Huge Pay Packages Can't Guarantee Success

Since 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.

"Big 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 necessary."

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 Academy of Management Journal (February 2002). Bloom says that in some cases it might make sense to offer a substantial pay package to top executives even if poorer-paid middle managers get disgruntled and quit.

In other 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 is 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 firm is 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 corporations.

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.

"People say, 'You may be worth more, but not that much more," Bloom says. "Their gut feeling is nobody's worth that much money."

-Excerpted from The Indianapolis Star