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ASU research finds that rule on ethics boosts nonprofits' performance

September 28, 2021

New York law leads to CEO pay cuts but more donations, revenue

An Arizona State University professor’s research has discovered that holding nonprofit organizations to best practices reduced CEOs’ pay and improved performance.

Ilona Babenka, an associate professor of finance in the W. P. Carey School of Business, looked at compensation data for 14,765 nonprofit organizations in New York state for the years 2009–17.

Babenka and her two co-authorsBenjamin Bennett of Tulane University and Rik Sen of the University of New South Wales wanted to see what happened after the state's Nonprofit Revitalization Act of 2013 was passed. Their paper, “Regulating CEO Pay: Evidence From the Nonprofit Revitalization Act,” has been posted on SSRN and will be submitted to a journal.

The researchers found that after the law went into effect, the compensation for CEOs of nonprofits declined, but the executives didn’t work any less. Other performance metrics — such as donations, revenue and volunteers — improved.

The Nonprofit Revitalization Act prohibits CEOs from participating in board or committee meetings in which their salary is discussed or voted on.

Babenka studies executive compensation and said that although many researchers look at the pay for CEOs of for-profit businesses, not as much attention has been paid to nonprofits.

“They’re very important to the economy, and they employ 10% of the workforce,” she said. “They also represent a lot of important sectors like child care, senior care and education.

 “These organizations are at least partly financed by public dollars through tax deductions and tax benefits, which is why it’s interesting to know how much their executives are being paid.”

Babenka said that there is a longstanding debate in finance on whether executives are overpaid or paid fairly, and whether reducing CEO pay would create turnover.

“Fortunately, there was legislation that allows to have a good empirical look at that,” she said.

The Nonprofit Revitalization Act created a natural experiment for the researchers to compare CEO pay before and after it went into effect.

“What we see is that pay dropped by 2% to 3% for CEOs, which is not a negligible amount,” she said, adding that the figure is probably an underestimate because some nonprofit boards already operated using best practices before the act was passed.

“The other key finding is, OK, the pay got reduced, but what happened to the performance metrics of the nonprofit? Do we see executives leaving the firm? Are they putting in the same effort, working the same hours?

“And what about the other metrics, like donor contributions, number of volunteers and revenue? Has that been affected?”

Essentially, no.

“In general, we don’t find any negative consequences, and we find some positive consequences,” Babenka said. “The CEOs worked a slightly longer hours, about 2%, or about one hour a week. It’s not a lot, but at least they don’t work less,” she said.

The research team found that, after the new law went into effect:

  • The new requirements did not lead to more CEO turnover.
  • Contributions and grants increased by nearly 4%. For the average nonprofit in the sample, that represented an increase of $525,000 in contributions per year.
  • The number of nonprofit volunteers increased by approximately 2.4%.
  • Revenue generation increased significantly, by approximately $15,000.

The researchers wrote: “These results suggest that the outside stakeholders generally had a better perception of N.Y. nonprofits following the act’s passage, with volunteers and donors willing to donate more of their time and money.”

All of the data on CEO pay, hours worked, donations, revenue and volunteers are publicly available on tax forms.

The law was not intended to curb CEO pay, but was meant to increase efficiency.

“At the time, New York was worried that they were losing business to other states with more favorable laws,” she said.

“So the law made it easier to register nonprofits in New York, and easier to classify the types. To make it palatable to legislators, it was, ‘And by the way, we’ll also implement good practices.’ ”

Babenka said it’s difficult to judge nonprofit CEOs on performance metrics.

“They can always say, ‘We had lower revenue, but we delivered more bowls of soup,’ ” she said.

“Because they have multiple objectives, it’s harder for their boards to determine whether performance is good or bad. But that is what makes the pay more interesting to study.”

Top image of New York City courtesy of Pixabay

Mary Beth Faller

Reporter , ASU News


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Charting a future with COVID-19

September 28, 2021

How the American strategy to combat the coronavirus will continue changing

President Joe Biden recently signed an executive order mandating that all employers with more than 100 workers require them to be vaccinated against COVID-19 or test for the virus weekly, and that workers at certain health facilities will have to be fully vaccinated. On the other side of the Atlantic, France is requiring proof of vaccination to access public spaces. With the coronavirus pandemic not showing any signs of slowing down as the world prepares to ring in 2022, many countries are adopting different ways of trying to slow the spread of the virus.

“It’s not about the science that’s different, it’s that our values are different and are, in fact, evolving over time,” Dr. Leana Wen, former Baltimore health commissioner, CNN medical analyst, author and contributing columnist at The Washington Post, explained during a recent Future Security Forum panel on the future of COVID-19. “I don’t think that there’s any agreement in the U.S. or between countries or really among people about what are the measures we should be looking for at this point.”

The American approach to containing the spread of COVID-19 was the topic of discussion during the panel, moderated by Emily Schneider, co-editor of the New America/ASU Coronavirus Daily Brief

Schneider and Wen discussed how various countries focus on different metrics used for tracking the virus and how their focus has changed over time, such as the U.S. initially being concerned with numbers of positive cases and then shifting toward being more concerned with hospitalizations.

American views around COVID-19 and its impacts on society might ultimately shape the type of procedures and restrictions that are implemented to try to stop the spread of the virus going forward.

“I hope that our endgame isn’t where we are now, which is well over 1,000 deaths every day from COVID — that’s about 365,000 deaths every year. I don’t think any of us could find that to be acceptable,” Wen said. “But would it be acceptable the level of the flu, and we’re happy with about 44,000 deaths from COVID every year? That feels very high to me, but I think at this point we need to have this honest conversation that weighs the risk of severe illness and death and even infection in the first place versus what is the price that we’re willing to pay to get there.”

Wen and Schneider also discussed how vaccine inequality around the world could contribute to the pandemic going forward, noting that domestic coronavirus policy and international humanitarian efforts to distribute vaccines aren’t mutually exclusive when COVID-19 is mutating into new strains in other parts of the world. 

“I think that where I get concerned is when somehow things are framed as an either/or, as in there have been some people who have said don’t do booster or don’t vaccinate children in wealthier countries, but instead focus on vaccinating the world,” Wen said. “That should not be a choice — we should both do booster shots and vaccinate children and scale up manufacturing and distribution in other countries, and I think that is ultimately is what’s going to get us out of this pandemic.”

Before fully integrating the COVID-19 vaccines into U.S. health policy, like the polio and measles vaccines, the vaccines first need to start being understood the same way the other vaccines are.

“Part of the reason why COVID-19 has become so polarized and divisive and politicized is that it’s seen as somehow different from other diseases that we wrestle with all the time, and the vaccine is somehow not understood the same way that we understand routine childhood immunizations that are required in all 50 states,” Wen said. “So, I think there is a reckoning that needs to occur, and that reckoning needs to place the COVID-19 vaccine in the same light as we do all other vaccines.”

And when will the pandemic “end”?

Wen believes more needs to be done.

“I think what France has done is what we should be doing here. ... If you want to be unvaccinated, that’s your choice. But if you want to go to bars, restaurants, gyms, be on a plane, train, if you want to be around other people, you need to get vaccinated because you do not have a right to infect others with a potentially deadly disease,” Wen said. “Why should the vaccinated be the ones who have to isolate themselves and stay out of public settings out of fear for coronavirus when the problem is the unvaccinated?”

More from the Future Security Forum

The Future Security Forum, held virtually on Sept. 13 and 14, is the premier annual event of the Future Security project — a research, education, and policy partnership between ASU and New America that develops new paradigms for understanding and addressing new and emerging global challenges. The forum brings together thought leaders from government, academia, the military and the media to reflect on the legacy of the United States’ “longest wars,” discuss the impact of the past two decades of U.S. policy, and chart national and international security trends.

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