Executive Salaries

With The Market for executives churning these days, onlookers and managers alike are understandably curious about who is getting the top dollar and why.

The demand for good men is high not only because of the explosive growth of businesses to be managed but because of the shortage of qualified men in the 35-44 age group, ordinarily the reservoir from which top men are selected. (During the Depression, people just weren't having many babies.) One result is that businesses increasingly are reaching down into the younger 25-to-34 age group to locate and earmark men of promise, and then groom and guide them. These are the men who will gradually move into positions from which they can have a clear shot at the top.

The demand for good men is such that, although three years ago a newly minted master of business administration would be offered $7500 to $8000, today the M. B. A. will have little difficulty getting $9500 to start and, if he looks really hot, $11,500. And, to move up a bit, the seasoned man who is on the threshold of achievement as a full-fledged manager can usually command $20,000 to $25,000.

Management has become quite age-conscious in assessing men. especially young ones. They examine the man's age-position relationship. If a 30-year-old and a 35-year-old are being considered for the same managerial job, then if other things are reasonably equal, the 30-year-old will get the nod. He offers more continuity and growth potential. One leading executive recruiter, John Handy, says: "If you have a man of 40 making only $18,000, you wonder if he has started going sideways."

By the age of 30, a man of promise headed toward top management (where the true executive jobs lie) should be making at least $10,000 And by the age of 40, he should be making around $25,000. This span of the man's 30s, according to management consultant Robert Sibson, is the greatest period for leaps in pay. A really good man in his 30s will be increasing his compensation by at least 15 percent a year.

Some executive recruiters talk of the importance of a man's "age-to-earnings ratio" in assessing his growth potential. On the basis of information supplied by one leading recruiting firm, I find that the age-to-earnings ratio for "top-drawer" men would look something like this:

Age 27-30 ..............................................................$10,500--$14,000

Age 30-35 ..............................................................$14,000--$20,500

Age 35-40 ..............................................................$20,000--$28,750

Age 40-45 ..............................................................$23,000--$35,000

Age 45-50 ..............................................................$26,500--$40,000

Over 50 ................................................................$32,500--$57,500

By the late 30s, if a manager has growth potential, he will certainly have established a foothold in middle management. The American Management Association has identified 69 varieties of middle manager, including such jobs as chief engineer, plant manager, traffic manager, and so on. It has released data indicating the following, for example, as probable maximums for typical middle-management jobs:

General accounting executive of a company with assets of $20,000,000 to $50,000,000 ..........................$15,000

Regional sales director supervising sales of $10,000,000 to $20,000,000 ............... $21,500

Plant manager with production of $10,000,000 to $20,000,000 ...........................$22,100

Research and development executive with a budget of between $500,000 and $900,000 ............$25,000

It might be added, however, that in most companies, research and development is not considered one of the more promising routes to the top--or to the really big pay checks.

Considering management ranks as a whole--and not just middle management--the best-paying functional area, Sibson and Co. reports, after making an extensive survey, clearly is marketing. This is followed in descending order by finance, manufacturing and research.

Scanning down from the top of a company, you will usually find a clear hierarchal pattern in the way that money is allotted to the top ten men. Thus, if you know the pay of any one of the top ten men, you can make an enlightened guess about the pay of any of his nine colleagues. If it is known, for example, that the chief executive officer is making a modest $100,000, then his nine closest subordinates will probably be earning:

2nd highest ...................................................$70,000

3rd highest ...................................................$60,000

4th highest ...................................................$55,000

5th highest ...................................................$50,000

6th highest ...................................................$42,000

7th highest ...................................................$38,000

8th highest ...................................................$35,000

9th highest ...................................................$32,000

10th highest ..................................................$30,000

An A. M. A. official who reported a roughly comparable descending scale indicated that the jobs in a hypothetical company might, in descending order, be: president, executive vice-president, marketing vice-president, financial vice-president, manufacturing vice-president, treasurer, controller, industrial-relations or personnel director.

Then, lower down--and with increasingly smaller differences in salaries--there might be the purchasing agent, chief engineering executive. research and development director and public relations director. The latter might be making $25,000 if the president is at $100.000.

Up through middle management, a man can be reasonably sure that his pay will be (continued on page 86)Executive Salaries(continued on page 75) commensurate with his responsibilites, regardliess of the size of the company or the industry he is in. At least this is an A. M. A. finding.

But as a man moves up into general management responsibilities--and he should by his early 40s if he is going to make it--he starts finding important differences in compensation, depending on what company he is with. This becomes increasingly true the higher he goes.

For example, look at some of the eyepopping compensation packages handed out in the automobile-making industry. Motorcar officials may fret from time to time about their tribulations, but they do not customarily fret about their pay, and for good reason. Take the case of Edward D. Rollert, who in 1965 was seventh vice-president, on the basis of pay, at General Motors. His compensation package came to approximately $525,000.

This seventh vice-president at GM received more remuneration in 1965 than any tycoon in a publicly held corporation outside the motorcar industry. This included presidents and chairmen. His pay, for example, was almost twice that of Roger M. Blough, the chairman of United States Steel Corporation.

General Motors had at least nine executives in 1965 who made more than a half million dollars. It had six who made more than $600,000. Its chairman, Frederic G. Donner, made more than $800,000.

At Ford Motor Company, three men also were awarded more than a half million dollars, including a vice-president. The 12 highest-paid men in America's thousands of publicly owned corporations were all in these two motorcar companies.

It is only when we drop down to the $440,000 level that we come to our first nonmotorcar man. He was Lammot du P. Copeland, president of E. I. du Pont de Nemours & Co. But again there is a perplexity. His chemical company was about on a par in sales during 1965 with Swift & Company, the meat packer, and yet the top man at Swift was paid or credited with considerably less than half as much ($156,000) as Du Pont's top man. Or note another seeming anomaly. A. T.&T. has nearly five times the assets of General Motors and 60,000 more employees. Yet the head of A. T.& T., Frederick Kappel, received only a little more than a third of the pay of GM's Frederic Donner.

Why? Is there any pattern to account for such seemingly large discrepancies in the pay that is awarded to the higher executives of U.S. enterprise? What is it, ambitious young men may properly wonder, that establishes the price a corporation is willing to pay the man who rises above the general run of managers? How is a top manager's contribution measured? And does the pay match the contribution?

There are, indeed, some yardsticks used by the world of business for measuring what rewards a particular job should command. Normally, it should be noted, the chief executive officer is awarded the largest compensation package, whatever his title. Today in large corporations, this is usually the chairman. A few years ago it was the president.

Incomes of many leaders in the business world can be found by examining official proxies that publicly owned companies are required by law to file each year with the Securities and Exchange Commission. These must detail the compensation of certain top officers. I have scrutinized a few dozen of these. Most are, I assume, deliberately prepared by experts in obscurantism. To add to the confusion, an executive's "compensation package" often involves several components.

Salaries alone usually count for only a part--and often a small part--of a man's annual compensation. There may also be incentive payments in the form of bonuses, deferred-compensation awards (to be spread over several years to ease the tax burden) and contingent awards of stock. There is a great search to find ways "to inject more motivation into the executive payroll dollar," to use one consultant's phrase. At Zenith Radio Corporation, for example, president Joseph Wright's salary is listed at a mere $60,000. But in 1965, when his company had a fine year, thanks in part to the booming market for color TV, he also received $308,000 in additional forms of compensation, to bring his total reward to a very respectable $368,000.

As for deciding a man's total compensation package--whatever the components--in a quite general way, sheer size of the company as revealed in total sales or revenues is one widely used yardstick. There is a tendency--but only a tendency--for bigger companies to pay more than those somewhat smaller.

Among the really big companies, the average top pay is likely to be above $200,000. By my computations, the average total compensation of the first 50 chief executives listed in Business Week's survey of executive compensation was approximately $235,000 in 1965.

Smaller companies, as measured by their annual sales, move down from this level in a more or less regular way, according to Arch Patton of McKinsey and Company, management consultants. A couple of years ago, he listed the average compensation of chief executives of companies in 21 industries where sales were at three levels:

At $400,000,000 a year sales, the chief executive salaries ranged from $106,000 to $183,000. depending on the industry.

At $100,000,000 a year sales, the chief executive salaries ranged from $68,000 to $120,000.

At $30,000,000 a year sales, the chief executive salaries ranged from $46,000 to $84,000.

Mr. Patton has contended, in Harvard Business Review, that there has been a deterioration in top-executive pay during the last decade or so. He noted that the pay for the chief executives of 420 companies he had studied rose only 25 percent, while the size of the companies, as measured by sales, rose 76 percent (and by profits, 102 percent).

Another and more frequently used yardstick for determining the pay of a top business executive is the amount of profit the company makes while he is in command. That, after all, is primarily what interests the board of directors. Today at most large companies, a man near the top receives some part of his annual earnings in the form of a bonus that is somewhat linked to the company's profits during the year.

Several of Ford's top men got pay increases of more than $100.000 in 1965, almost all of the increases in the form of "supplemental compensation." During the year, Ford's net profits had jumped nearly $200,000,000. At smaller Martin Marietta, on the other hand, profits dropped by $7,000,000 from 1964 to 1965 and the compensation of its president dropped by $50,000.

The top executives who are at the helm when their companies enjoy a sensational growth in sales, accompanied by good profits, are even more likely to be rewarded bountifully. Thus, Joseph C. Wilson, president of the relatively tiny Xerox Corporation, outdrew chairman Albert L. Nickerson of Socony Mobil (now Mobil Oil Co.) with a compensation package of $263.000, even though his company's profits were only one sixth those of Socony Mobil. Corporate growth is a major explanation. Xerox in 1963 was 294th on Fortune's list of the nation's 500 leading industrial corporations, while Mobil was fifth. In two years. Mr. Wilson's company, thanks in part to the boom in photocopying, leapfrogged over 122 other companies to become 171st on the list. Meanwhile, Mobil had dropped back one spot to sixth.

There appear to be a host of factors in addition to the yardsticks of sales volume and profits that influence the setting of top compensation in business.

To mention a few:

The degree to which bureaucratic thingking has come to dominate the company. The extent to which the top officers can feather their nests without undue worry about protests form "outside" directors and shareholders. The degree to which the company wishes to keep its leaders contented and securely anchored to the company. The extent of family domination in the company's (continued on page 165)Executives Salaries(continued on page 86) affairs. Finally, and this often seems of major importance, the nature of the enterprise. If the company's affairs tend to be rather static, relatively unchallenging or subject to outside controls, the pay tends to be low. On the other hand, if a highly competitive, beat-last-year, shoot-the-works-on-advertising, go-for-broke spirit prevails, rewards for good performance tend to be extra generous.

A leading executive recruiter, E. R. Hergenrather of Los Angeles, recently conferred with four top executives in the West and advises that their general impression was that leaders in industries such as cosmetics, where a great share of the selling price is spent in promoting the product, tend to be paid more than executives who work in less promotion-minded industries.

In industries where there is a considerable amount of Government regulation or supervision, pay tends to be depressed. This includes such industries as utilities, railroads, banks and insurance. There is a feeling that many of the really crucial decisions affecting the companies are made outside, by supervisory agencies. This helps explain why the utility that is the giant of all American corporate giants in assets, A. T.&T., pays chairman Frederick Kappel a seemingly modest $304,600. In contrast, International Telephone and Telegraph, which is primarily engaged in manufacturing communications equipment and which operates in many countries, felt free to pay its chairman and president, Harold S. Geneen, $395,600, even though its assets were only one sixteenth of A. T.&T.'s.

Also, the more competitive and volatile the industry, the more likely is a sizable spread between the salary of the man at the top and those of his various vice-presidents. This is especially true of middle-sized companies. If the president of a volatile company receives $100,000 in pay, then his executive vice-president is more likely to earn $65,000 than $70,000 or $75,000.

It is often contended that it is deceptive to cite $100,000 to $800,000 remunerations paid to the princes of free enterprise, because the Federal Government takes most of it away in taxes. That is true to an extent. Some executives have contended that, after a certain point, getting more money is not a prime incentive, because of the taxes. And many of the proxy statements defensively show an estimate of each top executive's pay after taxes.

But despite the shrinkage caused by taxes, executives will still concede that it is important that their money "label" be right. If they are to keep face while consorting with fellow tycoons, they want the proxy statements to show they are wearing the right label, which should be up in the six figures.

The tax bite has never been as severe as executive groaning would make it seem, at least for most of them. During the late Fifties and early Sixties, a vast amount of business ingenuity went into developing "compensation packages" that were designed to protect an executive from having his earnings eroded by taxes. One executive recruiter boasted of having 26 "shelter plans" to choose from for men he placed in high-level jobs. These included a variety of deferred-compensation plans, stock options, etc.

A more important reason the tax burden has become less severe is that the Revenue Act of 1964 greatly eased the tax on higher incomes (considerably more than on low incomes). The much-decried 91-percent tax bracket is no longer with us. The worst that even a high-six-figure automobile tycoon without any shelters whatever could expect on his 1965 income is a tax of somewhere between 65 and 70 percent. Here, for example, is how the Federal income tax for a man with a taxable income of $300,000 has changed between 1963 and 1965 in terms of what he can keep, assuming he is married and files a joint return.

Amount Remaining After Tax

1963 ............................................... $76,360

1964 ...............................................$104,820

1965 ...............................................$119,020

In short, a man with a taxable income of $300,000 can keep nearly $43,000 more of his 1965 income than he could have kept in 1963. And the man with a taxable income of $100,000 can now expect that no more than 45 percent of his earnings will go to pay his Federal income taxes, if he is married.

Bachelors who have a substantial income from their jobs still find the Federal tax enormously depleting, even at the $25,000 level. One bachelor with a promising job that was paying $27,000 quit to get off a payroll and establish his own business. The bachelor discovered that about 60 percent of each additional dollar he could earn from a job would go to taxes.

One result of the over-all easing of the tax is that executives are no longer as fascinated with stock options, deferred-compensation plans, etc.; and they now increasingly want to get a larger portion of their compensation package in cash.

This does not mean they have completely lost interest in some of the perquisites of executive life, such as company-paid $100,000 life-insurance policies, generous expense accounts, free trips to a spa for a leisurely medical check-up between daily golfing matches, and arrangements that provide comfort after retirement. (When the new chairman of Gulf Oil Corporation ultimately retires, he will receive an estimated $51,000 a year in annuities and benefits for the rest of his life. The retiring chairman of Schenley was assured in the 1965 proxy statement that he would never be fully retired unless he desired, since there would always be advisory and consulting services to perform for the company, at $150,000 a year.) One expert estimates that extras beyond cash compensation are likely to add 30 to 50 percent to the value of the average top executive's compensation package.

Though the nonfinancial perquisites of office are becoming of less interest in large companies, the top man still may want his own private dining room with chef, his plane and car with chauffeur, and his sumptuous suite when business calls him to Washington or New York.

Some people may ask whether top U. S. business executives are worth all the six-figure incomes that are awarded to them. What do they do to earn all that money?

The good ones work far longer hours than most of us. The executives in greatest demand today are the rare generalists who enjoy taking charge of very different projects one after another. They are coordinators of far-flung and widely diversified operations and probably have picked up a good deal of insight about operating in the world market. A major factor contributing to the selection of James M. Roche as president of General Motors ($688,000 for a start in 1965) apparently was that he had been overseeing the company's international operations.

The top executive now in most demand is at ease in turbulent situations and has a capacity to generate enthusiasm for, and confidence in, the goals he feels are best for his company. A top man also must often be willing to put his dedication to company above dedication to family, be willing to be a team player and be gifted at it, to live in the expectation that he may not have his six-figure income and leather swivel chair with neck rest for very long.

But are his contributions of a special kind that call for greater rewards than are given to other leaders of large organizations? This is somewhat less than clear. Business executives in Europe rarely are paid the foreign equivalent of six-figure incomes. Arch Patton, an expert on corporate compensation, points out that chief executives abroad tend to be paid about one half the compensation of their U. S. counterparts. These foreign executives, on the other hand, often have more perquisites of office--such as Bentleys, yachts, company-owned homes and company-paid domestic staffs--than executives in the U. S. A.

The puzzle about the worth of an executive's contribution deepens when we look at the compensations paid to executives in Government. In terms of the physical assets and employees they must manage, their responsibilities often would seem to be far greater than those of the business executive, and yet their compensation is usually a fraction of that of a top business executive of a large or even medium-sized company.

When Robert McNamara was persuaded to leave the presidency of Ford to become the U. S. Secretary of Defense, he left a job paying $410,000 a year to take one paying $25,000. And his Federal responsibilities in terms of expenditure may well be nine or ten times as great as they were at Ford. Furthermore, he must still pay taxes. Although he is now in a lower bracket, the income he can keep from his job as Defense Secretary comes to less than $20,000.

Another executive who more recently made the financial sacrifice of moving from private enterprise to Government is John T. Connor. He resigned as president of Merck & Company, where his compensation in 1964 was running at about $250,000, to become U. S. Secretary of Commerce at $25,000. His responsibilities as U.S. Secretary of Commerce involve a concern for the effective operation of all the corporations in the U. S. Or, to give a reverse example, Jack Valenti's salary leaped from $30,000 to at least $125,000 when he left his job as special assistant to President Johnson to become head of the Motion Picture Association of America.

The state governor is another top executive in government who would seem to be underpaid for his responsibilities. The highest paid of the governors of the 50 states in 1965 were those in New York ($50,000), California ($44,100), Massachusetts, New Jersey and Pennsylvania ($35,000). In the state of Michigan--where at least a dozen auto executives each earned more than $500,000 a year--the governor, George Romney, was paid $30,000. Among the lowest-paid governors were those of Arkansas and North Dakota ($10,000). These figures, of course, are their incomes before taxes.

Business consultants rationalize such relatively low pay by suggesting that public servants are more interested in "psychic" rewards. But recruiter Hergen-rather offers this explanation:

"Executives in private companies or industries are judged by company stock-holders on profits the company makes and by its growth. If things are going well, no one bothers much about executive salaries being high." However, university presidents, Government officials and military officers are running institutions owned by the people, and "it is very difficult for taxpayers to justify salaries considerably higher than their own earnings or earning capabilities." In short, a philosophy of egalitarianism is, apparently, more likely to influence the pay of leaders in situations where the people have an effective vote, with power of protest or veto.

When the profits of large corporations are in good shape, the only realistic limitations on the pay that top executives arrange for themselves, through their boards, are possible squawks from (1) disgruntled stockholders, (2) Government agencies with which the company must cope and (3) company employees who may feel they aren't getting their share of the pie.

Officers of large U. S. corporations can point out--and they often do--that they accumulate from compensation only a fraction of the annual increment in wealth of some of our entrepreneurs in privately held enterprises. A Texas oil digger, a discount-chain operator, a shopping-center builder or an operator of a tanker fleet, if lucky and if he has a rapidly expanding enterprise, can add millions of dollars to his personal worth. And when he sells his holdings, the profits he makes will be subject to the relatively low tax on capital gains.

The top nine officers at General Motors, who have each been making more than $500,000, might also argue that the company got a good bargain in 1965 for the approximately $5,767,000 paid to them for their leadership. Their total remuneration amounted to less than one fourth of one percent of the company's net profits.

What it all comes down to, apparently, is a question of values. In a society where money-making ability is esteemed as much as it is in the United States, and where business leaders remain among our foremost social models, six-figure incomes will presumably continue to be demanded and obtained by the leaders of our large corporations.

Perhaps the picture of compensation presented here raises philosophic questions about whether we have gone too far from an egalitarian ideal. But if there is a serious hazard to our present society in this situation, the hazard is not simply that some leaders make high-six-figure incomes. Rather, the hazard is in the fact that many leaders--in Government, universities and other public or service institutions--make low-five-figure incomes; skilled natural leaders are not available in abundance. If most of the available supply gravitates to the private areas where we offer the greatest material rewards, then the leaders who will help us face the urgent social challenges of the coming years will have to be responsive to nonmonetary motivation including the indubitable appeal of public notice, prestige and power.

Meanwhile, most Americans will continue to be upward strivers in a largely dollar-dominated society. How we fare in various enterprises, at various ages, in various job classifications, may be graphically gauged from the table on page 76 and the chart on page 165. From them you should be able to measure yourself against your peers, foresee your earning potential and--if you are young and mobile enough--select your preferred area of endeavor.