Mar 30 2009
Does Paying More Always Get You Better Quality?
The setting is an upper-class, New York suburban neighborhood. As you drive through you might remark to yourself, “Wow! That’s like the 10th Beemer I’ve seen in the last quarter mile!” Your thoughts turn to melancholy as you sit in your decade old Toyota Tercel and lament on life choices that, if made differently, might have placed your lazy butt behind such a nice ride. But is it the car itself or the mere cost of the car that leaves the indelible impression? If you saw a car that looked identical in all respects to a Beemer and had a Hyundai insignia on it, would you be having the same thoughts, or would you be saying, “They must have spent all their money on their house?”
There has always been a certain stigma that is associated with price. We do it all the time. My wife tells me to buy Softsoap instead of some other liquid soap brand. When I ask why, she says because it’s more expensive and explains that you pay for what you get. In some cases I believe she’s right, but is that always the case? I doubt it.
What if you are an investor and you are looking into a certain company? You know that the average pay for a VP of Finance is $2M a year for a company of this size. When you look at the company you see that the VP is only being paid $500K. What is your reaction?
According to an article written by Professor’s Scott Schaefer and Rachel Hayes of the University of Utah’s David Eccles School of Business, you would say that there is something wrong with that VP if he or she is making so little when compared against the industry average. You would conclude that this VP of Finance must be young or unproven, and you would consequently downgrade the company’s stock.
So does this mean that businesses have to pay their high-level managers exorbitant amounts of money whether or not they deserve it because of the benighted view of some external investors? Looking at current events, I don’t know how you could answer this in any other way but you be the judge.
The link below will give you an overview of the above mentioned article. The actual article has yet to be published.
