Are Donors Watching? Nonprofit Rating Availability and Pay-to-Performance Sensitivity

CEO compensation by nonprofit organizations is controversial. Higher-qualified CEOs should be compensated more than lesser-qualified individuals because of better performance regarding organizational goals and missions. Alternatively, an ethical issue may exist if CEOs are overcompensated resulting in a negative impact on the operations of their organizations. Donors have the incentive to monitor nonprofit organizations, but their role is limited to their ability to acquire nonprofit organization information. However, charity rating agencies make information more accessible and understandable, thus reducing information asymmetry between donors and nonprofit organizations. This study examines whether charity rating availability is associated with negative pay-to-performance sensitivity. Using a sample derived from the IRS Form 990 s and Charity Navigator ratings, this study provides evidence that rating availability is negatively related to pay-to-performance sensitivity in nonprofit organizations. Additional tests provide evidence that the overall rating score and its financial rating component are negatively associated with pay-to-performance sensitivity.