Automotive News - September 15, 2008 - (Page 66)

General Motors Story 20 /100 Investment plan locked in top talent For every $10,800 they invested, key execs reaped $61,218 after 7 years Kirk Seaman n 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. © GM Corp. I Sloan knew the importance of putting the right people in the right jobs — and then keeping them. Alfred Sloan’s plan sought to create “a partnership relationship between shareholders and executives.” 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 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.” Not a bad return How the plan worked 80 executives were invited to participate. Number of available shares were based on positions in the company. Each $1,000 worth of stock purchased represented a partial payment on 450 GM shares. Executives used future bonuses to pay off balance. The result: Each $10,800 invested became $61,218 in 7 years. 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 Rank had its privileges for GM brass he lives of top GM executives in the 1950s afforded perks and privileges available to only the few. Peter De Lorenzo, publisher of the industry Web site autoextremist.com, witnessed the life of a GM executive firsthand as the son of Tony De Lorenzo, who was General Motors’ public relations vice president from 1957 to 1979. “Back then,” Peter De Lorenzo recalls, “the division general managers were akin to the potentates of small countries. They had incredible power and authority. There’s just no equivalent now; managers today simply would not be able to relate.” For the first two years as PR chief, Tony De Lorenzo commuted between Flint and Detroit with GM CEO Harlow Curtice — but not by carpooling in a 1957 Chevy. “Every Sunday night, Curtice and my dad would fly down to Detroit in the company plane,” Peter De Lorenzo says. “From Monday to Friday they would stay in the executive suites off the 14th floor of the GM Building. Their executive canteen was the London Chop House (one of Detroit’s premier restaurants), where they would have T dinner and hold court every night. Then on Fridays, they’d fly back to Flint and spend the weekends with their families.” He remembers the GM Building itself as a monument to the world’s largest automaker: “The main lobby was great. There was always an armada of the latest models on display, with two or three cars from every division. With all of its marble, glass doors, and gilt trim, it definitely felt like you were in the lobby of the most powerful corporation on earth.” And, he says, “The executive garage always had some hot stuff.” Cole had a lead foot An example: Ed Cole’s personal car in the early 1960s was a 1961 Impala SS that had one of only two 409 engines then in existence — the other was powering “Dyno” Don Nicholson’s Chevy at the Summer National Drags. Cole, an engineering whiz who became general manager of Chevrolet and later GM president, was never far from the newest, hottest engine technology. “Ed actually let us borrow it for a weekend, and riding shotgun for my older brother, Tony, is one of the highlights of my youth,” Peter says with a chuckle. “We humiliated many a car on Woodward Avenue that weekend.” Woodward, Detroit’s most famous avenue, was a drag-racing mecca in those days. Dave Cole, Ed Cole’s son, recalls that although GM’s top managers at the time were among the most highly paid executives in the country, first and foremost for them was the product and technology. Cole also remembers his father’s passion for performance: “Dad had a lead foot and loved all things fast. One of his favorite projects was a black, plain-as-could-be 1953 Chevy that he had outfitted with a 265-cid V-8. He would pull into a gas station and ask the attendant to check the oil just to see the looks on their faces when they saw what was under the hood.” Bunkie fixed the phone The power of GM’s upper managers wasn’t limited to being able to create their own personal hot rods. Judy Christie, daughter of Bunkie Knudsen and granddaughter of William S. Knudsen, tells the story of when she and her husband, Howard, moved to Clarence, N.Y., in the early 1960s for Howard’s job there with GM. “Clarence was remote and sparsely populated, so we shared a party telephone line with the neighborhood,” she recalls. “During a phone call with my dad, then Chevy’s general manager, one of the neighbors picked up and my dad asked, ‘What was that?’ I told him it was our party line. The next day a truck came out and ran new phone lines for the whole neighborhood so we could have a private line.” As Howard Christie made his way up the ranks at GM, he had the chance to see up close how upper management was treated. “Whenever an executive was collected at an airport, there was always somebody to meet him and carry his briefcase,” he recalls. Christie adds, “I’ve thought a lot about why things were the way they were back then. The best I can come up with is that a lot of these guys had served in World War II and had seen how the guy ahead of them in rank was treated with all the perks and privileges. They’d think to themselves, ‘When I get to that position, I want that, too.’ “I think that attitude carried over once they got civilian jobs, because I saw it in a lot of places back then, not just at GM.” — Kirk Seaman AUTOMOTIVE NEWS S http://www.autoextremist.com

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