Managerial Compensation and Monitoring in a Non-Profit Organization: Evidence from the Irish Loan Funds

Using unique data on the Irish loan funds, a nineteenth-century system of quasi-banks, we show that higher levels of uncontrolled capital, where there is no residual claimant, lead to higher wages. The loan funds relied on deposits, as well as donations and accumulated profits, to finance their lending. We examine the effect of different levels of deposits and capital on managerial salaries and expenses. Higher net income (before non-interest expenses) is associated with higher non-interest expenses. More surprisingly, lower deposit to capital ratios and smaller numbers of depositors lead to higher expenses even after controlling for net income. Hypotheses for understanding this finding suggest that depositors can play an important role in microfinance such as that currently found in development contexts. More generally, this provides some insight into the determination of compensation in non-profit organizations.