Balancing incentives in the compensation contracts of nonprofit hospital CEOs.

Given the considerable insight into corporate governance achieved through studies of executive compensation in proprietary firms it is surprising that executive contracting in nonprofit organizations remains largely unexplored. In this paper, we use the multitask principal agent model of Holmström and Milgrom [The Journal of Law, Economics and Organization 7 (1991) (Suppl.) 24] to argue that nonprofit hospitals represent an optimal response to information asymmetries between managers and boards. For a board with multidimensional objectives, the agency problem is getting top executives to distribute their efforts across all dimensions of the hospital's mission. The nonprofit form is preferred because the absence of high powered incentives such as share ownership reduces executives' incentives to place undue emphasis on improving financial performance at the expense of important but less observable tasks. Using newly available compensation data we test the model by comparing the conditional distributions of earnings for industrial and nonprofit hospital CEOs in Ontario. Our best estimates are that CEOs in publicly traded firms earn twice as much on average as those in similarly sized nonprofit hospitals but bear roughly eight times the income variance. Estimates of the associated degree of risk aversion are well within conventional bounds and are consistent with the trade-off between insurance and incentives predicted by the theory.

Creating a balanced scorecard for a hospital system.

In 1999, hospitals in Ontario, Canada, collaborated with a university-based research team to develop a report on the relative performance of individual hospitals in Canada's most populated province. The researchers used the balanced-scorecard framework advocated by Kaplan and Norton. Indicators of performance were developed in four areas: clinical utilization and outcomes, patient satisfaction, system integration and change, and financial performance and condition. The process of selecting, calculating, and validating meaningful indicators of financial performance and condition is outlined. Lessons learned along the way are provided. These lessons may prove valuable to other finance researchers and practitioners who are engaged in performance measurement endeavors.