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...the factor.
In the private for-profit sector there have been several studies attempting to link the compensation of executives to the performance of the firm. Modern theories of executive compensation arise in the context of complex work environments where the owners (principals) and executives (agents) have incomplete information and must arrive at contractual terms of employment. (1) The Holmstrom and Milgrom (1994) model summarizes the issues involved. The principal monitors the agent (executive) using measures of performance. In the case of college administrators, such measures might be total endowment revenue, endowment earnings, the reputation of the institution, etc. The performance of these measures is assumed to be a function of the effort expended by the agent. The optimal incentive scheme or compensation package yields benefits to the principal, while the effort expended by the agent has associated costs. Some forms of compensation with clearly defined property rights are transferable, while others are nontransferable. In the private sector stock options would be transferable, while in private nonprofits all property might be held by the principal. Holmstrom and Milgrom point out that the sustainability of nonprofits implies they may have some merit. Low-powered incentives and bureaucratic constraints may prove an efficient form of compensation where output is not easily measured. Nontransferable returns may be enjoyed by the agent or dissipated, but they can not be assumed by the principal. Examples might be the pleasure the agent receives from doing a certain job or doing something in a certain way or associating with certain colleagues.
Prendergast (1999) surveys the literature on the relation between the organization (principal) and the employee (agent). Agents respond to incentives and principals construct contracts to induce desired responses. He observes that in the context of agents with difficult to measure or complex multidimensional outputs, incentive mechanisms may lead to multitasking. Agents will concentrate on those aspects of their jobs that are linked most closely to their compensation. To prevent this, organizations may prefer not to establish contracts based on incentives. Prendergast finds conflicting evidence on the relation between the noisiness of the output measure and the use of incentive contracts.
This paper examines the relation between executive compensation and institutional attributes, bureaucratic constraints, in not for profit private institutions (private liberal arts colleges). (2) Special attention is given to what Milgrom and Roberts (1992) refer to as middle-level executives. They conclude that incentives are less common among such executives than those higher up in the hierarchy, though they admit there has not been a great deal of study of this group.
The Market for Private Nonprofit Liberal Arts Administrators
Studies of compensation in nonprofits are limited. Roomkin and Weisbrod (1999) look at the relationship between executive compensation and incentives in for-profit and nonprofit hospitals. Their conclusion is that nonprofit hospitals pay executives less and rely less on bonuses than do for-profit hospitals. Roomkin and Weisbrod's work suggests that the objective of nonprofits is more complex and less measurable, implying that managerial compensation will be less related to performance. Compensation may be lower because there is less uncertainty in the nonprofit than in the for-profit sector.
Ehrenberg, Cheslock, and Epifantseva (2001) studied the compensation of college presidents in over 400 colleges and universities from 1992-1993 through 1997-1998. (3) They conclude that there is little relation between changes in the compensation of presidents and various measures of institution performance. My analysis differs from Ehrenberg, Cheslock, and Epifantseva in that president compensation is compared to that of other executives within the organization. The analysis is restricted to only private...
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