Governance in Not-for-Profit Hospitals: Effects on CEO Compensation and Performance

Abstract

We examine the effect of corporate governance on both CEO compensation and several financial performance indicators in a sample of Dutch hospitals. In a series of pooled regressions, we find evidence that supports earlier findings in the literature. For instance, our results indicate that the size of the supervisory board is associated with lower CEO compensation and higher profitability, suggesting that in the hospital sector, larger boards are more effective from a governance point of view (Aggerwal et al., 2012). We also find a positive association between supervisory board compensation and CEO recompense, which may imply that better paid supervisors are less effective in disciplining CEO rent extraction (Cardinaels, 2009). However, these governance factors add little to the explanation of the variance in CEO compensation and financial performance. Moreover, if we simultaneously correct for both serial and cross-sectional dependence, we no longer find any significant effects for the governance variables included in our study. These results demonstrate the importance of controlling for firm- and year-fixed effects, and suggest that not doing so may lead one to overstate or misinterpret the effects of governance choice.

Keywords: Governance, Hospitals, CEO Compensation, Performance

JEL Classification: I10, G34, L31