This Question of Salary


ON August 25, Mr. Joseph B. Eastman, Federal Coördinator of Transportation, issued a statement in which he said: —

‘Under normal conditions I believe that it is best to leave the fixing of salaries to the managements, so long as the railroads are privately owned and operated. Nothing else is consistent with the theory that they can be managed better by private enterprise than by the government. It is the essence of that theory that the self-interest of the private owners will insure efficient management, and the selection and payment of officers lies at the very heart of management. If the theory is unsound, there should be a change, but the right change would most certainly not be to create a duplicate public management, in the guise of a regulatory body, alongside of the private management. Only confusion and division of responsibility would result. Public regulation can do certain things well, but control over details of management and operation is not one of them. . . .

‘The Regional Coordinating Committees have considered the matter at length and thoroughly, and they report that they believe that the railroads of the country, with one possible exception where a definite conclusion is still to be reached, are willing to reduce salaries so that $60,000 will be the maximum, this figure to embrace compensation received from all companies, carrier or non-carrier, included within a system. This corresponds with a peak maximum, within the past five years, of $150,000. This $60,000 somewhat exceeds the maximum which was in my mind.’

The highest railroad salaries were finally fixed at $60,000. For Mr. Atterbury of the Pennsylvania, that meant a reduction of 60 per cent from the $150,000 of 1929. No other employee had his pay cut by so large a percentage. When Mr. Eastman advocated these reductions in the remuneration of officers, the Reconstruction Finance Corporation had already insisted on drastic cuts of all railroad salaries above $4800 on those roads to which it lent money. Management was in this way held up to public scorn. At the same time, the law which made Mr. Eastman the Coordinator for the purpose of effecting savings provided that he was not to make savings that displaced labor. In this there is something reminiscent of

Mother, may I go out to swim?
Yes, my darling daughter;
Hang your clothes on a hickory limb,
But don’t go near the water.

It would have been inconsistent, of course, for a government which had in process a National Recovery Programme based upon spreading work to allow Mr. Eastman to make savings which would affect labor — and he will have a hard time finding savings that won’t. But it is questionable whether it is wise or fruitful for national recovery to discourage management while encouraging labor.

A picture of the railroads as institutions in which no one will be paid very much, but in which more people than necessary will be paid something — such a picture will not call young men of ambition and imagination into the railroad business. Mr. Eastman very truly says in his statement that ‘money is by no means the only compensation received by a railroad executive, or even a lesser officer. The best compensation of all, in my judgment a much more effective one than is commonly supposed, is the joy of creative work well done, particularly when it involves the element of public service. Lower in rank but very influential is the compensation which lies in the sense of power which such a position carries with it. Public recognition of eminence also plays a part.’

There are probably enough of those elements in the railroad job to keep the present executives there. It is very doubtful if there are enough of those elements to draw good recruits for the future. The railroads are under scrutiny by Congress and commissions most of the time. If the investigations find good management, nothing appears. If the government finds something it does not like, the headlines follow.

So the young man looking at the railroad business as a career can, from the present evidence, be fairly certain that if he succeeds in his profession, — and the present attitude of the government continues, — he will have a restricted money compensation and silence, but that if any action of his fails to satisfy any one of half a dozen agencies of government, he will appear in the headlines as a public enemy.


Mr. Eastman made a report to the Senate covering the railroad salaries as of March 1932 — that is, prior to his pressure to have these salaries cut. At that time there were five men receiving more than $100,000. But there are thirty-nine railroad presidencies, and these positions are the prizes for which, so far as money is concerned, the million men in the railroad industry strive. These thirty-nine salaries not only provide payment to the men who at present receive them, but they also give a stimulus all down the line, for, in spite of all the discussion of leveling, the average young American still is eager to rise and wants a fair recompense for his services. It is probable that neither the public nor the stockholder spends any money, directly or indirectly, from which as much genuine value is received as that which comes in the way of stimulus to the whole organization from high salaries at the top.

And it is interesting to note how small the cost of that stimulus is. On the Illinois Central in 1930, — and this is typical of the larger railroads, — the amount paid in salaries to the executives, officials, and staff assistants (every one receiving $10,000 or more) was only 3 per cent of the total pay roll.

Of course, there is a firm tradition in the American mind that regulated industries are different from competitive industries; that they are ‘affected by a public interest,’ and that this gives government a right to exercise control over them. There is no question about the government’s right to regulate them; the only question is whether it is wise in so doing to discount management and forgo the stimulus of such salaries as the railroads have been accustomed to pay. In fact, from the point of view of building up the ability in the railroad organizations and of improving service, it would seem that the problem is to provide more stimulus, in the long run, rather than less.

When the reverse is true, the railroads cease to be a part of the land of opportunity. Young men of ambition, either those who seek money or those who want the respect of their fellow citizens, will do better to apply elsewhere.

The government takes this attitude because it believes the public feels that way. Probably the public does feel that way; and it may continue to do so, for the government is by far the ablest centre of propaganda in the country, and as long as it thinks that a criticism leveled at railroad management is an asset to government reputation, the railroads are a good place for any young man who thinks he is worth more than $4800 to stay away from.

It is only fair to Mr. Eastman to say that, whatever may have been his attitude earlier in his career, he is now engaged heart and soul in trying to rehabilitate the railroads. And, while Congress has given him the power of a dictator, he must, as he implies, use the present managements to accomplish his ends. To attack their morale and reputation by implying to the world that they were not worth what they were getting, and that their recompense should be reduced more than anyone else’s, cannot encourage the present managements or attract able men as their successors, particularly those with sensitiveness about their reputations.


If the railroads are outside the land of opportunity for the young man, what about the light and power industry? That has been a rapidly growing business. In the last thirty years it has equipped a nation of 120,000,000 people with electric facilities. In the next thirty years it can expect an increasing use by a growing population, but it will have no vast population to equip anew as it had in the past. Yet the industry ought to provide great opportunity for able young men. But it may not. In the era of exuberant growth, men made large fortunes. It is true that no one in a public utility ever made so large a fortune as Mr. Ford did in a public necessity, but the public has fixed in its mind that fortunes made in utilities come out of the public, whereas fortunes made in automobiles or real estate come out of the air. Why this belief came to be fixed in the American mind is an interesting, but a different, question. However, the young man seeking a job can count upon its being a part of the world he lives in. If his desire is to get rich, the operating end of the light and power business will not offer him the opportunity. Even if he wants to speculate in public utility stocks, he will be better off to follow the example of Mr. Baruch and adopt the profession of speculator with no responsibilities of management.

But, aside from speculation, there are great opportunities for the display of administrative and executive capacity in the light and power business. Is it wise for a young man to try for these opportunities? Present events are determining this question. It may be that the government will feel about the light and power companies as it does about the railroads, and in the long run expect them to take care of as many low-priced people as possible, paying the executives small salaries with a bonus of governmental hostility sufficient to prevent their jobs from being attractive. It is quite possible that this will take place. The government plans to set up government competition with the light and power companies in Tennessee, Oregon, and elsewhere. Undoubtedly these plants will be run without any high salaries. And there would be a natural tendency on the part of the government to have the private companies conform to its standards in this matter, regardless of whether or not the government plants, directly or indirectly, dipped into the Treasury for support.

The young man contemplating a career in the light and power industry cannot afford to neglect the letters in the vox populi columns of the newspapers to the effect that ‘no utility executive can be worth more than $25,000.’ If this is to be the maximum that anyone in these businesses can make, the young man must consider that the other salaries will grade down from that, and perhaps he had better stick to speculation, real estate, automobiles, brewing, or some enterprise in which the government believes it proper to accumulate a competence. He may make as many million dollars as he chooses as a newspaper owner criticizing hundred-thousanddollar salaries, or in lawyer’s fees investigating or counseling receivers for utilities, but the present temper of the government is against his making a competence by wise and able management of a utility. This great business may also be outside the land of opportunity for the young man. Logically, also, trucking companies, air transportation, and other public agencies would fall in the same category, and, since these companies are smaller, their maximum salaries would probably be $5000 or $7500.

But these very factors of discouragement offer the real opportunities in the great and essential businesses of railroading and power and light distribution and other public services. Both the stockholders and the public need all the ability that can be gotten in the administration of these enterprises, and the government likewise, for profitable and well-run businesses are the only ones in the long run that can meet the government debt. When the electrical business was in its infancy it was a speculation. A man who put his money into it stood a good chance to make a 100 per cent loss. Senator McAdoo, when he was a young man, tried electric traction in Tennessee, and did just that. It was reasonable, therefore, with such risks, for men to expect a high profit on their money and effort. But in large degree that situation is changed. There is much less risk, and in large measure the public has put up the money for the enterprises. The public generally did so with the facts before it, but the public did not have the time or inclination or experience to study the facts. Lots of people made money in Mr. Insull’s holding-company securities at a rate which must have indicated to them that some speculative element was in the enterprise, and the press made it abundantly clear that Mr. Insull had made a vast fortune. The lesson of his debacle is not only that such manipulations are illegal, but that the speculative era in the utilities is over.

That being true, what is the opportunity for the young man in that business? The opportunity, and it is a great one, is to take speculation out, so far as possible, and so manage these enterprises as to deserve and acquire the confidence of both the rate-paying and the stockholding public. There is room in the business for bigger men than it has had, for it takes a bigger man to work with human beings than with electricity or balance sheets. Mr. Insull understood the generation and transmission of one kind of power very well. He understood the responsibilities of the other kind very little. He knew electricity, but not democracy. He was a materialist, and handled materials ably. But as a philosopher or humanitarian he was a failure. The opportunity for statesmen in the utility business is as great as it ever was.


And if the young man enters the public utility field and becomes a statesman, what will be his reward? His first reward will be the observation of the change he has wrought. If he and the others who run the industry do their work successfully, the public hostility to their business will cease, and with it governmental hostility.

What should such a man receive when he gets to be president of a large utility corporation? A very outstanding man who works his way up through the ranks of an operating utility will have a financial record something like this: —

Hired at 21 at $ 1,500

By 25 is paid 3,000

By 30 is paid 7,500

By 35 is paid 15,000

By 40 is paid 20,000

Even in the largest enterprises only a very few of the most successful will have come up as fast as this. The incentive to the whole group is the possibility at the top. From the age of forty up to fifty or fifty-five, the numbers that continue rapidly to mount the ladder diminish even more rapidly, for there are but few places at the top. The man who reaches the top position, say at fifty-five, will then get $100,000 or $150,000 a year.

Up to that time he can hardly have saved $100,000 out of his salary. If for the next ten years after he becomes president he saves half his salary, — which would be remarkable, — he will have accumulated $500,000 or $750,000 by the time he is sixty-five. Adding interest to the higher figure will hardly bring it up to a million dollars. And there is now present a further factor which must enter in. The tax on a salary of $100,000 in Massachusetts is $1025 state and $29,500 federal, or $30,525 in all. On $150,000 the figure is $52,570. From $200,000 a year up, the taxes would amount to about half. This means that under present taxation a $200,000 salary would net its recipient about $100,000. If the requirements of his position made him spend $50,000 a year (probably it would be more than that), he would be able to save $500,000 in the last ten years of his life. That is about one fiftieth of the amount Senator Couzens acquired by a short association with Henry Ford, about half what Mr. Untermeyer got as a single fee — in fact, less than is made by countless men managing small enterprises all over the United States.

Mr. Eastman’s $60,000 for a railroad president would call for about $15,000 of taxes, leaving $45,000. If the man stayed president for ten years and saved 20 per cent of his salary, he would have accumulated a competence of $90,000. To have one man in a billion-dollar enterprise able to accumulate $90,000 in a country in which every little town has at least one man worth more than that will hardly attract talent to the business.

If Mr. Eastman feels the necessity of contributing some scapegoats to the depression, that is a temporary matter. If as railroad dictator he intends to build up the railroads on this basis of compensation for talent, he has very seriously increased the difficulties of his task.

If we were not in an angry mood it would appear as foolish as it really is to expect to recruit first-class talent to operate the railroads, utilities, and other public businesses at a figure below what that talent is worth, and what it can get, in other enterprises. If the public could be sure that none of the ability would be turned toward making $10,000,000 or $20,000,000 for itself on the side, but that all would be used for the benefit of the company, then the public would probably be glad to pay salaries of $150,000 or $200,000 to men of ability. In fact, the public ought to insist on it, for fair or generous payments are a prerequisite of a high standard of ethics in management coupled with a high standard of ability. Underpaid management is an invitation to speculation. Often it also promotes corruption or stupidity, as is only too evident in many city administrations.


From time to time the salary of the President of the United States is injected into discussion of the payment of business executives. ‘Why,’ it is asked, ‘should a utility or railroad executive get more than the President of the United States, whose salary is $75,000 a year?’ It is a fact that this country has grown up with all business remuneration on a different basis from government remuneration. But the President of the United States is in reality an exception to this.

The United States News points out that ‘the last three Presidents, including the incumbent, have been authorized to spend about $182,000 a year entirely in what is classified as personal as distinguished from all office expense. This does not include the automobiles for a President or his family, but does include a $75,000 salary, a $20,000 entertainment and travel fund, and about $87,000 for the 58 servants, employees, and workers in the Executive Mansion and on the grounds.

‘Now let us take the case of a corporation president who gets $75,000 a year. His company does not furnish him with a $20,000 fund for his entertainment expenses, nor does it give him a home with rent free and the cost of servants and employees on his estate all paid for by the corporation. Nor is he exempt from the payment of federal and state income taxes.’

If a corporation tried to pay the personal expenses of its president, he would probably land before a Senatorial Committee charged with evading the income tax. If the corporation wanted to pay its president so that he would have $182,000 to spend, it would have to give him a salary of about $364,000, of which just about half would go for taxes. The salary of the President of the United States is in reality equivalent to about $364,000. His remuneration is, therefore, a more potent argument for large salaries than for small ones.

But the conditions in industrial life and political life are so different that political salaries are not a useful criterion for industrial payments.


It has been the practice of certain businesses to pay men less in salaries than they are worth and make it up to them in bonuses on sales or production or some other criteria. There are many difficulties in the management of these bonus systems, but, so long as the one responsibility of the business is to make money, the bonus system is a matter between owner and manager. In the great public businesses, however, there is a serious question about the wisdom of the bonus system at all. The fundamental difficulty with the bonus for these businesses is the philosophy that underlies it, which is that every pressure should be put upon the executives to make the most money possible. That may be all right in certain enterprises. That is not the function of a great public business. Its function is to give the most service it can to the public at a proper profit — and what a proper profit is depends on the kind of business and the time and circumstances. But it is essential that the executives of a great public business be left free of undue pressure to determine what that profit is. There are, of course, a great many stockholders who have no more conception of this fact than Mr. Insull had, and these stockholders would like to see business operated on the hit-and-run basis — that is, make a killing and sell to someone else who can take the consequences. But a public business ought to be operated for the long run, and the undue pressure of the bonus plan on executives is likely in the end to prove embarrassing.

For example, it has been a practice of some banks to pay low salaries and high bonuses. The low salaries were public camouflage. The bonuses were to attract ability. The bonuses not only attracted ability, but put terrific pressure on that ability to make the most money it possibly could. High profits go with high risk. To make every last cent it is necessary to take a chance. Perhaps if public sentiment had stood solidly for adequate salaries to attract ability and had opposed bonuses to attract speculation, the banking situation might have been better. The object of a bank is not to make the last cent it can for its stockholders. Its object is to safeguard the depositors’ money, serve the commercial needs of the community, and make what return it can for the stockholder consistent with these other duties. The executives ought to be free of the personal pressure of the bonus or of speculation so that they may give their whole attention to these duties. A careful analysis of the testimony before the Senate Committee will show that the evils disclosed arose, not from high salaries, but from bonuses, speculations — methods of making money outside of the salaries.

The big public businesses — railroads, utilities, banks, and the like — offer the greatest opportunity to the young man. It is the opportunity to prove that there are character and wisdom enough which can be drawn into the management of big business to enable it to serve the public. The requisite which the very size of these organizations demands turns out not to be organizing, managerial, or technical ability, but character, social philosophy, and a sense of trusteeship. For the young men with these qualities big business offers a rare opportunity, and, if they succeed, the conditions they create will allow these businesses to pay good salaries with public approval. With that done, the bonuses and extra pickings of all kinds can be eliminated. The era of capacity and a high sense of responsibility in these public enterprises can be delayed by governmental insistence that ability in these businesses shall have small compensation when the same ability in competitive business can have large compensation. The young men will still go to the land of opportunity. They will want some money, if they are successful, and the ‘decent respect of the opinion of mankind.’ If these are not to be had in the great enterprises, the able youngsters will go elsewhere, and these great enterprises will tend toward stagnation.

Prior to the reign of Clive in India, the East India Company gave its agents great powers and had them handle vast sums of money — and paid them small salaries. The inevitable happened. They made it on the side. That very intelligent observer, Sir Thomas Roe, in the reign of James I, strongly urged the Directors to apply a remedy to the abuse. ‘Absolutely prohibit private trade,’ said he, ‘for your business will be better done. I know this is harsh. Men profess they come not for bare wages. But you will take away this plea if you give great wages to their content; and then you know what you part from.’

This advice is still good. Attract the ability to run the great enterprises by paying ‘great wages to their content’ — wages that will allow the head of a great public utility or bank to amass as great a competence from his salary as is made by thousands of men of lesser ability in small businesses; and then see to it that that is all he makes — that he gives his full ability and effort for his salary, and that he does nothing ‘on the side’ to distract his attention, confuse his relationships, or obscure his moralities.