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Managerial Compensation and Incentives in For-Profit and Nonprofit Hospitals

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  • Roomkin, Myron J
  • Weisbrod, Burton A
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    Abstract

    Differential economic behavior of for-profit and nonprofit institutions can be manifest in both output and input markets. When behavior in output markets is difficult to observe, behavior in input markets can be useful proxies. We examine monetary compensation and its composition between base salary and bonus, and the associated incentive structures, in the U.S. hospital industry. Our data permit controlling for interinstitutional differences in the scope and complexity of jobs having the same titles, as well as differences in organization size and other variables. We find (1) total monetary compensation for the two top executive jobs is substantially higher in the for-profit sector; and (2) the composition of compensation as between base salary and bonus differs materially across forms of organization, bonuses being absolutely and relatively greater in the for-profit sector. Particularly noteworthy is the finding that for-profit hospitals utilize compensation mechanisms that, by involving larger contingent components, provide stronger incentives--greater rewards--as compared with nonprofit hospitals, for performance that is more easily monitored. While our findings are consistent with more than one model of comparative organizations differ in their goals and, hence, in the kinds of managers they demand and the reward structures they offer. Nonprofit organizations may pursue objectives that reflect greater concern about collective goods or other outputs that are more difficult to measure and reward. Alternatively, nonprofits, confronted by a nondistribution constraint on the payout of profit to managers, may lack incentives for efficiency, and so may pursue other goals such as a quiet life. Such differential objective functions, together with the differential constraints on the distribution of profit to managers, have two kinds of implications. (1) Nonprofit and for-profit organizations may attract different kinds of managers, especially at the top levels, because nonprofits prefer working for a nonprofit organization and, hence, may offer a lower supply price to them. (2) The two types of organizations can be expected to offer differential composition of compensation as between base salary and performance-based bonus, providing different incentives for managers. Our analysis is positive in character, the goal being to identify systematic differences in organization behavior. Copyright 1999 by Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

    Volume (Year): 15 (1999)
    Issue (Month): 3 (October)
    Pages: 750-81

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    Handle: RePEc:oup:jleorg:v:15:y:1999:i:3:p:750-81

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    Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
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    Web: http://www.oup.co.uk/journals

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    Cited by:
    1. Francois, Patrick, 2005. "Making A Difference," CEPR Discussion Papers 5158, C.E.P.R. Discussion Papers.
    2. Jill R. Horwitz, 2005. "Does Corporate Ownership Matter? Service Provision in the Hospital Industry," NBER Working Papers 11376, National Bureau of Economic Research, Inc.
    3. Andersson, Fredrik, 2009. "A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing," Working Paper Series 784, Research Institute of Industrial Economics.
    4. Leemore Dafny & David Dranove, 2006. "Regulatory Exploitation and the Market for Corporate Controls," NBER Working Papers 12438, National Bureau of Economic Research, Inc.
    5. Bae, Kee-Hong & Kim, Seung-Bo & Kim, Woochan, 2012. "Family control and expropriation at not-for-profit organizations: evidence from korean private universities," MPRA Paper 44029, University Library of Munich, Germany.
    6. Patrick Francois, 2004. "'Making a Difference': Labor Donations in the Production of Public Goods," The Centre for Market and Public Organisation 04/093, Department of Economics, University of Bristol, UK.
    7. Joseph Lanfranchi & Mathieu Narcy, 2013. "Effort and Monetary Incentives in Nonprofit and For-Profit Organizations," TEPP Working Paper 2013-01, TEPP.
    8. Kuhn, Michael & Gundlach, Erich, 2006. "Delegating budgets when agents care about autonomy," Thuenen-Series of Applied Economic Theory 69, University of Rostock, Institute of Economics.
    9. Ge Bai, 2013. "How Do Board Size and Occupational Background of Directors Influence Social Performance in For-profit and Non-profit Organizations? Evidence from California Hospitals," Journal of Business Ethics, Springer, vol. 118(1), pages 171-187, November.

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