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Although VCB has put much effort into designing its incentive plans,
every plan VCB has put much clrort can be improved The bank's board
directors annually reviews it in light developments and changes in
competitive pressures and recommends improvement Cument
recommendations include refining some nonfinancial performance
measures for inclusionthe bank's incentive formulas.The bank's president
and CEO also serves on the boards of directors of several charitable,
nonprofit organizations and has been urging their boards to adopt features
of the incentive plans of VcB and other suc cessful companies.Incentive
Plans in Nonprofit organizations Nonprofit organizations range from
small, informal organizations such as sports clubs, student organizations,
and parent groups supporting sports and music activiues to well-
established organizations such as the Uniled Way the Amercan Red
Cross,most universities, and govemment departmentsand agencies, such as
the US Postal service the Department of Transportation, and the En
ironmental Protection Agency.Many of these nonprofit organizations
apply the concepts in this chapter, with some modifica uons, for the same
that profit-seeking competent employees and to align their interests with
those of the organizations B definition, a nonprofit organization has
something other than eaming a profit asits pri many goal.Thus, effective
nonprofit incentive plans pnmanly should create incentiv for managers to
perform well on nonfinancial dimensions Key Nonfinancial Performance
This focus on nonfinancial performance largely is due to the absence of
prices or ob- jective values for the outputs of nonprofit organizations For
example, although mostagree that helping victims of natural disastersisa
valuable activity, there is not a ready Red Cross services.Indeed, the lack
of fonnal markets market value for American one of the major reasons for
the existence on nonprofit organizations;they fill needs not addressed by
markets.When markets do exist for govemment services, in particu- lar,
increasing pnvatuzation of government activities is occurring Because they
are not seeking to eam profits, nonprofit organizations d not man- age
themselves by the numbers to the same extent as profit companies
do.Whereas a company can evaluate a business unit manager's
performance by measures such as return on inves ment or economic value
added, these comparisons usually are not available or relevant for
nonprofit organizations Although many large charitable or ganizations
publicize financial performance measures such as the percentage of
revenues directly devoted to providing services, most nonprofits do not
and perhaps should not manage themselves primarily by financial n Some
nonprofit organizations operate more by culture or shared values than for
profits do.For example, the parents in a school support organization share
the value of providing support for their children's educational
activities.Likewise, the culture of re ligious organizations binds members
and provides a powerful force for acting to achieve commdn goals None of
this means hat al performance is unimportant al a nonprofit organization,
however Importance of Financial Performance Although nonprofits do not
try to maximize profits, theyhave strong needs to provide services in a
cost-effective manner Nonprofits a compete for scarce funds and
nonmonetary
support and must be able to show donors and supporters that their
contributions are being able used effectively Smart Money magazine, for
example, annually analyzes the efficiency o ons.nonprofit's concem value
be similar to that of a profit-seeking firm.organizations must demonstrate
proper accountability for the use of funds and manage their operations and
revenues to en sure that they break even.For example, the US Postal
Service is under a mandate to break even financially and to manage itself
more like a for-profit enterprise.It controls billions of dollars of assets in
buildings, vehicles, and sorting equipment, so management adopted
economic value-added policies to help control its capital costs
Management evaluated its per- formance by applying a cost of capital to
the assets for each responsibility center usingis borrowing rate that
Congress mandated: one-eighth of a percent over the three- month
Treasury Bill rate.With stiff competition from the private sector, such as
United Parcel Service and Federal Express, the US Postal Service also
must concentrate on customer service.To see it and other government
agencies adopt a balanced scorecard with economic value added as one of
the financial measures will not be surprising Increasing the Use of Private-
Sector-Developed Incentive Plans In some voluntary and charitable
organizations, incentive compensation plans rely heavily on
intrinsicrewards Most employees generally earn a lower salary than they
do in the private sector.Furthermore, nonprofits do not offer opportunities
for large fi these voluntary and charitable nancial payoffs for excellent
performance.However, organizations attract people for whom the intrinsic
reward from doing good work compensates for the lost financial
compensation available in the private secto Government agencies also
attract people who obtain intrinsic rewards from the work and or people
who prefer the security and benefit packages that are oftenavailable in
government organizations Despite differences between for-profit and
nonprofit organizations, nonprofit organ izations increasingly use features
of executive incentive plans developed in the private sector.These
organizations also compete for top management talent and must align
exec- utive's interests with those of the organizations.Expectancy and
agency theories do not disappear in nonprofit organizations.The NonProfit
Times reported a recent salary sur which indicated that nonprofits are
faced with greater competition lfor executive talentj with the private sector
that's unparalleled to anything they've seen before.Furthermore, 20 percent
of responding organizations reported awarding performance of bonuses me
nonprofit hospitals offer performance bonuses up to 10 percent based on
cost savings, health care improvements, and other factors.Many
organizations however, decline to develop incentives to retain
management talent only to find that they must pay much more to replace
talent lost to the private sector or more aggressive non profits.Some
nonprofit organizations even have developed stock-option plans to
compete with for-profit firms.How can that be when nonprofits have no
shares to option?Clever compensation consultants have found tax
loopholes that allow nonprofit orga nizations to award options for mutual
fund or corporate shares.One Big-5 consultant stated."The tax-exempt
organization i going to have to compete with taxable corpo- Such plans are
controversial rations for talent, and this gives them more flexibility.
because nonprofits fear tuming off donors who expect their executives not
to be so are skeptieal that awarding optionsin stock concerned with
personal wealth and who are skeptical that awarding options in stock