Comparative Analysis: Ceo Compensations in the Non-Profit Sector in United States and European Union

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Comparative analysis: CEO compensations in the non-profit sector in United States and European Union

GiedreTuinylaite (3480585) Xin Charlie Chen (3617378) Utrecht University Table of Contents

1.Introduction3
2.Theoretical background4
2.1. Endowment funds4
2.2.Nonprofit organizations5
2.3.Public charities and Private foundations5
3.Legal Analysis of not-for-profit corporations in the United States6
3.1. Rule of law for nonprofits in New York, California and Texas6
3.2. Internal Revenue Service7
3.3. Uniform Prudent Management of Institutional Funds Act8
4. Comparing restriction on compensation for Non-profit organizations of the USA with the EU8
4.1 Theoretical Background8
4.2 Executive Compensation in European Non-For-Profit Corporations9
4.3 In comparison to the United States10
5.Conclusion10
Bibliography12

1.Introduction

Up until early 1990s the main investors into companies in the United States were individual investors. However, just after rapid development of means of communication, institutional investors started to become major players in the investment world (S.L. Gillan, 1999). All around there are many types of institutional investors who have their own rules for investors. Those institutions are: investment banks, insurance companies, mutual funds, pension funds, companies and endowment funds. The scope of this research will only involve the endowment funds, as it is an area, which is not as well researched as the other types of institutional investors. There is a lot of research made based on the executive pay in big corporations, however it has very little connection with the compensations of non-profit organizations, such as public charities or private foundations. There is much more consideration relating ethics, when analyzing non-profit funds, as most people do tend to believe that non-profit organizations should not compensate their management with six figure or seven figure sums. (Charity Navigator, 2010). However, one should understand that the incentives behind running multimillion-dollar organization have to be properly aligned to the incentives of the whole entity (Charity Navigator, 2010). Furthermore, it can also be believed that large compensations might lead to higher levels of aspirations, thus larger productivity and higher performance of the organization (Borjas, 2010) This paper tries to find if the compensations of non -profit organizations management can be justifiable. There are 50 states, however only 3 states have the largest concentration of public charities and private foundations in the country(NCCS data, 2012). These three states are New York, California and Texas and they are used as benchmark in this paper. To begin the analysis we first decided to find out if there are any state laws concerning the compensations of the non-profit corporations. Different states have different legislative rules, but all lead to the same conclusion: the compensation must be reasonable according to the standards provided by Internal Revenue Service of United States. Therefore the more extensive research for rules of non-profits and the reasonableness defined by IRS is provided in the paper. Furthermore, there is a large number of nonprofits created in Europe. They also operate mostly using endowment funds and are subject to certain restrictions under the European Commission and the Nonprofit Corporation Act. Our interest is concentrated if there are any substantial differences between the legal rules concerning management compensation in...
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