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

By Giroux, Gary; Willson, Victor | Journal of Public Budgeting, Accounting & Financial Management, December 1, 2006 | Go to article overview

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


Giroux, Gary, Willson, Victor, Journal of Public Budgeting, Accounting & Financial Management


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.

State regulators have a particular interest in superintendent salary. The Texas Education Agency (TEA) regulates Texas school districts. Funding school districts is a substantial portion of the state budget ($21 billion in Texas in 2004, 34% of the state's overall budget). The TEA gathers and monitors annual superintendent base salary information. However, there is little direct state regulation. Although performance pay is the majority of corporate CEO compensation, rewards are only loosely tied to performance for superintendents, if at all (Hanushek, 1996). An obstacle to bonuses for superintendents is the lack of a clear definition of what defines improved performance worthy of a bonus (Ehrenberg, Chaykowski, & Ehrenberg, 1988). Results of this study suggest that salaries are not based on either education or fiscal performance and these should be considered for future policy-making decisions.

Because of the complex environment, structural equation modeling (SEM) is used for model building and empirical analysis. Although common in behavior studies, SEM is not widely used for testing economic models with archival data. We believe this is the first paper to analyze compensation using SEM. The only accounting paper we found on governmental/nonprofit analysis was Cheng (1992). …

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