Pay Packages Can't Guarantee Success
a grinding bear market has clipped billions of dollars from
the value of public companies, shareholders are having second
thoughts about huge pay packages granted to top corporate executives.
pay packages-salaries, bonuses, stock options-aren't always
bad," says Notre Dame Management Professor Matt Bloom.
"And big pay packages aren't always good, and aren't always
Sometimes it makes
sense to turn on the cash spigot to reward
top managers, says Bloom, co-author with Notre Dame colleague
Management Professor John Michel of a study published in the
of Management Journal (February 2002). Bloom says that in some
it might make sense to offer a substantial pay package to top
executives even if poorer-paid middle managers get disgruntled
circumstances, it makes no sense at all. The trick rests in
making the right call.
"It's easy to
look at somebody making much more money than you and
say 'It's too much,'" Bloom says. "It's harder to
dig into the
nuances of why it's too much." Or why it's not.
"If you're in
a turnaround situation and the organization is clearly
in decline, then I think getting really good people at the top
really important," Bloom says.
That means opening
up the corporate pocketbook, even if lower-level
managers get angry over the pay spread. Talent at a failing
probably already thin.
Star pay for star
managers also makes sense in businesses where
competition is fierce, change comes quickly
and innovation and fast growth get top priority, Bloom says.
"A couple of
(top) people can make or break the success of the
organization," he said.
A prime example:
startup companies. Venture capital investors, who
risk their cash on new businesses, say the quality of top management
matters even more than the quality of the business plan.
But huge differences
in pay can work against other companies, says
Bloom. That's especially true for larger, slower-growing
Strong managers below
the senior-most level are key to the success
of these firms, he says. And the Bloom-Michel study shows that
middle managers indeed are more likely to quit when corner office
executives get whopping pay packages.
How big a difference
is too big for these managers to tolerate? That depends.
'You may be worth more, but not that much more," Bloom
says. "Their gut feeling is nobody's worth that much money."
from The Indianapolis Star