100

p Capitalist managers who reach the apex of the corporate “ladder” become part of the monopoly bourgeoisie, but they, as before, remain hired employees of finance capital. A top executive can be dismissed from his post if he does not really control “his” company.  [100•1  His income is determined by the contract with the corporation. The charter of the corporation or the rules drawn up by the board of directors set the maximum term of his stay in the leading post and 101 the age when he must retire. In contrast to the real owners of the corporation, he can leave "of his own accord" and take another position if offered a higher salary.

p The existence of a market of top executives in the United States is a real fact, also admitted by bourgeois authors. One of them cynically called it the "executive flesh market".  [101•1  Here, like at any market, there is a supply and a demand. The supply is a result of different reasons, of which we shall mention the main ones: the difference in salary and the possibility of finding a better place in another company; dismissal of "insufficiently capable managers" or managers guilty of misbehaviour; bankruptcy or absorption of middlesize and big companies, which leaves their top executives jobless for a time; the existence of a group of civil servants and brass hats associated with the business world who are ready to take a well-paid post in big corporations; the large-scale "shake up" of the state machine which occurs periodically after the opposition party comes into office, and so on.

p Since the monopolies prefer executives who develop within their own companies, the demand on the top executive market for outsiders is quite narrow, but it always exists within certain bounds. The system of "internal training" at times does not work and the owners look on the outside for more suitable candidates for top managers. At times big companies after landing in difficulties decide to radically reorganise the system of management and look for capable people in other firms.  [101•2 

p Firms working for the government, especially war industry corporations, are on the lookout for government officials, generals and admirals who, when they receive a post 102 in a private company, preserve their connections with government institutions, upon which the distribution of contracts depends.  [102•1  Thus, the market for top executives is one of the spheres in which the tendency for the coalescence of the monopolies with the bourgeois state is displayed.

p The existence of a market for managers has led to the setting up of special companies engaged in the placing of managers. For a fee they accept orders of companies to lure managers from other firms; they find more lucrative positions for managers who want to change jobs or for those who lost them. Luring away managers is the most profitable business of these firms, which even the bourgeois press has named “man-hunters”. According to calculations of the American Association of Managers, about 85 per cent of the big companies are actively “hunting” for specialists employed in other companies, and they are ready to pay big money to the go-betweens.

p Like any commodity, a manager has his use value and exchange value. The use value is the ability to perform the functions of capitalist management. Owing to the duality of the latter, a manager must combine qualities needed for guiding the production process as such and also for the exploitation of the working class and the extraction of profit by crushing competitors and exploiting small capitalists and shareholders through various financial manipulations.

p The exchange value of a manager is largely an irrational magnitude. Only to the extent to which a manager really participates in the production process (and, as we have seen, this applies only to the lower and middle echelon) the value of his “labour-power”, placed at the disposal of the capitalist, is determined by the sum of the socially necessary expenditure for its maintenance in a normal condition and for reproduction. But the remuneration of a top executive includes not only these expenses which by themselves, of 103 course, are much higher than the outlays for the maintenance and reproduction of the labour-power of a worker, but also a certain part of the surplus value appropriated by a top executive.

p In this sense the value of the “labour-power” of the top manager is as irrational as, for example, the value of fictitious capital. The top executive gets the share of the profit coming to him, but the proportions in which it is divided between him, the small stockholders and the finance- capitalist is determined neither by the social outlays of labour nor by the rate of interest, nor the rate of profit (since the manager does not invest his own capital in the business), but by the actual relationship of forces between these three groups. If we abstract ourselves from this circumstance, the remuneration of a top executive, all other conditions being equal, is determined by the mass of profit retained with his participation.

p Thus, while the lower-link manager, selling his managerial ability, gets a salary covering the socially necessary outlays for the maintenance and reproduction of this ability and the middle-link manager, in addition, gets a small part of surplus value, the top manager, selling the same ability, receives in money something incommensurable with these outlays, namely, the right to receive a definite part of the surplus value created by others.

p There are no official statistics of top managerial incomes in the United States. From time to time, more or less general data on this question are published by authors, journals or organisations. The adverse aspect of these data is that they are hardly comparable because different criteria are taken as a basis of the studies. Moreover, as a rule, these data cover only the chief executives of corporations, chairmen of the board and presidents and do not include the highly paid vice-presidents. Lastly, not all the forms of incomes of executives are presented in these data, which greatly reduces their value.

p This does not mean, however, that there is no basis for more or less complete and regular publication of relevant figures. On the contrary, there is such a basis. All companies whose shares are listed on stock exchanges must annually submit to the federal Stock Exchange and Securities Commission information on the salaries and additional 104 compensation of all their top executives. Under the law, they must also report this information in the annual proxy statements. But all these data which are kept in government institutions are not subject to regular publication. Bourgeois authors are using this valuable information in a way that is far from complete.

p The first review of executive compensation on a countrywide scale was made by the American Management Association (AMA) on the basis of data for 1950-52.  [104•1  In 1954, the Harvard Business Review published a similar survey made by the McKinsey and Co. In subsequent years the same journal regularly published articles tracing the main changes in executive compensation.

p A general regularity revealed by these data is that in the big American corporations the income received by executives is determined in the first place by the mass of profit received by the given corporation.

p This conclusion reveals the nature of the manager’s compensation: of importance is not simply the size of the firm, i.e., the relative complexity of management, as bourgeois economists assert, but the surplus value the manager extracts from the workers and the part he receives for his “efforts”.

p The salary of a manager, however large it is, must remain within bounds that do not infringe the "sacred rights" of the finance-capitalists and do not place the executive in the position of the actual owner of the company. As for the lower boundary of compensation of corporation executives, we must take into account the relationship between big and small business. A manager who has the ability to administer a large corporation has the intrinsic desire to organise his own business. In present-day conditions such a manager has always a chance of entering into partnership with the owner of relatively small capital and becoming the co-owner of an independent enterprise. The size and profit of such an enterprise in the initial years (even if it is successful) cannot be big. But if such a profit is higher than the compensation of a manager of a large corporation, he will be directly interested in leaving the corporation. Thus, while the higher boundary of executive compensation prevents him from 105 entering the rank of finance-capitalists, the lower boundary prevents him from becoming an independent businessman.

p Now let us examine the concrete components of compensation, i.e., the actual forms in which a top executive appropriates surplus value (entrepreneur’s incomes). His main compensation is a salary. All top executives receive a salary if they are hired employees, irrespective of the specific distinctions of compensation existing in various companies. In some corporations a definite post commands a definite salary and it does not change if one executive is replaced by another. If there is a difference it is fully determined by the length of service of the given executive in the company.

p But in many cases a salary is fixed personally and is changed, depending on who holds the leading post. The salary of a manager, as a rule, does not depend on fluctuations in business activity, the size of profit and the results of a company’s operation.

p All these and other details of money and other compensation of top executives are determined by a contract. An individual contract has now become a characteristic attribute of hiring top executives.

p Salary is not the only form of compensation. In most cases it is supplemented by other forms of which a bonus is the most widespread in the United States. In contrast to a salary, a bonus is not a fixed sum and can widely fluctuate. Outwardly the bonus depends on the financial results of a company’s operation, but there are no strict formulas which American corporations follow. Bonuses and the system of paying them are veiled in top secrecy. At times even top executives do not know what bonuses are received by other executives in their own companies. Corporations which have bonus systems are reticent about their size and those which have no bonuses refuse to explain the reason why they do not introduce them. The cause of this secrecy is obvious. This is a mechanism for the redistribution of surplus value which the financial oligarchy does not want to make generally known, fearing dissatisfaction.  [105•1 

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p Bourgeois authors stress that the main purpose of bonuses is to make top executives more interested in the results of their company’s operations. This is untrue. Originally, this form of compensation was connected with the possibility of supplementing the relatively modest official salaries with huge sums that did not have to be made generally known and could be lost in the maze of balance-sheets and other accounts. So long as there were no laws making it obligatory to publish the exact amounts of salaries and bonuses, the latter were the most convenient form for the concealed robbing of the stockholders.

p Here is a case in point. Grace, who headed the Bethlehem Steel Corporation, received in 1929 a salary of only $12,000, but his bonus ran to $1,623,800: the bonus was 130 times bigger than the salary. From 1918 to 1930, Grace received a total of $10,595,000 in bonuses, an average of $815,000 annually.  [106•1 

p In the 1920s, about 60 per cent of the large U.S. corporations paid bonuses. But in 1929-32 and during the years of the depression, this form of compensation disappeared almost entirely because profits dropped precipitously. After World War II, when profits set new records, both the size of bonuses and the range of managers getting them increased. Fortune calculated that the total sum of bonuses rose to $330 million in 1947 and exceeded $615 million in 1956. In 1955, General Motors paid its executives bonuses exceeding $94 million; Bethlehem Steel gave 15 top executives $4.5 million (an average of $300,000).

p In post-war years bonuses acquired a different economic purpose. They have been used as a way of compensating the top executive’s losses, resulting from the payment of income tax. While formerly the bonuses, as a rule, though not always, consisted of a lump sum in money, now they are most often given in the form of shares.

p Here is how this system works out in General Motors.  [106•2  The corporation annually allots to the bonus reserve 12 per cent of its net profits remaining after deducting 5 per cent on the invested capital. The allotment must not exceed the dividend paid on the common stock. The distribution of the 107 reserve is done by a special committee consisting of five directors  [107•1  which, at its discretion, can pay as bonuses only part of the appropriated sums. In 1955, the Bonus and Salary Committee distributed $95 million as follows: 15 per cent were earmarked for rewards to the lower-level managers who received a salary from $7,500 to $9,600. Then the bonuses for the other executives were fixed, including $6.2 million for the 12 top executives. The balance was turned over to a subcommittee of four top executives for distribution among the “middle-level” personnel.

p The awarded bonus is paid by General Motors over five years in equal shares. The purpose of the "staggering out" is to reduce the size of the income tax and also to prevent the executives from deserting to other companies. According to the regulations, persons dismissed from General Motors lose the right to receive the outstanding part of the bonus, while those who leave of their own accord may receive it only with the sanction of the committee of five. The latter refuses to pay the outstanding bonus if the retiring executive is hostile towards the corporation or his behaviour in some way runs counter to its interest or if he engages in actions competing with the actions of the corporation, etc. All bonuses above $5,000 are paid both in cash and in General Motors stock. Money is allotted in an amount sufficient to pay the income tax, and the balance is given in stock.

p After 1955-56, the total sum of bonuses to American executives began to decline. This can be judged from the following figures. In 1955, bonuses of $250,000 or more were received by 36 people, and in 1960 only by 10 (in 1963, by 14). In 1955, bonuses of this group exceeded their salaries by 220 per cent, and in 1960 by 110 per cent.  [107•2  Renunciation of bonuses or their reduction is explained by the fact that in recent years other forms of compensation offering better taxation loopholes have been devised and applied.

p One of these is the "dividend unit”. A top executive gets 108 additional compensation neither in cash nor in stock, on which a considerable tax would have to be paid, but in the form of dividend units, which are not taxable in any way. A manager who is awarded, for example, 100 such units gains for life the right to receive an income equivalent to dividends on 100 of the company’s shares.

p The following two examples illustrate the change in the form of compensation. In 1959, Arthur Homer, chairman of the Board of Bethlehem Steel, received a salary of $200,000 and a bonus of $208,000. In 1960 the bonus system was abolished, but his salary was raised to $300,000, and he also was given 3,634 dividend units. At the existing level of dividend payments this brought him an additional $8,700 annually. Should he get a similar number of dividend units every year, in 12 years he would have, through dividend units, an annual income of $100,000, not counting other forms of compensation. Moreover, his fortune will not be affected by stock market fluctuations.

p W. K. Whiteford, chairman of the Board of Gulf Oil, received in 1960 a salary of $175,000 and a bonus of $150,000. In addition he was also given 4,926 "stock units”. This brought up the total number of the units he held to 30,200. The dividend annually paid on these “units” amounted to $30,200. In addition, Whiteford had an option to receive 30,200 shares or a sum of money equivalent to their market value, that is, another $1.2 million. Thus, his additional compensation over and above his salary and bonus amounted to $207,200 in 1960 and his total income, to $532,000.

p More widely developed and now one of the main forms of enriching the top executives is the stock option system.  [108•1  In 1953, 30 per cent of the companies whose securities are listed 109 on the New York stock exchange gave their executives stockoptions; in 1954, 40 per cent; in 1957, 50 per cent and in 1959, 70 per cent.  [109•1  This system became so widespread that at the beginning of the 1960s a Congressional committee had to investigate this practice.

p The option system works as follows. Top executives ot a company are given the right to buy a definite number of its shares at a fixed price over a number of years. Since the stock quotations are usually on the rise this means that the executives are able to buy the shares at a much lower price than quoted on the stock market, After several years, a manager who has exercised his option, that is, bought shares at a fixed price and resold them at the market price, receives a bigprofit. In contrast to the usual income which is progressively taxed up to 70 per cent on incomes over $100,000, the profit made on exercising a stock option is considered a capital gain on which the maximum tax is 25 per cent. Up to 1951, there was a law taxing this income at the usual rate; moreover, the tax had to be paid the moment the stock option was exercised. This law was repealed by the efforts of the monopolies and moreover, the lower tax has to be paid now only after the stock is sold. This opened the door wide to the option system.  [109•2 

p A few examples will explain the operation of this system. Whiteford, chairman of the Board of Gulf Oil, in addition to the $532,000 he received from the company also exercised in 1960 his option to buy 7,351 shares at $11.83 a share when the market price was $39.69. His capital gain was $175,394. The same year a vice-president of the Polaroid Corporation bought 3,040 shares at an option price of $17.63 when the market price was $218. His profit exceeded $600,000 (his salary and bonus were $55,700).

p A vice-president of the Spiegel Company exercised his stock option, receiving a profit of $204,188, while his salary amounted to $87,500. General Motors had so “improved” the system of enriching its executives that they receive the profits directly without troubling to buy or sell the stock. If officials do not exercise their option in ten years General 110 Motors pays them one-third of the value of options based on the market price at the time.  [110•1 

p Neither the colossal salaries of the managers, nor bonuses, nor stock options have essentially altered the distribution of stock ownership, as was feared by some bourgeois authors. Ownership of stock by managers makes up less than 10 per cent of the total number of shares of the leading corporations. It does not at all follow, however, that the top executives in each large corporation may in the near future come to own sufficiently large blocks of its stock to place them in a position of control. The point is that until now most of the executives have used these shares not for accumulation, but for resale. The economic purpose of the stock option systems is really to make up for the “inadequacy” of other forms of managerial compensation.

p There is ample statistical proof of this observation. The United States Stock Exchange and Securities Commission keeps a record of the acquisition and purchase of shares by “insiders”, that is, executives, directors and chief stockholders of big corporations. The latter are obligated to submit this information to the Commission under the 1934 Act. This data shows a systematic and considerable excess of sale of shares by insiders over their purchase.

p General information on the ownership of shares by American executives is quite hazy. The censuses conducted by the New York Stock Exchange place managers and owners of enterprises into one category. R. W. Goldsmith in a study, based primarily on materials for 1950, arrives at the conclusion that managers own from 5 to 7 per cent of the privately held shares, while the capitalists proper own from 59 to 85 per cent.  [110•2  According to Lampman’s data, the typical owner of a fortune of $120,000 to $150,000 (there are quite many of them among top managers) places only 24.4 per cent of his wealth in stock.  [110•3 

p At the end of 1956, the president of the New York Stock Exchange stated that, according to his estimates, 50 per cent of all company officials own no shares at all. At the beginning of 1957, Fortune made public the results of a poll, from 111 which it followed that the overwhelming majority of executives have no big blocks of shares.

p Four and a half years later Fortune, summing up certain results of the stock option system, wrote, referring to top managers, that "a new class of well-heeled, but only vaguely informed investors" had appeared "whose personal financial transactions are carried on rather aimlessly with a very imperfect awareness of investment alternatives".  [111•1  This statement indirectly confirms the fact that although top executives have in the last few years clearly increased their stock ownership, it still does not exert a telling effect on the alignment of forces within the monopolistic bourgeoisie. In 1959, F. Donner, chairman of the Board of General Motors, had only 23,879 shares of his corporation with a market value of $1,000,000. This was less than 0.01 per cent of the total. Fred Kappel, president of American Telephone and Telegraph, owned only 236 shares out of the 70 million, or 0.003 per cent!  [111•2 

p We have analysed data for over 100 of the biggest U.S. corporations and established that at least in the last ten years there has not been a single case of any of the hired executives advancing to the ranks of their leading stockholders. In smaller companies there were such cases, but even then very rarely. Thus, there are no grounds whatsoever for statements about a radical change in the structure of stock ownership in favour of managers.

p In addition to salaries, bonuses, stock options and other legal forms of executive compensation, there is also a semilegal form, namely, the use of company funds for paying the personal expenses of executives. In the case of top executives this form is quite an essential and integral part of their income. Harvard Business Review presents interesting data showing what part of the executives (from among the top and middle level) have their official and other expenses paid by the company.  [111•3 

According to data presented in the journal, 73 per cent of the top executives go on business trips with their wives and in 83 cases out of 100 the company pays for them. In contrast to the middle-level management, they also enjoy 112 privileges in covering expenses not associated with their business. The company pays for 87 per cent of trips to professional conferences, 83 per cent of professional journals addressed to the office and 27 per cent addressed to their homes, 82 per cent oi the membership dues in professional organisations, 81 per cent of cost of entertaining clients in clubs and restaurants, 43 per cent of the cost of such entertainment at home, 48 per cent of the expenses on a personal car, 42 per cent of presents to business clients, 42 per cent of membership dues to clubs, etc. In Pittsburgh the exclusive Duqucsne club admits only such executives for whom their company undertakes to pay the membership dues.

Type of travel expense Per cent of top managers whose company will pay for item Transportation to destination . . Room............ Meals............ Taxi, public transportation . . . Tips............. Business entertainment..... Car rental or mileage allowance Phone calls home....... Valet, laundry........ Personal entertainment, reading, TV............ Auto repairs......... Theft, loss, or damage to personal effects ........... 99 98 97 96 95 91 89 63 53 22 18 18

p Unfortunately there are no calculations making it possible to ascertain the total sum of this semi-legal compensation of top executives and the share of this source in the income of persons in this category. Some idea can be gained from individual examples. Robert Ingalls, Jr., the head of Ingalls Industries, received a relatively small salary and had a fortune of $10 million, but thanks to the extensive use of the company’s funds led a life as though he owned at least $50 million. Fie bought with company funds a yacht, the 113 maintenance of which costs $200,000 annually.  [113•1  Of course, by far not all top executives can dip into the corporation treasury as into their own pocket. But according to very rough estimates, this source, depending on the circumstances, can range from 60 to 300 per cent of the main salary of the top executive.

p There are also illegal ways of enrichment by executives, such as the acceptance of bribes from persons and firms interested in doing business with the respective corporations or the secret organisation of their own companies which are given the most lucrative orders.

p Highly indicative in this respect is the scandal which broke loose in the Chrysler Corporation, the third biggest automobile company in the U.S.A. An investigation made in 1960 showed that the top executives of this company had systematically enriched themselves by organising their own companies which then received some of the most lucrative Chrysler orders. William C. Newberg, who had been Chrysler’s president, together with Ben Stone, a Detroit businessman, organised on a parity basis the Press Products Company, which sold automobile parts to Chrysler. In 1955, they sold it for a large sum and set up another one, the Bonan Company, along the same lines. Newberg provided it with contracts. In 1958, they repeated this trick, forming the Sango Company which, alongside sales to Chrysler, speculated in securities and oil lots. When all these shady deals came to light Newberg, besides resigning, had to pay Chrysler $450,000 as compensation for losses. These swindles made him a millionaire in a short time.  [113•2 

p K. T. Keller, chairman of the board of Chrysler, together with his brother, organised the National Automative Fibers as far back as 1940. It served as an intermediary in transactions between Chrysler and suppliers, receiving 5 per cent of the price of the parts. This firm became a monopolist in the resale of a wide range of articles needed for the automobile industry. In 1955, Keller’s son who was then a vicepresident of Chrysler, bought control of the Therm-rite Co. which had an exclusive contract for the delivery of gas for welding equipment to the automobile company.

114

p Jack Minor, another Chrysler vice-president, organised the Taxi-Ad Company which engaged in advertising Chrysler automobiles. This small business brought him about $12,500 annually. Rinehard S. Bright, another vice- president, bought in 1957 the G. M. Hall Lamp Company, which became the exclusive supplier of headlights for Chrysler. Paul C. Ackerman, another vice-president, bought a block of shares of a company which supplied automobile bodies for Chrysler; he also systematically accepted bribes from firms which wanted to get profitable contracts.  [114•1  Newberg, Keller and other Chrysler executives are not small fry, but typical representatives of the influential top managers who enjoyed the unlimited trust of the financial oligarchy. Exposure of their swindles in the business press staggered bourgeois America. The press spoke up about the need lor earnestly taking up the “ethics” of the executive. As for the fate of the Chrysler executives, it will be described subsequently in a somewhat different context.

p The inclination of top executives to swindling inevitably follows from their desire to get rid of their dual position, to discard the fetters of a hired official and become an independent capitalist.  [114•2  That is why such scandals occur at all rungs of the hierarchic ladder, from the lowest to the highest. The story of Carrol Shanks, president of Prudential, one of the biggest companies in life insurance, is instructive. He was closer to the top of the pyramid than the Chrysler executives. A former member of the Root, Clark, Buckner and Ballantine, a big Wall Street law firm, he was director of Morgan Guaranty Trust, National Biscuit and a number of other Morgan companies and a member of the board of trustees of the influential Committee for Economic 115 Developmerit. As president of Prudential Insurance he was getting an annual salary of $250,000 and was considered one of the most trusted agents of the Wall Street upper crust.

p But he obviously “exceeded” his powers, engaging in a shady deal which brought him a profit of $400,000. Shanks owned a block of shares in the Georgia-Pacific Corporation which was getting big loans from Prudential Insurance. Taking advantage of his position, he bought about 12,500 acres of forest lands and resold them to Georgia Pacific at a huge profit. He borrowed the needed money from the Bank of America and deducted the interest (about $150,000) from his personal income, thus greatly reducing his income tax. The resultant scandal forced Shanks to resign.  [115•1 

p When a top executive resigns, he loses the exclusive position he enjoyed when he was handling the affairs of a big corporation. His future is determined by the size of the capital he managed to accumulate and the amount of the pension he is entitled to under his contract. A pension plays a big part in the life of a retired executive, because it is equivalent to the ownership of a sizeable fortune. Thus, a typical top manager who after retirement is paid $20,000 annually for life, is able to live in a way as though he had capital of at least $500,000 invested in securities.  [115•2 

p The size of the pension, as a rule, is determined in advance either by the terms of the contract or the general procedure established in the given corporation. In 1960, 84 per cent of the large American corporations had pensions lor top executives. The average pension ranged from 17 to 33 per cent of his total money compensation (including salary and bonuses), amounting on the average to 26 per cent.  [115•3 

p But in addition to a definite pension, there are also other forms of compensating a retired official. In 1960, 24 per cent of the big companies had a system of "deferred compensation”, according to which the company undertook to pay him for a number of years a sum equal to his compensation for the last two or three years of service. If his salary at the moment of retirement, for example, was $240,000 and it was agreed to pay him altogether a two-years salary, he could receive it either in the form of $240,000 for two years 116 or $160,000 for three years, over and above the pension.  [116•1  Some firms annually credit their top executives with sums payable only after retirement. Ex-general Lucius D. Clay, chairman of the Board of the Continental Can Corporation, was credited in 1960 with $42,000, bringing up the total sum of such credits to $376,000. Clay received this money in 1962 when he retired. Whiteford, chairman of the Board of Gulf Oil, in addition to a large number of stock units, yielding an annual income of $30,000, is also entitled to a fixed pension of $7,800 annually and also to $33,000 under the " deferred compensation" programme.  [116•2 

p Some corporations pay their retired executives large sums "for consultation”. Woods, president of Commercial Solvents, in addition to a pension of $20,600 received the sum of $50,000 annually for four years, as consultant.  [116•3 

Thus, even after retirement, top executives remain in the ranks of the capitalist class of the U.S.A.