My Years With General Motors

by Alfred P. Sloan Jr.

  At the close of each year I held a Managers Securities Company shareholders meeting, attended by all the participating executives, in order to review the results of the year just ended. This gave me a chance to emphasize the mutuality of interest between its executive shareholders and the General Motors shareholders. At these all-day meetings, Donaldson Brown recalls that "comprehensive statements were presented to display how those common interests were served by effective control of capital expenditures, of inventories and receivables, efficiencies in manufacture, sales and distribution, and in product-appeal to the consuming public."

  General Motors Management Corporation

  The concept of the Management Corporation was similar to that of the Managers Securities Company, though the technique was in some respects necessarily different. It, too, was set up to give our executives an opportunity to increase their ownership interest in General Motors and to provide added incentive. This was accomplished, as in the case of Managers Securities Company, by setting aside a block of General Motors common stock to be paid for by the participants by an initial, partial cash payment and by the application of their participation in supplemental compensation for a number of years in the future.

  To effectuate the new plan, of course, another large block of General Motors stock was necessary. In anticipation of this need, General Motors Corporation had accumulated, over the three years previous to 1930, 1,375,000 shares of General Motors common stock. This was sold to the Management Corporation at the market price of $40 a share, at an aggregate cost of $55 million. Management Corporation financed this purchase by selling 50,000 shares of its own common stock for $5 million and by issuing $50 million of seven-year, 6 per cent serial bonds; both offerings were subscribed by General Motors Corporation. General Motors, in turn, sold the common stock of the Management Corporation for cash to some 250 executives—more than three times as many as participated in the original Managers Securities Company.

  The early life span of the Management Corporation covered the years of the great depression, which affected adversely virtually every commercial arrangement. While General Motors, as I have indicated, maintained its share of the over-all automobile market, industry sales declined because of the economic conditions and our volume was reduced correspondingly. Under the circumstances, the performance of General Motors was remarkable—even in the lowest year of the depression, the corporation was able to operate profitably, although earnings after taxes fell below 7 per cent on capital employed and so no bonus fund accrued. Furthermore, as a result of the low level of earnings, the Management Corporation was unable to retire its debt or even to pay the interest on it. Needless to say, the market value of General Motors stock also fell drastically— it was down to about $8 per share at one point (which in terms of today's $1% par value common stock would be the equivalent of a little over $1 per share). At these depressed levels, the market value of the General Motors common stock held by the Management Corporation was far less than its outstanding bonded indebtedness to General Motors.

  General Motors was seriously embarrassed by these developments and executive morale was badly hurt, for the executives, as shareholders in Management Corporation, were liable for that corporation's debt to the extent of their accumulated normal annual bonus payments and their initial capital investments. I urged the Finance Committee of General Motors, therefore, to make some adjustment so that executives would not see their entire bonus swallowed up each year in the Management Corporation's loss.

  In urging the Finance Committee to take action, I was guided by concern for the well-being of the General Motors shareholders as much as that of the General Motors executives. One was intimately related to the other. I felt it crucial to the best interests of all concerned in General Motors to restore executive morale. The Finance Committee was reluctant to offer any relief at first, because it felt that the price of General Motors stock would recover. Nevertheless, in 1934 after much consideration, it adopted a revision of the original plan.

  This revision contemplated certain adjustments in the capital structure of Management Corporation, as well as an adjustment of the past-due interest on the bonded indebtedness. The most significant change, however, was a provision that the indebtedness to General Motors at the expiration of the plan could be satisfied by delivery to it by the Management Corporation of the entire number of available snares of General Motors common stock at $40 per share; or, at its option, Management Corporation could deliver one half of the shares (again at $40), and make the concurrent payment of one half of the indebtedness in cash. This provided a more flexible basis for the handling of the debt.

  As matters turned out, the Finance Committee's original judgment was correct. The price of General Motors stock recovered to $65,375 per share by the time the plan terminated on March 15, 1937. By using part of their equity in the Management Corporation's holdings of General Motors stock at $40 per share to pay off the debt, the executives, as Management Corporation shareholders, gave up a $5 million profit. This profit flowed to the benefit of General Motors Corporation.

  While the Management Corporation did not prove to be as successful as Managers Securities, it did accomplish the objective of increased stock ownership and both General Motors and its executives benefited from its operation. Again, as an illustration, let me state the results in terms of each $1000 invested in the stock of the Management Corporation in 1930. Each $1000 represented in effect a partial payment on 275 shares of General Motors $10 par value common stock with a then market value of $40 per share, and the executive had agreed to apply his future bonus participation to pay off the balance due. Over the next seven years, the applicable share of contract payments made to the company by General Motors totaled $4988 on such an investment. Again, these represented amounts which the executive would have received as bonus during the period and in effect constituted additional investments in the company by the executive, increasing each $1000 of original investment to $5988.

  On March 15, 1937, at the termination of the plan, the resulting total investment represented an unencumbered claim on 179 shares of General Motors $10 par value common stock with a cost of $40 per share. The reduction in the proportionate interest in General Motors common stock reflected the sale by the Management Corporation of 187,300 shares on the market and the delivery of 293,098 shares of General Motors common stock to reduce its indebtedness to General Motors. During the interim, the market value of General Motors common stock had appreciated from $40 per share to $65,375 P er share, so that the 179 shares had a market value of $11,702 at March 15, 1937. Taking into account dividends of $893 received during the period, the final value of the $5988 investment was $12,595.

  The Basic Bonus Plan

  Participation in the General Motors Bonus Plan has shown an increase paralleling the growth of General Motors. In a period of over forty years the number of employees receiving a bonus award increased about twenty-five times—from 550 in 1922 to about 14,000 in 1962. In 1962 some 9 per cent of all salaried employees received a bonus award, compared with only 5 per cent in 1922.

  During the middle and late 1920s the coverage of the Bonus Plan widened considerably, without any basic change in the rules for eligibility, simply because of the vast expansion of the corporation's management organization. By 1929 nearly 3000 salaried employees were receiving bonus awards—a fivefold increase in seven years.

  The increased coverage since the 1920s has come in several big steps. In 1936 the incentive plan was extended to a large number of additional salaried employees, by reserving a portion of the annual bonus provision for employees earning between $2400 and $4200 a year. In the depression year 1931 the minimum salary for eligibility had been reduced from $5000 to $4200 a year to adjust for a salary cut. When the minimum salary for eligibility was then reduced to $2400 in 1936, this quadrupled the number of bonus participants from 2312 in 1935 to 9483 in 1936.

  Except for 1938, which was a year of low earnings and hence of a relatively
small bonus fund, the number of awards ranged around the 10,000 level until 1942. In the latter year the minimum salary was restored to $4200 and the number of bonus awards dropped to about 4000 a year.

  During the first few postwar years, the Bonus and Salary Committee kept the number of recipients at about that same level, increasing the minimum salary as inflation raised the general pay level. In 1950, however, the Bonus and Salary Committee again widened the coverage of the Bonus Plan—from 4201 participants in 1949 to 10,352 in 1950—by lowering the minimum salary for eligibility from $7800 to $6000. "The action of the Committee in reducing the minimum salary rate for 1950 bonus consideration to $500 a month," as the annual report put it, "gives recognition to the fact that there are many employees in this classification who contribute importantly to the success of the business. It is expected that this broader base for bonus distribution will have a very stimulating effect on the General Motors organization."

  Time has certainly vindicated that judgment. Although the minimum salary for eligibility has been raised steadily, to keep pace with the general increase in salaries, the number of employees receiving bonus awards has climbed fairly steadily, and now is about 14,000 a year.

  In general, it has been the practice to deliver bonus awards in installments over a period of years. Since 1947, for example, awards up to $5000 have been paid in installments of $1000 each, while larger awards are paid in five equal annual installments. The plan also contains provisions under which an employee may lose his right to earn out his undelivered bonus installments if he leaves the employ of the corporation under certain circumstances. This basis of earning out recognizes that one of the purposes of the Bonus Plan is to furnish an incentive for executives to remain in the employ of the corporation.

  One of the basic purposes of our incentive program is to make our executives partners in the business. Part of this concept has been that bonus awards should be made in General Motors stock. Common stock is purchased in the market from month to month to meet each year's needs for bonus purposes. Originally, the entire bonus award was payable in stock, but with the development of high personal income taxes, it became evident to the Bonus and Salary Committee that delivering the entire award in stock was futile if the beneficiary had to sell a large part of that stock in order to pay the related income taxes. Therefore, in 1943 the corporation adopted a policy of making bonus awards partly in cash and partly in stock. Since 1950, the general objective has been to award in cash such portion of the bonus award as will enable the recipient to pay the tax on his total bonus and retain the stock portion of his bonus. The stock which is not delivered to the executive at the time of his award is retained by the corporation as treasury stock until the bonus installments are earned out. During the earning-out period the executive is paid cash amounts equal to the dividends which would be paid on the stock if it had already been earned out and delivered.

  Notwithstanding the impact of high personal income taxes, the amount of stock held by the operating executives of the corporation is substantial. As of March 31, 1963, the aggregate stock-holdings of some 350 of the corporation's top executives, plus stock to be earned out in their undelivered bonuses and contingent credits and stock held through the Savings-Stock Purchase Program, totaled more than 1,800,000 shares. If you assume a market value of $75 per share, which is in line with the recent trading range, it follows that the capital investment of the top executives in the business to which most of them are devoting their lives, amounts to more than $135 million at the present time. That, if I may say so, is a substantial proprietorship.

  The Stock Option Plan

  High personal income taxes have, for some time, reduced the portion of bonus awards that the principal executives have been able to retain as an investment in General Motors stock.

  Since one of the major objectives of the Bonus Plan is to create and maintain an owner-management group, the shareholders supplemented the Bonus Plan in 1957 by approving a stock-option plan for key employees, which provided for the granting of options in each of the years 1958 through 1962. It was felt that this would provide an opportunity for increased stockholdings on the part of the participants and together with the Bonus Plan would furnish even more effective incentive than the Bonus Plan by itself. In 1962 the stockholders approved the extension of the plan without change through the year 1967. The stock-option plan is based upon what are known as the Restricted Stock Option Plan provisions of the Revenue Act of 1950. The Bonus and Salary Committee continues to determine individual bonus awards. It also determines those who shall receive stock options. However, the bonus awards to executives who receive stock options are, in the aggregate, only 75 per cent of the amount they would otherwise be awarded. The bonuses are paid in the usual installments, although entirely in cash. At the same time, these executives are conditionally credited with contingent credits, in the form of General Motors common stock, in an amount equal to one third of the reduced bonus awarded to them. Thus, their bonus awards plus the contingent credits which were conditionally credited to them are equivalent to the amounts they would have been awarded as bonus if they had not received stock options. Each of these executives is then granted an option to buy three times as many shares of stock as are in his contingent credit. The option price is the fair market value of the stock at the time the option is granted.

  The plan as extended authorizes stock options in any or all of the years 1958 through 1967, up to a total of four million shares. No executive, however, may receive options for more than a total of 75,000 shares over the ten-year period. Options may be exercised only if the executive continues in the corporation's employ for eighteen months after the option is granted, and, except in the case of termination of employment, are good for a period of ten years from date of grant. If the executive exercises his option or any part of it, he loses any right to the related contingent credit, but any shares remaining in the contingent credit when the option expires are distributed to the executive over a five-year period. As long as the contingent credit is conditionally credited to the executive, he is paid cash amounts equal to the dividends which would be paid on the stock in the contingent credit if he had it in his own name.

  One of the benefits flowing to an executive from the stock-option plan lies in the fact that, under current tax law, should he exercise the option or any part of it within the ten-year period, and should he hold the stock that he purchases under the option for a period of more than six months, any profit, if he sells the stock, is taxed only as a long-term capital gain. The stock-option plan does not entail any change in the underlying principles or even the method of administration of the General Motors Bonus Plan. It was adopted simply to make the incentive and proprietor-ownership concepts more effective.

  The Administration of the Bonus Plan

  The heart of the General Motors incentive program lies in the procedure for determining how much, if anything, to award to each eligible employee.

  The Bonus and Salary Committee has full discretion over bonus awards. It is composed of directors who are not eligible for bonus consideration. This committee alone can determine the bonus to be awarded to executives who are members of the board of directors. In all other cases the Bonus and Salary Committee reviews and approves, or disapproves, bonuses recommended jointly by the chairman of the board and the president. In keeping with the policy of decentralization with co-ordinated control, the initiative in recommending individual bonuses is delegated to the operating divisions and staff organizations. To start with, the committee is advised by the independent public accountants each year of the maximum amount that is available out of the year's earnings for bonus purposes, which currently is 12 per cent of the net earnings after taxes and after deducting 6 per cent on net capital. The committee must then first decide whether this full amount or some lesser amount shall be transferred to the bonus reserve. For example, in five of the years during the sixteen-year period 1947 through 1962, the amount transferred to the bonus reserve b
y the committee was less than the full amount available. The total credited to the bonus reserve over this period was $131 million less than the maximum. In 1962 the amount credited was $38 million less than the allowable maximum.

  Furthermore, the amount of bonus actually awarded in any year may be less than the sum transferred to the bonus reserve for that year. Thus, during the first three postwar years, more than $19 million of the amount credited to the reserve was not awarded, but was carried forward, available for use in some subsequent year. However, in 1957 the Bonus and Salary Committee determined that the entire unawarded balance in the reserve at the end of 1956, which then approximated $20 million, should be restored to the income of the corporation. This amount was not included in net earnings subject to bonus.

  After deciding how much to transfer to the bonus reserve and how much of that sum to award in aggregate bonus, the committee must determine the awards to each individual. This process requires several steps. The minimum salary for bonus eligibility is set by the committee each year after receiving a recommendation from the chairman of the board and the president. The plan also permits awards to be made in special cases to employees whose salaries are below the minimum, to permit recognition of outstanding merit at all levels.