How Much Is Enough?

Is a $100,000-a-year salary a big enough incentive for an executive to do his best work?

This question (and it was seriously asked) last week stirred up a first-class family fight in Federated Department Stores, Inc., fifth biggest U.S. department-store chain.*

Federated's brass hats were dead sure that the answer to the question was no. So, like many another corporation, they devised their own incentive plan, based on stock options (TIME, May 29 et seq.).

Under Federated's plan, 14 top executives would get options to buy 125,000 shares of Federated stock over a period of five years at approximately the market price. They would pay for it in installments spread over 15 years, thus profit on any rise in price during that time if they decided to sell.

Chief beneficiaries would be Walter Rothschild, president of Federated's Brooklyn subsidiary, Abraham & Straus, and Federated's famed Lazarus brothers: Fred Jr., $100,000-a-year president; Simon, $100,000-a-year president of Federated's Columbus (Ohio) subsidiary, F. & R. Lazarus & Co.; Robert, $75,000-a-year vice president of F. & R. Lazarus; and Jeffrey, $75,000-a-year vice president of Federated's Cincinnati subsidiary, John Shillito & Co. The plan, said Federated, would provide "those executives with a greater incentive for resourceful and imaginative employment of their skills."

Enough Incentive. Last week, the incentive pay plan ran afoul of birdlike, aging (73) Samuel Joseph Bloomingdale, Federated director and honorary board chairman of an important subsidiary, Manhattan's Bloomingdale Bros.

In high dudgeon, Mr. Bloomingdale (who does not want his 12% ownership of Federated lessened by a new stock issue) tossed off a letter to stockholders. He said--and minced no words saying it -- that Federated's $100,000-a-year bigwigs had all the incentive they need. The plan, he wrote, is actually a device to give executives a salary increase "not subject to ordinary income taxes" but only to capital-gains taxes (25%). For example, said angry Mr. Bloomingdale, if Fred Lazarus should make $50,000 by a rise in the price of any stock purchased, "he would retain $37,500 after payment of federal capital-gains tax. For Mr. Lazarus to be able to retain $37,500 a year out of any additional salary . . . subject to ordinary income taxes, his present salary would have to be increased more than $500,000."

Enough Proof? Next week Federated's stockholders will settle the quarrel by a vote. Even if the plan passes, Federated's bigwigs may find the task of slipping through the capital-gains loophole comparable to passing through the needle's eye. Once, the loophole yawned wide. But five months ago, the U.S. Supreme Court ruled that profits on stock options, where the stock was bought at less than market prices, are subject to income, not capital gains, taxes in the year the option is exercised and the stock is bought. Since then, the U.S. Treasury has suspiciously microscoped option plans that might be tax-dodging schemes. In the light of its family squabble, Federated might be hard put to it to prove that its plan is not.

*Allied Stores, May Department Stores, R. H. Macy & Co. and Gimbel Bros, are larger.

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