Chapter 22
The General Motors Bonus Plan has been since 1918 an integral part of our management philosophy and organization, and, I believe, an essential element in the progress of the corporation. Our management policy, as the 1942 annual report formally stated it, "has evolved from the belief that the most effective results and the maximum progress and stability of the business are achieved by placing its executives in the same relative position, so far as possible, that they would occupy if they were conducting a business on their own account. This provides opportunity for accomplishment through the exercise of individual initiative, and opportunity for economic progress commensurate with performance. In that way managerial talent is attracted to and retained by the Corporation."
The Bonus Plan and the policy of decentralization are related, since decentralization gives executives the opportunity for accomplishment, and the Bonus Plan makes it possible for each executive to earn a reward commensurate with his own performance, and so gives him an incentive to put forth his best effort at all times.
Although the General Motors Bonus Plan was first adopted on August 27, 1918, its fundamental principles have never changed— that the interests of the corporation and its stockholders are best served by making key employees partners in the corporation's prosperity, and that each individual should be rewarded in proportion to his contribution to the profit of his own division and of the corporation as a whole. We have made alterations, of course, from time to time; for example, in 1957 the incentive program was expanded to include a stock-option plan for a group of top executives. At the present time, bonuses may be awarded out of net earnings only if the corporation has earned more than 6 per cent on its net capital employed. The maximum annual credit to the bonus reserve is limited to 12 per cent of the net earnings after taxes and after the 6 per cent return, and in its discretion the Bonus and Salary Committee may determine to credit less than the maximum. For 1962, some 14,000 employees were awarded bonuses totaling $94,102,089 in General Motors stock and cash. In addition, contingent credits under the stock-option plan amounted to $7,337,239. These amounts, together with $3,550,085 applicable to the separate bonus plans of four overseas manufacturing subsidiaries, were distributed out of a credit to the reserve of $105 million for 1962, which was $38 million less than the maximum permitted under the plan.
But while bonus awards depend on profits, the bonus system is not a profit-sharing plan. It does not entitle any employee to any regular share in the earnings of the corporation or any of its divisions. The Bonus and Salary Committee may—and sometimes does —award less than the maximum sum available for bonus payments. More important, each man must earn the right to be considered for a bonus award each year by his own effort. Since his effort is judged each year, his bonus award may fluctuate widely from year to year— if, indeed, he receives one every year. The knowledge that his contribution to the corporation is weighed periodically, and a price put on it, acts as an incentive for each executive at all times.
The Bonus Plan has also had an important effect in creating an identity of interest between management and shareholders by creating an owner-management group: in most cases, bonus awards have been made partly or wholly in General Motors stock. As a result, General Motors has always had a top management group with a heavy stock interest in the corporation—heavy, that is, from the standpoint of the executives' total personal assets, if not from the standpoint of the corporation's total stock outstanding. Since the bulk of their own assets usually consists of General Motors stock, General Motors executives are more conscious of the identity between their interests and those of the shareholders than they would be if they were professional managers only.
But the Bonus Plan has done more than stimulate and reward individual effort per se; when the plan was first started, it made a tremendous contribution in encouraging executives to relate their own individual effort to the welfare of the whole corporation. Indeed, the Bonus Plan played almost as big a role as our system of co-ordination in making decentralization work effectively. O. E. Hunt observed in a letter to me:
Decentralization provided the opportunity; [the incentive compensation] . . . provided the stimulation; jointly they made the top level executives in the Corporation a cooperatively constructive group without destroying individual ambition and initiative.
Before we had the Bonus Plan in operation throughout the corporation, one of the obstacles to integrating the various decentralized divisions was the fact that key executives had little incentive to think in terms of the welfare of the whole corporation. On the contrary, the general managers were encouraged to think primarily of their own division's profits. Under the incentive system in operation before 1918, a small number of division managers had contracts providing them with a stated share in the profits of their own divisions, irrespective of how much the corporation as a whole earned. Inevitably, this system exaggerated the self-interest of each division at the expense of the interests of the corporation itself. It was even possible for a division manager to act contrary to the interests of the corporation in his effort to maximize his own division's profits.
The Bonus Plan established the concept of corporate profit in place of divisional profits, which only incidentally added up to the corporation's net income. Suitably, it provided for bonuses to be paid to employees "who have contributed to its [General Motors'] success in a special degree by their inventions, ability, industry, loyalty or exceptional service." At first total bonus awards were limited to 10 per cent of the net earnings after taxes and after a 6 per cent return. In 1918 more than 2000 employees received bonus awards, and in 1919 and 1920, more than 6000. In 1921, when the recession and inventory liquidation cut profits sharply, no bonus was awarded under the plan.
The first major modification of the Bonus Plan was made in 1922, when bonus awards were resumed. The minimum return on capital that had to be earned before any bonus provision could be made was raised from 6 to 7 per cent, after taxes. It stayed at that level until 1947, when the minimum return on capital was reduced to 5 per cent and the per cent of net earnings after taxes available for bonus above the minimum return was increased to 12 per cent. In 1962 the minimum return on capital was increased to 6 per cent.
The 1922 revisions also related the employee's level of responsibility to his eligibility for bonuses. Since the simplest measure of an employee's level of responsibility is his salary, eligibility for the bonus was set on that basis: for several years, beginning with 1922, the minimum salary for bonus eligibility was $5000 per year. As a result of this change we awarded a total of only 550 bonuses in 1922.
Managers Securities Company
Another important change was made in November 1923 with the establishment of the Managers Securities Company. Managers Securities Company was set up, essentially, in order to give our top executives an opportunity to increase their ownership interest in General Motors. We had in mind that this would provide added incentive. A block of stock, made available by the du Pont Company, was in effect purchased by the executives selected for participation in the plan at the then market price. Through their participation in the Managers Securities Plan, the executives made a partial payment for the stock in cash at the outset, and agreed to pay the balance by applying their participation in supplemental compensation for a number of years in the future. This meant that, if the business was successful, they would be in a position to become substantial owners of stock. Those who benefited by this plan are indebted to Pierre S. du Pont and John J. Raskob, who arranged that General Motors stock be made available for that purpose, and to Donaldson Brown, who developed a highly effective plan for creating a reality out of an opportunity. Here are the essentials of the plan worked out by Mr. Brown.
Managers Securities Company was organized with an authorized capital stock of $33.8 million divided as follows: $28.8 million of 7 per cent cumulative nonvoting convertible preferred stock; $4 million of Class A stock with a par value of $100; $1 million of Class B stock with a par value of $25.
On formation Managers Securities Company bought a block of General Motors Securities Company stock, which was the equivalent of 2,250,000 shares of General Motors common stock. General Motors Securities Company was a holding company for du Pont's ownership in General Motors stock. The purchase by Managers Securities Company represented a 30 per cent participation in General Motors Securities Company.
The reason du Pont was willing to sell at the market a 30 per cent interest in its entire holding of General Motors stock was twofold. First, du Pont believed firmly that it was thereby creating a partnership relationship between General Motors' management and itself. It was convinced that the resulting incentive to General Motors' executives would be reflected in increased dividends and would enhance the value of the stock, thereby compensating du Pont through the increased value of its remaining interest. Second, du Pont sold because the stock in question was an extra investment originally acquired under duress, so to speak, in connection with the financial adjustment of Mr. Durant's affairs. These circumstances led Pierre S. du Pont to request Mr. Brown to consider possible avenues through which du Pont's objectives might be effected.
Managers Securities Company paid General Motors Securities Company $15 per share for the 2,250,000 shares, or an aggregate purchase price of $33,750,000. This purchase was financed by paying for same with $28,800,000 par value 7 per cent convertible preferred stock and the balance in cash to the extent of $4,950,000. Managers Securities Company obtained the cash by selling its entire Class A and Class B stock to General Motors Corporation for the aggregate sum of $5 million. General Motors undertook to pay to Managers Securities Company an amount equal to 5 per cent of the net earnings after taxes of the corporation less 7 per cent on capital employed during each year. This payment was equivalent to one half the aggregate bonus fund for each year. The agreement was to last eight years, beginning with 1923 and ending with 1930.
General Motors further agreed that, should the contract payment to Managers Securities Company in any year come to less than $2 million, then General Motors would make up the difference in the form of an unsecured loan, to Managers Securities Company, bearing interest at 6 per cent. (Payments under this provision were in fact made in both 1923 and 1924.)
General Motors in turn resold Class A and Class B stock to about eighty of its top executives by an allotment based upon recommendations submitted by me to a special committee appointed by the board of directors of General Motors. Employees paid $100 cash for each share of Class A stock and $25 for each share of Class B stock, the same price that General Motors had paid Managers Securities.
In general, the number of shares allotted depended upon the executive's position with the corporation. I personally visited every executive who appeared to qualify under the plan, and discussed his situation with a view to determining whether he wished to join the plan and whether he could afford to pay cash for his allotment. I tried, in general terms, to limit the investment on the part of each executive to an amount no greater than his annual salary. Not all the shares of Managers Securities Company were originally allotted. A block was set aside for future allotments; first, to executives who might later qualify, and second, to supplement an executive's holdings in the event that his responsibilities increased.
General Motors held an irrevocable option to repurchase all or part of any executive's holdings should he resign, or should his position or performance in the corporation change. In order to maintain participation in the Managers Securities Company on a current basis, an annual review was required of the performance of each executive in the Managers Securities Plan to determine whether his participation was out of line compared with other executives, including those not in the plan. Where the discrepancies were significant I could recommend an additional allotment of unused Managers Securities Company stock or an award out of the half of the bonus that did not flow to Managers Securities Company.
Here is how the plan worked.
The annual payments by General Motors Corporation to Managers Securities Company, which were 5 per cent of the net earnings after taxes of General Motors less 7 per cent on the capital employed, were credited to Class A surplus for the benefit of the Class A stock. Dividends received on the General Motors stock owned by Managers Securities Company (through General Motors Securities Company) were credited to Class B surplus along with all other income of Managers Securities. Dividends on the outstanding 7 per cent preferred stock of Managers Securities were paid out of Class B surplus.
The Managers Securities Company was obligated each year to retire 7 per cent preferred stock in an amount equivalent to all its income after taxes and expenses and after deducting an amount equal to the dividends paid on the preferred stock. Managers Securities Company could also pay dividends on its Class A and Class B stock—not in excess, however, of 7 per cent per annum on such paid-in capital ($5 million) and the surplus earned thereon —provided that all cumulative dividends on the 7 per cent convertible preferred stock were paid.
As a result of the success attained by General Motors during the period after 1923, the Managers Securities Company plan was successful beyond the most optimistic expectation. As I have pointed out, this was a period of remarkable accomplishment for General Motors. Significantly, the over-all automobile market did not show much growth during the period—as a matter of fact, it remained at a level of around four million cars and trucks annually in the period 1923 through 1928. But General Motors sales more than doubled over this period and our share of the market increased from less than 20 per cent in 1923 to over 40 per cent in 1928. This, of course, resulted in a rapid increase in earnings and with it increased payments to the Managers Securities Company representing the supplemental compensation of the participants. The preferred stock was completely retired by April 1927 and so the total assets of the company were held exclusively, and without encumbrance, for the benefit of the Class A and Class B stock with their respective surplus accounts.
The expansion of the earnings of General Motors Corporation not only permitted the retirement of the 7 per cent preferred stock of Managers Securities, but also enhanced the market value of General Motors stock. This, together with the increased dividends on the General Motors stock, resulted in such a high value for Managers Securities Company stock that it could no longer be offered to executives who had been advanced to top management after the plan had been started. In consequence, the contemplated period of eight years was reduced to seven years, and ended with the year 1929 instead of 1930. The purpose of this was to facilitate the organization of General Motors Management Corporation— which was designed to carry on the general concept of the Managers Securities Company for another seven years, with a broadened executive participation commensurate with the increased size of the business.
I have already stated that the Managers Securities Company plan was successful beyond the most optimistic expectation. Perhaps that can best be demonstrated by stating the results in terms of each $1000 of stock purchased in Managers Securities Company Class A and Class B stock in December 1923. At that time such an investment represented in effect a partial payment on 450 shares of General Motors no par value common stock, with a then market value of $15 a 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 the contract payments made to the company by General Motors totaled $9800 on such an investment. These represented amounts which the executive would have received as bonus during the period and in effect constituted additional investments in the company, increasing each $1000 of original investment to a total of $10,800.
During the period from 1923 to 1930, the applicable 450-share equity had, through exchanges, stock dividends, and additional purchases by Managers Securities, increased to 902 shares. After General Motors made the last contract payment to Managers Securities on April 15, 1930, the resulting total investment represented an unencumbered claim on 902 shares of General Motors $10 par value common stock. Expressed another way, by that time the total of $10,800, represented by a $1000 original investment and the $9800 applicable share of supplemental compensation, had in effect purchased 902 shares of General Motors $10 par value common stock. As a result of the appreciation in the market value of General Motors common stock during the interim period, the 902 shares had a value of $52,375 per share, or a total market value of $47,232. Taking into account the redemption of a portion of the investment for $2050 in 1927 and 1928 and dividend income of $11,936 received over the period, the final value growing out of the total $10,800 invested was $61,218.
The Managers Securities Company Plan rewarded the General Motors Corporation and its shareholders as handsomely as it rewarded the participating executives. The success of the plan reflected the success of General Motors between 1923 and 1929, and I am confident that this success was due in part to the fact that Managers Securities Company created a top management team with a heavy personal stake in the success of the corporation as a whole. Managers Securities Company was certainly a great individual financial incentive. But as Walter S. Carpenter, Jr., of the du Pont Company has written me, it also supported the enterprise as a whole and led to greater co-operation. Mr. Carpenter said:
The importance of Managers Securities Company was that it created in these many individuals ... an urgent and continuing desire to make a success of the whole as distinguished from their previous parochial and separate interests . . .
You know, perhaps as well as anyone, that the design of that so-called financial mechanism was such that the benefits of the earnings of the corporation as a whole were pyramided in a form to give a tremendous leverage upon the individual's participation in the results. That is now so old and has been used so much that we accept it now as more or less a matter of course. We must recognize that in that form and at that time it was quite new and in that way contributed enormously to the drive and determination ... to make the corporation as a whole a success. This, of course, in turn facilitated the development of cooperation and correlation and interdependence, all of which later played such an important part in the success of that corporation.
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 by 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.
In the allocation of the fund, eligible employees are divided into certain categories for administrative purposes, as follows:
(a) Directors of the corporation who are operating executives.
(b) General managers of the operating divisions and the heads of the various staff organizations. (These two groups comprise the top administration area of the corporation's organization.)
(c) The balance of the organization, down to those whose salary is equal to the minimum set by the committee.
In considering the allocation of the fund to these various categories, the committee considers the amount available to be awarded as bonus and its relationship to the aggregate eligible salaries and the performance for that year.
The first step taken by the committee is to determine a tentative allotment to the directors of the corporation who as operating officers are eligible for bonus consideration. Each individual director is considered separately and his performance is reviewed by the members of the committee. In this connection, the committee may consult informally with the president and the chairman on the performance of the individual directors, exclusive of those two officers. With this accomplished, a determination is made of the aggregate allotment to all the directors as a percentage of the total bonus available.
The next step is to determine the allotment for the second category: general managers of divisions and heads of the staff organizations.
The committee considers what the tentative allotment should be to this entire group in relation to the aggregate bonus available. After the committee establishes the allotment for this category, the chairman and president make the individual recommendations and report them back to the Bonus and Salary Committee for approval or revision.
Having established allotments for the directors, and for the general managers of the operating divisions and the heads of the staff organizations, the chairman and president are advised of the balance which is available for the personnel of the operating divisions and the staff organizations. Then the chairman and the president, together with some of their principal associates, recommend a breakdown of the total sum available among those various groups.
Dealing first with the operating divisions, which are the profitmaking instrumentalities of the corporation, the committee, after consulting with the chairman and the president, establishes the general basis of allocation to be followed. Allocations to divisions give consideration to aggregate salaries of eligible employees, relative return on invested capital, and an over-all judgment on divisional performance, taking into account any special circumstances that may justify special consideration. Following committee approval of the divisional allotments recommended by the chairman and the president, the general managers of the operating divisions are notified of the allotments for their divisions and it then becomes their responsibility to make the recommendations, according to their judgment, for individual bonus awards for employees within their divisions (excluding themselves, of course). In the case of staff organizations which are not profit-making activities per se, the allocations are made to each group based upon their eligible salaries and an evaluation of the staff performances.
Within the various divisions and staff organizations, there is no single formula for determining individual bonus recommendations. Each has its own technique. Each individual, however, is awarded a bonus on the basis of the most careful and searching analysis his superiors can make of his contribution to the corporation during the year. Normally, the point of origin of the recommendation for a given individual is his immediate supervisor. The supervisor's appraisal is reviewed through the succeeding levels of management, up to the general manager of the division or to the appropriate staff head. The general manager or staff head reviews all the recommended awards for those under his jurisdiction and transmits them to the group executive under whom he serves. The group executive in turn reviews and passes on the recommendations and then submits them to the chairman and the president. After all such recommendations have been reviewed by the latter executives, together with the executive vice presidents, they are transmitted to the Bonus and Salary Committee for final decision.
While each division follows its own procedures in recommending bonus awards, the review process reduces any inequities to the minimum. It is impossible, of course, for the Bonus and Salary Committee to familiarize itself with the detailed qualifications of some 14,000 beneficiaries. However, the committee receives detailed pertinent statistical summaries of all the individual bonus recommendations, designed to aid their evaluation of the recommended bonus distributions, along with complete listings of all bonus eligibles and the proposed individual participants and awards. Moreover, the committee evaluates the individual recommendations pertaining to approximately 750 principal executives, and compares awards for those in comparable positions throughout the corporation, in the various divisions as well as in the central office staffs. The committee carefully reviews the performance of each of these executives to assure that bonuses reflect variations in accomplishment and provide the most equitable distribution possible. In the nature of a byproduct, the careful review of the progress and development of individual executives is very valuable from the standpoint of analyzing the strengths and weaknesses of the corporation's management personnel. This is particularly useful in planning ahead and preparing for inevitable organization changes.
The Value of the Bonus to General Motors
Is the Bonus Plan really worth all the executive time and effort taken up by its administration? And is it worth the money it costs? I believe so emphatically. I am convinced that the Bonus Plan has not cost the shareholders a single dollar, but has, on the contrary, greatly increased their return over the years. I believe that the Bonus Plan has been, and continues to be, a major factor in the remarkable success of the General Motors Corporation. When an enterprise is new and small and is operated by a few people who have invested their own savings, it is perfectly apparent to them that their own interests are interwoven with those of the enterprise. But as the enterprise grows and more and more men participate in its management, this connection becomes remote and needs periodic expression and emphasis, such as the Bonus Plan provides.
The Bonus Plan creates different kinds of incentives at different levels of the corporation. It creates a tremendous incentive among employees not yet eligible for bonus awards to become eligible. One of our top executives recalled a while back in a letter to me: "I well remember the thrill that came with the time when I was first awarded a bonus—the feeling of having made the team and the determination to continue to advance in the organization." I believe that same feeling has been shared by all who have had the opportunity to participate in the Bonus Plan. And for many of them, bonus awards today probably comprise the great bulk of their personal assets.
Since bonuses are awarded annually, the incentive continues as long as the man stays with the corporation. The stimulus in fact becomes increasingly effective as a man advances in the organization, for the bonus is generally larger in relation to salary at high-salary brackets than it is at low brackets. In other words, the bonus tends to increase in a kind of geometric (rather than arithmetic) progression as a man is promoted. And so there is a tremendous incentive for him not only to do the best possible work in the job he already has, but to do such an outstanding job that he will be promoted to a higher rank.
The incentives and rewards are not solely financial, however. Again, I quote from the letter mentioned above:
There is still another value which I am sure the Corporation derives from the administration of the Bonus Plan. It is the intangible incentive it provides as distinct from the tangible incentive of a monetary reward. The potential rewards of the Bonus Plan to ego satisfaction generate a tremendous driving force within the Corporation.
Each bonus award carries with it considerably more than the intrinsic value of its cash and common stock. To the recipient it is also an evaluation of his personal contribution to the success of the business. It is a means of conveying to the executive a form of recognition which he prizes independently of his monetary compensation.
This non-financial incentive is reinforced by a fairly general practice of having each recipient's supervisor deliver the bonus notification letter. This furnishes an opportunity for a review and discussion of the recipient's performance.
One important side-effect of the Bonus Plan is that it makes each participant acutely aware of his relation to his job and his superiors; he is obliged, as it were, to dwell on his own and the corporation's progress. A man derives satisfaction from knowing that his superiors have judged his value, and at the same time there is the spur of having his work reviewed annually.
This kind of atmosphere cannot be generated or maintained under a straight salary system, or a salary system supplemented by an automatic bonus or profit-sharing system, in which an employee is conscious of being judged only when he receives or fails to receive a raise. And penalties are more difficult under the usual arrangement, for salaries generally are inelastic on the down side. Under the General Motors Bonus Plan, however, a substantial reduction in a man's bonus that runs counter to the trend in the total amount of bonus awarded, constitutes a severe penalty—and one of which the individual concerned is very much aware. The total amount to be awarded is published in the annual report.
The Bonus Plan also provides much more flexibility on the up side than is possible under a salary system. It may be difficult to reward a man for superior performance by raising his salary, since the increase may upset the whole salary stratification. A salary increase, moreover, commits the company indefinitely, whereas the bonus makes it possible to tailor the reward to the period in which performance was unusual. And so the Bonus Plan makes it possible for the exceptional individual to break out of the over-all salary schedule without at the same time upsetting the schedule.
The Bonus Plan, moreover, tends to keep executives with the corporation. As explained earlier, bonuses are currently paid in five annual installments; an employee who leaves voluntarily may lose the right to earn out the undelivered balance of his bonuses—in some cases, a very substantial sum. The net result of this deterrent —plus the stimulus the plan provides—has been that over the years General Motors has lost relatively few executives it has wished to retain, especially in the upper levels.
In the last analysis, of course, it may not be possible to "prove" the success of the Bonus Plan, for we can only conjecture what might have happened if the plan hadn't existed. My friend and associate of many years, Walter S. Carpenter, Jr., has expressed my own sentiments in response to my request to him for an evaluation of the effectiveness of the Bonus Plan. He wrote:
If by the "effectiveness" of the bonus plan you infer some more or less factual, perhaps even mathematical, proof of the results achieved by the Bonus Plan, I will have to admit right at the start I am afraid I cannot be of much help. I say this because we have given this matter a great deal of thought over the years. We have considered it particularly at those times when we have revised the bonus plan in an effort to ascertain even in rough measure what percentage figures we should use in deriving the amount of the annual bonus fund. Again each year we have given this matter our thought when we have endeavored to formulate the percentage of the earnings to be set aside, of course all within the maximums provided for in the bonus plan itself. I have pretty well come to the conclusion that it is one of those things that we have to accept largely on the basis of our judgment of the results which we have observed during our experience with the plan over the long period of years. To this might be added our confidence in the general underlying philosophy on which the principles of the bonus plan have been based.
There are one or two factual circumstances from which I think we can derive some measure of support for our feeling that the bonus plan is an effective tool even though they cannot be closely measured.
I refer first to the fact that the du Pont Company and the General Motors Corporation, both of which I believe have been the most prominent exponents of the bonus plan, have been extraordinarily successful. Here, of course, the detractors can say there were many other reasons for this success and no doubt there were. It is, however, impressive that these two companies have been outstandingly successful . . .
And so it is, Alfred, that while we may not have isolated or mathematically demonstrable proof of the effectiveness of the bonus plan, we do have to support our assurance in its effectiveness the record of success of two great enterprises over a long period of years in which it played an important role, we have evidence of its contribution toward the assembling and retention of an organization of outstanding men and we have in addition our confidence and faith in the basic principle on which it is founded.
To this I should like to add my own profound conviction that to abolish or seriously modify the Bonus Plan after forty-five years of successful operation might very well destroy the spirit and organization of the corporation's management.