How Much Incentive?

Should U.S. industry set up a system of incentive pay for executives?

This question is as hot to the thousands of U.S. business executives as the size of the pay envelope is to U.S. workers. Last week it boiled up in Manhattan as a full-fledged corporate issue. The argument had simmered fortnight ago over the "incentive plan" which Sinclair Oil Corp. set up for its president Harry Sinclair (TIME, May 29). Twentieth Century-Fox Film Corp. came along with a similar plan to make management more attractive to its president Spyros Skouras (see above).

But it was Paramount Pictures, Inc. that set the pot boiling furiously. Paramount proposed to stockholders, for a vote on June 20, that Paramount should sell $2,000,000 worth of promissory notes to its egg-pated $141,000-a-year president, Barney Balaban, 56, also head of Chicago's Balaban & Katz. The notes would carry 2 1/4% interest, payable in seven years. During that time, President Balaban would be permitted to convert a fourth of the notes a year into Paramount common stock at a fixed price of $25 a share, as long as he remained with the company. Thus, if the stock rose above $25 (at week's end it was selling at $25 7/8) Balaban could convert the notes, reap a profit. If it dropped, President Balaban simply hung on to the balance of his notes. Obviously this was a considerable inducement to Barney Balaban not to retire.

And taxes would amount to only 25% on profit on a long-term capital gain, as compared to the 74% income taxes on his regular salary of $141,000 a year.

Tax Dodge? But in a time when the majority of U.S. citizens enjoy no such means of getting pay raises, there arose considerable hubbub over this newest loophole in the income-tax laws.

In the New York World-Telegram, Financial Editor Ralph Hendershot wrote: "Granting stock options to officials of corporations is beginning to be almost a habit. . . . The wave of options (other terms are used in many instances) currently being proposed are designed chiefly to avoid income taxes. If salaries are increased for those already drawing down large amounts, the bulk of the increase would be paid in taxes. . . . These companies evidently believe that through these stock options, capital gains can be created, in which event the tax is only 25%."

Right or Wrong. Many a Wall Streeter was quick to point out that this was not the whole picture. They argued that U.S. corporations are approaching a managerial crisis. In the main, they have become too big for one-man ownership or operation. They must shop outside for top-drawer talent, then offer a substantial inducement for that talent to stay put. With sky-high taxes, sky-high salaries alone are no such inducement. The best inducement is to give top men a chance to build up what Wall Street calls "an adequate capital position," i.e., make more money.

Furthermore, many a thoughtful businessman has long believed that top managers should have a greater tangible stake in their companies, i.e., a sizeable stock interest. The new stock option plans are regarded by many as a step in that direction. As a clincher, Wall Streeters point out also that before any recipient of a stock option can benefit, all the other stockholders must benefit also. Said one, summing up the whole question: "If you believe in the incentive system what other incentive can you give them but money?"

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