in both absolute and relative terms. Determining what should be done about this lopsided imbalance continues to pose a daunting problem for both society and regulators.
Similar to CEOs in general, corporate executives in the hospital services industry have not been shielded from societal attention regarding their pay (Martineau 2007; Waldman 2008; and Wangness 2009). At first blush, this attention seems to be misplaced since most hospitals are organized on a not-for-profit basis because of their charitable mission. Not-for-profit hospitals are exempted from paying income, property, and sales taxes, with the understanding that this indirect government subsidy is being used to provide community benefits of various kinds such as uncompensated care, education, research, and outreach programs. In addition, Hansmann (1996) notes that not-for-profit organizations face a nondistribution constraint because legally they cannot directly distribute any excess earnings to those who make decisions within the organization, such as employees, managers, or board members. Thus, not-for-profit status should mean hospital CEOs are compensated based upon their relative success at fulfilling the charitable mission of their organizations.
In contrast, however, economic theory suggests that a not-for-profit organization may pursue goals that maximize the personal utility of the CEO because, unlike a for-profit organization, no individual or residual claimant holds a financial stake in the company.
Therefore no single person or outside institution faces a financial incentive to closely monitor the actions of the CEO. These individual goals of the CEO may conflict with cost minimization or societal goals, such as providing sufficient community benefits, and take form in discretionary expenditures on the so-called "5Ps" of pay, perquisites, power, patronage, and prestige (Santerre and Neun 1993). Consequently, the CEO may be more interested in expanding the size of the organization, maximizing revenues to finance discretionary expenditures, or increasing the structural quality of the institution. Pursuing individual goals may be relatively unconstrained because the CEO often plays a pivotal role in the selection of various board members. The implication of this property rights model is that the compensation of hospital CEOs may be unrelated to their on-the-job performance, particularly with respect to satisfying the charitable mission of the organization. …