Like the spectacle of a million-dollar baseball player going on strike for higher pay, the $50 million worth of additional payments and benefits promised the top executives of Allied Corp. and the Signal Cos. in their recent merger agreement must seem wackily excessive to mere mortals.
If the friendly merger is approved by the two companies' shareholders next month, some two dozen top officers of Allied Corp. will receive $22.8 million in merger-related pay. A roughly equal number of Signal executives are to receive $31 million.
The merger-related benefits are particularly eye-popping for those at the very top. For instance, Michael D. Dingman, president of Signal, becomes president of the combined companies if the merger is approved, and he is guaranteed employment until 1996, when he turns 65. The terms of the merger agreement also promise Dingman that he will be elevated to chief executive officer on Dec. 31, 1990. And if the board chooses not to appoint him to that post, he can collect the future compensation anyway.
In addition, Dingman will receive $4.7 million in stock and cash as result of the merger, more than $4 million of that in the form of special "golden parachute" provisions automatically triggered by the merger.
Spokesmen for the two companies say these benefits are necessary to make certain that top executives such as Dingman don't jump ship, and it's true that the wholehearted support of the handful of key executives in the most sensitive posts is critical to the success of huge mergers on the scope of this $5 billion marriage.
But if the Allied-Signal benefits package succeeds as an insurance policy on executive loyalty, it may well be sending negative signals both to the public, and to other managers, professionals and employes of the two companies who didn't share in the benefits. That's the risk that the companies' directors have created by their generosity to those at the top.
The risks arise in an area of increasing importance to American companies: the relationship between rewards and performance. Some companies facing the toughest competitive pressures have focused on their pay and compensation systems as a vital factor in inspiring better management, more innovation and ingenuity, and closer attention to quality and productivity by everyone in the organization.
If there aren't many answers yet, there are plenty of continuing experiments. American Telephone & Telegraph Co. has offered managers and computer scientists at a new venture a payoff of up to eight times the portion of their salaries that they commit to the project if the venture succeeds; auto workers at the future General Motors Co. Saturn car plant will be on salary, not paid by the hour, with rewards for skill and productivity improvement. And National Intergroup Inc. and the steel workers union are trying to agree on a pay plan that rewards high-quality steelmaking.
The goal in each case is to create a widely shared view that people are being rewarded fairly, according to their performance.
That view is jeopardized by a rapid upward march in executive salaries, benefits and merger-related payments, according to a number of analysts quoted by authors John F. Berry and Mark Green in their new book, "The Challenge of Hidden Profits."
Berry and Green note that the average total pay increase for senior executives in 1984 was four times that of blue-collar employes, 12.3 percent to 3 percent. Louis Brindisi of Booz-Allen and Hamilton, warns in the Berry-Green book that "a large number of executive pay packages insulate CEOs from the consequences of weak performance." This is "a critical area of management because through the executive compensation program you send powerful messages to executives regarding the strategic direction of the firm, regarding what's important in terms of performance, and the kind of culture you're trying to develop, to maintain, or to change."
In his own book, Irving S. Shapiro, former chairman of E. I. du Pont de Nemours & Co., stresses the symbolic importance of executive compensation, saying "one of the most destructive mistakes a board can make, destructive to morale inside and confidence outside, is to leave the impression that top management lives in a feathered nest and will stay warm and dry regardless of stormy weather. There have been cases where large companies have been devastated by adversity, even to the point of collapse, while the management took excellent care of itself through some sort of self-managed protective network. Meanwhile, employes have been tossed out and stockholders left to pick over the corporate carcass for whatever scraps remained."
There is a strong, new upward pressure on executive compensation, says consultant George H. Foote, a former director of McKinsey & Co. "The basic motivation of the younger executive is to make their mark and make it fast. . . . The pecking order is 'how much do you make.' It's not just a title. The pendulum has really swung to more interest in compensation and more self-interest" on the part of senior managers in awarding the compensation, Foote says. The higher salaries awarded to subordinates by executives in policy positions are boosting their own, he adds.
There isn't a formula for deciding how much pay is enough, says Foote. Companies facing severe competitive challenges should reward executives whose performance is exceptional. And one of the hardest issues confronting corporate policy makers is how to connect performance and rewards.
But, as Shapiro says, the last thing corporations need is create the image of the feathered nest at the top.