Managerial Compensation and Incentives in For-Profit and Nonprofit Hospitals

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.