Are They Gold or Just Glitter?

FOR the salaried managers of U.S. industry the most promising way to make and keep a fortune nowadays seems to be through stock options. They have become the major device to counteract the heavy (up to 91%) ordinary income taxes on company officers' pay. Some of the gains have been big: at Radio Corp. of America, President John Burns has a paper profit of $830,000 on his options for 20,000 shares of stock, while General Electric Co. Chairman Ralph Cordiner has a $1,262,260 paper profit on options exercised since 1957. But with this year's fall in the market, and the failure of many stocks to rise during the past few years, many another executive has raised the question of whether options are as golden as their glitter.

The stock option is as old as U.S. industry itself, but it was not until 1950 that it began to be widely used. Then Congress for the first time specified that if 1) a stock option was at least two years old, 2) it was granted at no less than 95% of the stock's market price, and 3) the stocks so purchased were held for more than six months, the profits would be taxable at long-term capital-gains rates (maximum 25%) instead of higher ordinary-income rates.

"Taxes," as Inland Steel Vice President William Caples says, "are the main reason for the existence of stock options." For it is only with a stock option that a company executive in the 50% tax bracket can hope to keep more money than he pays the Government. Today, an estimated 60% of the companies listed on the New York Stock Exchange offer executive stock-option plans, v. 8% in 1951.

Primarily, options are offered to spur initiative and give professional managers a sense of ownership. Says Leland Hazard, director of the Pittsburgh Plate Glass Co.: "The stock option is an invitation to aggressiveness. It gives a man the incentive to act as an owner-manager of old."

An option is also one of the strongest cords to tie a man to a corporation. At General Motors Corp., key executives are given cash and stock bonuses, plus options to buy G.M. stock based on the amount of their bonuses. Few leave for other firms because if they do they must forfeit their options and must also give up a big part of their bonuses, which are paid out over a period of five years.

Actually, options in big or established companies are often less valuable for executives than those in small firms, simply because stocks in small, vigorous companies, with a small number of shares outstanding, often rise faster. For this reason, options, notably in electronics companies (e.g., Microwave Associates, Itek Corp.), are a cheap and sometimes most effective way to lure talented scientists from big corporations that pay higher salaries. Options have also helped turn scientists, who often care little about costs, into good managers. Since Massachusetts' transistor-making Transitron Corp. (TIME, Dec. 21) granted stock options to its scientific staffers last winter, it noticed a marked interest in cost cutting. Says Transitron President David Bakalar: "Many technical people don't ordinarily think of operating inefficiencies. Thanks to options they're broadening their role in the company and becoming more fully developed junior executives."

But options also have their critics. Dean Erwin N. Griswold of the Harvard Law School told a congressional committee that the tax advantages of stock options are "a one-way lottery" and that they "are inherently discriminatory." He warned of abusing options, cited the case of Alcoa's "fairy godmother stock-option committee, which canceled executives' options for 193,000 shares of stock at $117.25 and issued new ones at $68.15 when the company's stock dropped in price in 1958." But most companies do not change option prices if the stock drops. Another drawback is that many an executive has found an option hard to pick up, since he must usually borrow money to pay for the stock. It is risky as well: if the stock falls in price after the option is exercised, the executive suffers the loss. Even if he does not take a loss, an executive can find that he has scrimped to tie up his money in stock that promises no ready return.

The biggest objection to options is that a company may offer too many and cut the value of its stock, thus hurting all shareholders. Furthermore, Management Consultant John Gallagher, a partner in Booz, Allen & Hamilton, warns that stock options lose their effect if they are given to too many in the company. He thinks options should be restricted to top executives who have a direct effect on the company's earnings, "should not come to be considered fringe benefits." When options are used with care--and if the stock is on the rise--he and other management experts agree that they have proved to be a most successful method of spurring a smart executive and rewarding him with the riches he deserves.

This file is automatically generated by a robot program, so reader's discretion is required.