If boards want lower compensation for their executives, they might consider this one neat trick: kicking CEOs out of the room during compensation discussions, according to new research.
Researchers recently dove into 990s of over 1,600 New York nonprofits to analyze how salaries are affected when CEOs aren’t in the room. They were provided a great control group, and New York has passed legislation that bars executives from being in the board room while trustees are setting salaries.
We zeroed in on 1,698 nonprofits located in New York to see if their CEO pay changed after new regulations took effect in 2013. Since then, New York has prohibited nonprofit officers from being present at meetings where their pay is being discussed.
We found that compensation was an average of 2%-3% lower than expected by comparing pay for nonprofit CEOs in New York with pay in other states. We also compared the change in CEO pay with compensation changes for other executives’ pay at the same nonprofits —since they weren’t affected by this legislation.
We also found that many nonprofits changed how they handled executive compensation. That is, they were more likely to set up compensation committees, perform an independent compensation review or adjust pay to be in line with similar organizations. Nonprofit CEO bonuses also became more correlated with the growth of an organization’s budget — a strong indicator of overall performance.
And we found that, despite earning less than they might have expected, nonprofit CEOs spent about 2% more time working — without any additional turnover.
Interestingly, we also determined that by some measures, the nonprofits became better-run after the legislation took effect. For example, 2% more people chose to volunteer, and funding from donations and grants grew by 4%.