Investment plan locked in top talent

For every $10,800 they invested, key execs reaped $61,218 after 7 years

In May 1923, as Alfred Sloan became president of General Motors, the company finally was recovering from a series of upheavals that had challenged its very existence.

Less than three years earlier, the market had dried up almost overnight, causing inventories and debt to soar out of control and pushing the company close to bankruptcy.

Walter P. Chrysler, GM's manufacturing genius and Sloan's closest associate, had resigned in March 1920 because he couldn't put up with President Billy Durant. And by December of that year Durant had been ousted because of his reckless speculation in GM stock.

Crisis after crisis kept the company in constant turmoil, and Sloan, a devotee of order and control, abhorred turmoil.

Once at the helm, Sloan continued to advocate the organizational disciplines he had implemented in 1921 that had helped GM weather the storm. A natural corollary to those practices, Sloan knew, was putting the right people in the right jobs — and then keeping them.

With assistance from his predecessor and GM's chairman, Pierre DuPont, Sloan established a program that would reward — and hopefully retain — top executives by offering them a substantial stake in the company.

In November 1923, Managers Securities Co. was established, initially funded by 2,250,000 shares of stock sold to GM by DuPont, who held 37 percent of GM's outstanding stock.

An offer they can't refuse

Richard Holden, assistant professor of economics at the Sloan School of Management at the Massachusetts Institute of Technology — Sloan's alma mater and namesake school — has researched and written extensively about executive incentive plans at E.I. du Pont de Nemours & Co. and GM in the early 20th century. He found Managers Securities Co. to be unique in corporate history.

"To the best of my knowledge, this is the first time for such a plan," Holden said. "Unlike the no-cost options awarded to modern executives, this plan gave GM's executives more 'skin in the game,' so to speak. A board of directors wants its executives to act as closely to its interests as possible, and this plan helped achieve that goal."

Sloan would note in his memoir, My Years with General Motors, that the plan "was made possible by Mr. du Pont's belief in the validity of a partnership relationship between shareholders and executives." While the value of the program would be proved some years later, it served the more immediate purpose of furthering DuPont's own interests.

A portion of DuPont's substantial holding in GM was due in part to bailing out Durant after his stock speculations had posed a serious threat to the company. As Sloan diplomatically described it, "the stock in question was an extra investment originally acquired under duress, so to speak, in connection with the financial adjustments of Mr. Durant's affairs."

In addition to unloading those surplus shares, DuPont hoped that the incentive the plan provided to the executives eventually would enhance the value of the stock, benefiting the executives as well as the company's other shareholders — including, of course, himself.

The lucky 80

Eighty executives were invited to participate; the number of shares allotted was based on their positions in the company and at a cost no greater than their annual salaries. Sloan visited each one to make the pitch. With his morticianlike countenance and humorless demeanor — and his stature as their boss — it is impossible to imagine any of them refusing him.

They were wise not to do so; once the books were closed, Managers Securities Co. proved to be, in Sloan's words, "successful beyond the most optimistic expectation."

Every $1,000 worth of stock purchased represented, in effect, a partial payment on 450 shares of GM common stock. Each executive then agreed to apply his future bonuses to pay off the outstanding balance. Over the course of the plan, that amounted to $9,800, for a total investment of $10,800 for 450 shares. When the plan ended in 1930, each $10,800 invested had grown to $61,218.

Perhaps equally as impressive is that those gains were made in a period of relatively flat sales for the industry. From 1923 to 1928, sales of cars and trucks ranged from 2.8 million to 3.6 million annually. GM's sales more than doubled in that period, and its market share increased from less than 20 percent to more than 40 percent. Net income during the same period vaulted from $72 million to $248.2 million.

"While it's impossible to establish a causal relationship between the implementation of Managers Securities Co. and GM's success, it is certainly suggestive of one," Holden pointed out. "It's also interesting to contrast it with companies today, where highly nonlinear executive compensation sometimes encouraged behavior that often had disastrous results for shareholders."

For Holden, the lesson is clear. "Modern incentive plans may have something to learn from distant ancestors such as Managers Securities Co."

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