The Great Game of Gimmicks

EXECUTIVE PAY

LEWIS Carroll's Red Queen had to run as fast as she could to stay where she was. Many U.S. executives have the same feeling. When they get a raise, taxes take so much that they have little of it left in real income. To find other ways to reward them, U.S. industry is evolving a system of weird and complex devices known as "gimmicks." Says RCA's Chairman David Sarnoff: "You can't compete for executive talent today without a gimmick."

The problem of a $175,000 executive who is able to keep only $48,000 in take-home pay is not one calculated to arouse the sympathy of the average wage-earner. And the well-heeled executive, describing his unhappy plight in the Waldorf-Astoria bar or on the beach at Miami, is likely as not writing his entertainment or his vacation off on the company's expense account. But the problem of executive pay is nonetheless a real one to executives who are taking on greatly increased responsibilities with little or nothing to show for their efforts.

From 1939 to 1950, according to a survey of 41 major companies, the pay of top executives rose more than 35%, to an average of some $60,000. But taxes and prices rose so much faster that the executives actually ended up with 59% less purchasing power than they had before the war. Faced with such facts & figures, it is only natural that businesses all over the U.S. are looking for new ways to pay their top men.

Among the oldest gimmicks for extra compensation are incentive bonuses. Many General Motors executives, for example, get their incomes doubled with liberal bonuses. But the major drawback to bonuses is that they are taxed as straight income (one top executive, who got a $25,000 bonus, paid $18,000 in taxes, used the rest to pay back what he had borrowed to pay the previous year's taxes).

To get around such heavy taxes, many companies use deferred salary and profit-sharing plans, under which payments are spread over a period of years, and may, for example, be paid after a man has retired and has a lower income to be taxed. Many such plans pour into the Bureau of Internal Revenue every day for approval. There are even gimmicks within gimmicks; under some conditions, an executive can legally sell his profit-sharing contract back to the company when he leaves, pay only a capital-gains tax on the proceeds.

Stock options are among the most popular forms of extra compensation.

They usually run for five or ten years, and give top men the right to buy stock in their companies for as little as 85% of the market price at the time the option is issued. Stock options have persuaded many a top executive to switch jobs. Example: Ford lured Executive Vice President Ernest Breech away from a top G.M. job by offering him an option to buy Dearborn Motors stock. James Nance quit Jlotpoint's presidency (and a promising future in parent G.E.) to take over Packard, with an option to buy 200,000 shares of Packard stock at $4 a share at any time until 1957 (current price of Packard stock: about $5 a share).

Besides such BIR-approved plans, almost every company gives its top men special privileges that amount to extra compensation. An aluminum company keeps a lodge in Tennessee, with a nine-hole golf course, where its brass entertains top customers and gets some free relaxation in the process. Similarly, steel executives sometimes cruise the Great Lakes on ore boats which have been fitted out with sumptuous guest cabins and offer superb cuisine. Some oil-company tankers have guest cabins almost as luxurious as anything on the Queen Mary. One big electrical-equipment company recently bought a fancy yacht on which its executives can entertain customers--and themselves. An Akron rubber company sometimes uses its Arizona experimental farm as a dude ranch for officials. A Detroit company offers the choice of two vacation spots: an apartment house in Florida, a resort hotel on a Michigan lake. Some Southern textile mills, scrambling for executive talent, provide free housing, even free servants.

All these devices may be a tribute to the ingenuity of big business. But they may sometimes be more a hindrance than a help to its efficiency. Many promising younger executives leave big business altogether to try to start ventures of their own, in hopes of turning a capital gain at a lower tax rate.

So long as the tax structure continues to take so big a bite from top-bracket salaries, U.S. industry's great gimmick game will continue, and corporations will keep on looking for new and ever more ingenious ways of paying their best men rewards commensurate with their contributions. But their ingenuity may be taxed still more when the excess-profits tax expires next January. Then many of the company-paid luxuries now winked at as business expenses may suddenly look too expensive to be continued.

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