The Effect of High Tax Rates on Executive Incentive

What I am saying is that each of these fields must appeal to the same group of talented young men, and trust that the incentives it has to offer will attract sufficient numbers of them to carry on its work. And since the chief incentive industry has to offer is financial, it follows that any erosion of that incentive makes it more difficult for industry to get its share of the supply, with inevitable serious consequences for the future.

Of those who enter the business field, a certain number will be equipped potentially to handle the executive functions at various levels. It is to the advantage of the individual company, and ultimately to the advancement of the American economy, that those advancing into the upper levels of management be selected from as large and as eager a group as possible.

I think it is plain that the selection of 1 man from a list of 50 promising candidates offers more qualitywise than the selection of 1 man from a field of 20, or 15, or 5. The principle is the same in business as it is in the military, say, or in Government. As citizens, we are uneasy when we note a reluctance on the part of individuals to seek public office. As a business executive, I feel uneasy if there are not more than a few talented candidates for advancement. And this leads me to the second major area of difficulty.

Is Promotion Less Attractive?

In business, as elsewhere, it is important for us to induce as many of our younger men as possible to set their sights on the job ahead and to broaden their shoulders for responsibilities to come. If we are to do so, the game must be worth the candle. And some of my associates have already noted that there are signs among the younger men that promotion is a little less attractive than it used to be. How this trend may be expected to show up, in specific terms, is hard to say; my own guess is that it will take the form of slow attrition, beginning with borderline cases. Where we now have 10 who want to try for the jobs of major importance, we may have 9 tomorrow-1 candidate deciding that since it is worth considerably less after taxes, it isn't worth the extra effort. So we have 9, and the next year we may have 8, and management will be the poorer for the loss. For it is that extra effort that wins, that has made American industry what it is today. The progress we have made has not been achieved by perfunctory or routine performance; it has come about because people have been inspired or induced to give everything they had to the task at hand, and not to take it easy. The industrial miracle of America has come because our

people have shown a capacity for accomplishment well beyond their rated potential. It must follow that anything that weakens that capacity will weaken our industrial potential, and with it, the Nation.

In the Du Pont Co. we recognize 16 levels of employment, each successive one embracing more authority and more responsibility than the one below. In order to make it attractive for a man at one level to strive to advance to the next, there must be sufficient incentive to make the increased effort seem worth while. And this increase must be net, after taxes, for actual spendable money is what counts. The large gross figure, impressive though it may appear, gives one no advantage opposite the landlord or the butcher, or the increased financial demands that go with increased responsibility and higher standing in the community.

However, in order to provide significant net increases for the levels down the line, the gross salaries in the top levels must be very high indeed. Suppose we assume that the net increase between levels which will provide incentive to advance is about 25 percent, and then work out the progression for 16 levels. One arrives at figures at the top which are in the realm of pure fantasy which perhaps explains why my predecessor 30 years ago received a compensation after taxes twice as great as mine today with no adjustment for the purchasing power of the dollar. Being an honest man I think I should say that when I pointed the discrepancy out to him he replied merely that he was easily twice as good as I and hence deserved it.

Fortunately for this phase of my argument, the television program, The $64,000 Question, has provided quantitative evidence quite outside the realm of speculation. I am told that only one contestant has actually tried for the big payoff, and he, a Marine captain, was motivated by pride in his organization, not by after-tax benefits. For all others the risk involved to win a few thousand dollars after taxes just didn't seem worth while. Conversely, from the viewpoint of the sponsor of the program, to give a prize of $450,000 so that the winner could have his $64,000 net of taxes seemed understandably imprudent. It might have been interesting for your deliberations to have the viewpoints of the unwilling contestants on the question of the tax collector versus individual incentive.