Donor and Grantor Reactions to CEO Compensation in Nonprofit Organizations

Nonprofit organizations often rely on donations and grants to accomplish their mission. This study examines whether nonprofit organizations with high CEO compensation receive less in donor and grantor support compared to nonprofit organizations with lower CEO compensation. I find strong evidence that both donors and grantors give less to organizations that spend a larger percentage of total expenses on total CEO compensation. I also find that the reactions of donors and grantors differ based on the type of CEO compensation. While donors and grantors react to CEO base compensation, grantors also react to other CEO compensation and nontaxable benefits.;In additional tests, I find strong evidence that the negative reaction of donors and grantors is stronger when organizations have more sophisticated donors and grantors. I also find that the relation between future contributions and CEO compensation is stronger in organizations that are more reliant on contributions as a source of revenue. I do not find any evidence that the reporting of CEO compensation expense as program related, management, or fundraising has any effect on how donors and grantors respond to the percentage of expenses spent on CEO compensation. I also do not find that the CEO serving on the board of directors changes how donors and grantors respond to CEO compensation. Overall, my results suggest high compensation to CEOs of nonprofit organizations can have adverse consequences to an organization through reduced funding from donors and grantors.