My Years With General Motors

by Alfred P. Sloan Jr.

  In the allocation of the fund, eligible employees are divided into certain categories for administrative purposes, as follows:

  (a) Directors of the corporation who are operating executives.

  (b) General managers of the operating divisions and the heads of the various staff organizations. (These two groups comprise the top administration area of the corporation's organization.)

  (c) The balance of the organization, down to those whose salary is equal to the minimum set by the committee.

  In considering the allocation of the fund to these various categories, the committee considers the amount available to be awarded as bonus and its relationship to the aggregate eligible salaries and the performance for that year.

  The first step taken by the committee is to determine a tentative allotment to the directors of the corporation who as operating officers are eligible for bonus consideration. Each individual director is considered separately and his performance is reviewed by the members of the committee. In this connection, the committee may consult informally with the president and the chairman on the performance of the individual directors, exclusive of those two officers. With this accomplished, a determination is made of the aggregate allotment to all the directors as a percentage of the total bonus available.

  The next step is to determine the allotment for the second category: general managers of divisions and heads of the staff organizations.

  The committee considers what the tentative allotment should be to this entire group in relation to the aggregate bonus available. After the committee establishes the allotment for this category, the chairman and president make the individual recommendations and report them back to the Bonus and Salary Committee for approval or revision.

  Having established allotments for the directors, and for the general managers of the operating divisions and the heads of the staff organizations, the chairman and president are advised of the balance which is available for the personnel of the operating divisions and the staff organizations. Then the chairman and the president, together with some of their principal associates, recommend a breakdown of the total sum available among those various groups.

  Dealing first with the operating divisions, which are the profitmaking instrumentalities of the corporation, the committee, after consulting with the chairman and the president, establishes the general basis of allocation to be followed. Allocations to divisions give consideration to aggregate salaries of eligible employees, relative return on invested capital, and an over-all judgment on divisional performance, taking into account any special circumstances that may justify special consideration. Following committee approval of the divisional allotments recommended by the chairman and the president, the general managers of the operating divisions are notified of the allotments for their divisions and it then becomes their responsibility to make the recommendations, according to their judgment, for individual bonus awards for employees within their divisions (excluding themselves, of course). In the case of staff organizations which are not profit-making activities per se, the allocations are made to each group based upon their eligible salaries and an evaluation of the staff performances.

  Within the various divisions and staff organizations, there is no single formula for determining individual bonus recommendations. Each has its own technique. Each individual, however, is awarded a bonus on the basis of the most careful and searching analysis his superiors can make of his contribution to the corporation during the year. Normally, the point of origin of the recommendation for a given individual is his immediate supervisor. The supervisor's appraisal is reviewed through the succeeding levels of management, up to the general manager of the division or to the appropriate staff head. The general manager or staff head reviews all the recommended awards for those under his jurisdiction and transmits them to the group executive under whom he serves. The group executive in turn reviews and passes on the recommendations and then submits them to the chairman and the president. After all such recommendations have been reviewed by the latter executives, together with the executive vice presidents, they are transmitted to the Bonus and Salary Committee for final decision.

  While each division follows its own procedures in recommending bonus awards, the review process reduces any inequities to the minimum. It is impossible, of course, for the Bonus and Salary Committee to familiarize itself with the detailed qualifications of some 14,000 beneficiaries. However, the committee receives detailed pertinent statistical summaries of all the individual bonus recommendations, designed to aid their evaluation of the recommended bonus distributions, along with complete listings of all bonus eligibles and the proposed individual participants and awards. Moreover, the committee evaluates the individual recommendations pertaining to approximately 750 principal executives, and compares awards for those in comparable positions throughout the corporation, in the various divisions as well as in the central office staffs. The committee carefully reviews the performance of each of these executives to assure that bonuses reflect variations in accomplishment and provide the most equitable distribution possible. In the nature of a byproduct, the careful review of the progress and development of individual executives is very valuable from the standpoint of analyzing the strengths and weaknesses of the corporation's management personnel. This is particularly useful in planning ahead and preparing for inevitable organization changes.

  The Value of the Bonus to General Motors

  Is the Bonus Plan really worth all the executive time and effort taken up by its administration? And is it worth the money it costs? I believe so emphatically. I am convinced that the Bonus Plan has not cost the shareholders a single dollar, but has, on the contrary, greatly increased their return over the years. I believe that the Bonus Plan has been, and continues to be, a major factor in the remarkable success of the General Motors Corporation. When an enterprise is new and small and is operated by a few people who have invested their own savings, it is perfectly apparent to them that their own interests are interwoven with those of the enterprise. But as the enterprise grows and more and more men participate in its management, this connection becomes remote and needs periodic expression and emphasis, such as the Bonus Plan provides.

  The Bonus Plan creates different kinds of incentives at different levels of the corporation. It creates a tremendous incentive among employees not yet eligible for bonus awards to become eligible. One of our top executives recalled a while back in a letter to me: "I well remember the thrill that came with the time when I was first awarded a bonus—the feeling of having made the team and the determination to continue to advance in the organization." I believe that same feeling has been shared by all who have had the opportunity to participate in the Bonus Plan. And for many of them, bonus awards today probably comprise the great bulk of their personal assets.

  Since bonuses are awarded annually, the incentive continues as long as the man stays with the corporation. The stimulus in fact becomes increasingly effective as a man advances in the organization, for the bonus is generally larger in relation to salary at high-salary brackets than it is at low brackets. In other words, the bonus tends to increase in a kind of geometric (rather than arithmetic) progression as a man is promoted. And so there is a tremendous incentive for him not only to do the best possible work in the job he already has, but to do such an outstanding job that he will be promoted to a higher rank.

  The incentives and rewards are not solely financial, however. Again, I quote from the letter mentioned above:

  There is still another value which I am sure the Corporation derives from the administration of the Bonus Plan. It is the intangible incentive it provides as distinct from the tangible incentive of a monetary reward. The potential rewards of the Bonus Plan to ego satisfaction generate a tremendous driving force within the Corporation.

  Each bonus award carries with it considerably more than the intrinsic value of its cash and common stock. To the recipient it is also an evaluation of his personal contribution to the success
of the business. It is a means of conveying to the executive a form of recognition which he prizes independently of his monetary compensation.

  This non-financial incentive is reinforced by a fairly general practice of having each recipient's supervisor deliver the bonus notification letter. This furnishes an opportunity for a review and discussion of the recipient's performance.

  One important side-effect of the Bonus Plan is that it makes each participant acutely aware of his relation to his job and his superiors; he is obliged, as it were, to dwell on his own and the corporation's progress. A man derives satisfaction from knowing that his superiors have judged his value, and at the same time there is the spur of having his work reviewed annually.

  This kind of atmosphere cannot be generated or maintained under a straight salary system, or a salary system supplemented by an automatic bonus or profit-sharing system, in which an employee is conscious of being judged only when he receives or fails to receive a raise. And penalties are more difficult under the usual arrangement, for salaries generally are inelastic on the down side. Under the General Motors Bonus Plan, however, a substantial reduction in a man's bonus that runs counter to the trend in the total amount of bonus awarded, constitutes a severe penalty—and one of which the individual concerned is very much aware. The total amount to be awarded is published in the annual report.

  The Bonus Plan also provides much more flexibility on the up side than is possible under a salary system. It may be difficult to reward a man for superior performance by raising his salary, since the increase may upset the whole salary stratification. A salary increase, moreover, commits the company indefinitely, whereas the bonus makes it possible to tailor the reward to the period in which performance was unusual. And so the Bonus Plan makes it possible for the exceptional individual to break out of the over-all salary schedule without at the same time upsetting the schedule.

  The Bonus Plan, moreover, tends to keep executives with the corporation. As explained earlier, bonuses are currently paid in five annual installments; an employee who leaves voluntarily may lose the right to earn out the undelivered balance of his bonuses—in some cases, a very substantial sum. The net result of this deterrent —plus the stimulus the plan provides—has been that over the years General Motors has lost relatively few executives it has wished to retain, especially in the upper levels.

  In the last analysis, of course, it may not be possible to "prove" the success of the Bonus Plan, for we can only conjecture what might have happened if the plan hadn't existed. My friend and associate of many years, Walter S. Carpenter, Jr., has expressed my own sentiments in response to my request to him for an evaluation of the effectiveness of the Bonus Plan. He wrote:

  If by the "effectiveness" of the bonus plan you infer some more or less factual, perhaps even mathematical, proof of the results achieved by the Bonus Plan, I will have to admit right at the start I am afraid I cannot be of much help. I say this because we have given this matter a great deal of thought over the years. We have considered it particularly at those times when we have revised the bonus plan in an effort to ascertain even in rough measure what percentage figures we should use in deriving the amount of the annual bonus fund. Again each year we have given this matter our thought when we have endeavored to formulate the percentage of the earnings to be set aside, of course all within the maximums provided for in the bonus plan itself. I have pretty well come to the conclusion that it is one of those things that we have to accept largely on the basis of our judgment of the results which we have observed during our experience with the plan over the long period of years. To this might be added our confidence in the general underlying philosophy on which the principles of the bonus plan have been based.

  There are one or two factual circumstances from which I think we can derive some measure of support for our feeling that the bonus plan is an effective tool even though they cannot be closely measured.

  I refer first to the fact that the du Pont Company and the General Motors Corporation, both of which I believe have been the most prominent exponents of the bonus plan, have been extraordinarily successful. Here, of course, the detractors can say there were many other reasons for this success and no doubt there were. It is, however, impressive that these two companies have been outstandingly successful . . .

  And so it is, Alfred, that while we may not have isolated or mathematically demonstrable proof of the effectiveness of the bonus plan, we do have to support our assurance in its effectiveness the record of success of two great enterprises over a long period of years in which it played an important role, we have evidence of its contribution toward the assembling and retention of an organization of outstanding men and we have in addition our confidence and faith in the basic principle on which it is founded.

  To this I should like to add my own profound conviction that to abolish or seriously modify the Bonus Plan after forty-five years of successful operation might very well destroy the spirit and organization of the corporation's management.

  Chapter 23 The Management: How It Works

  It is not easy to say why one management is successful and another is not. The causes of success or failure are deep and complex, and chance plays a part. Experience has convinced me, however, that for those who are responsible for a business, two important factors are motivation and opportunity. The former is supplied in good part by incentive compensation, the latter by decentralization.

  But the matter does not end there. It has been a thesis of this book that good management rests on a reconciliation of centralization and decentralization, or "decentralization with co-ordinated control."

  Each of the conflicting elements brought together in this concept has its unique results in the operation of a business. From decentralization we get initiative, responsibility, development of personnel, decisions close to the facts, flexibility—in short, all the qualities necessary for an organization to adapt to new conditions. From coordination we get efficiencies and economies. It must be apparent that co-ordinated decentralization is not an easy concept to apply. There is no hard and fast rule for sorting out the various responsibilities and the best way to assign them. The balance which is struck between corporate and divisional responsibility varies according to what is being decided, the circumstances of the time, past experience, and the temperaments and skills of the executives involved.

  The concept of co-ordinated decentralization evolved gradually at General Motors as we responded to tangible problems of management. As I have shown, at the time its development began, some four decades ago, it was clearly advisable to give each division a strong management which would be primarily responsible for the conduct of its business. But our experience in 1920-21 also demonstrated the need for a greater measure of control over the divisions than we had attained. Without adequate control from the central office, the divisions got out of hand, and failed to follow the policies set by corporation management, to the great detriment of the corporation. Meanwhile, the corporation management was in no position to set the best policies, since it was without appropriate and timely data from the divisions. A steady flow of operating data, for which procedures were later set up, finally made real co-ordination possible.

  That still left us with the problem of finding the right combination of freedom for the divisions and control over them. The combination could not be set once and for all, of course. It varies with changing circumstances, and the responsibility for determining administrative organization is a continuing one. Thus, at one time, responsibility for the styling of the cars and other products was vested in the divisions. Since then it has been found desirable to place the responsibility for developing the general style characteristics of all our major products in the Styling Staff. This was suggested partly by the physical economies to be gained by coordinated styling. In addition, we learned from experience that work of higher quality could be obtained by utilizing, corporation-wide, the highly developed talents of the specialists. The adoption of any particular style
is now a joint responsibility of the division concerned, the Styling Staff, and the central management.

  Such continuing adjustments in the relative responsibility assumed by the division management and central management are permitted by the decentralized organization of General Motors whenever experience or changed circumstances present opportunities for improved or more economical performance. In my time as chief executive officer only a modest degree of supervision was actually exercised by general officers over division managers. I believe that basically the same is the case today, although changed circumstances and new and more complex problems have resulted in a somewhat closer degree of co-ordination than existed in my time.

  In General Motors we do not follow the textbook definition of line and staff. Our distinction is between the central office (which includes staff) and the divisions. Broadly speaking, the staff officers —being primarily specialists—do not have line authority, yet in certain matters of established policy, they may communicate the application of such policy directly to a division.

  The responsibility of the central management is to determine which decisions can be made more effectively and efficiently by the central office and which by the divisions. In order that such determinations be informed and knowledgeable, the central management depends heavily on the staff officers. Indeed, many of the important decisions of central management are first formulated in collaboration with the staff in the policy groups, and then adopted, after discussion, by the governing committees. Consequently, the staff is the real source of many decisions that are formally adopted by the committees. For example, the basic decision to participate in the manufacture of diesel locomotives was largely based on product research by the staff.

  Some of the general staff activities, such as legal work, have no counterparts in the divisions. Other general staff activities correspond to activities in each of the divisions, among them engineering, manufacturing, and distribution activities. But there are some important distinctions between these staff and divisional activities: the general staffs are concerned with longer-range problems, and with problems of broader application, than their opposite numbers in the divisions. The corresponding divisional staffs are engaged largely in the application of policies and programs already developed. There have been exceptions to this, however, as when a project has been approved for development in a division. An example is the development of the Corvair, which is referred to in the next chapter.