The more capable the company, the better it is at distributing money to its executives.

Let me first share a case study with you. This case marks the first historical instance of addressing modern executive compensation head-on—and it comes from General Motors (GM). As we know, GM appeared on the inaugural Forbes list and became the world’s leading automaker in 1918—a position it held until the 1980s, when it was overtaken by Toyota. During that era, it was widely acknowledged that GM’s incentive model played a pivotal role in its success. I’ve retrieved GM’s original compensation scheme for you—it represents the prototype of executive incentives. All contemporary executive incentive plans are essentially variations built upon this foundational model. When GM’s CEO Alfred Sloan designed the executive incentive system, he introduced the ‘Bonus Plan.’ After restructuring the organization, major shareholder DuPont had already withdrawn from active management. At that time, Pierre S. du Pont Jr.—often called ‘Little Pierre’—felt disinclined to manage the company personally and believed professional managers were essential. Sloan thus pondered how to align the interests of professional managers with those of shareholders. Based on this, he devised the ‘Bonus Plan,’ reasoning that shareholders sought profit—and therefore, all executives should strive toward maximizing corporate profits. What were the core principles of the Bonus Plan? Bonuses were calculated as 10% of the portion of company profits exceeding a 6% return on capital. Sloan reasoned that capital deposited in banks or invested in ordinary enterprises yielded a baseline market return; at the time, the U.S. average market return stood at 6%. Thus, if GM’s return on capital fell below 6%, management would have contributed nothing—indicating mediocrity. Only returns surpassing this societal benchmark demonstrated managerial competence: the higher the profit, the greater the managerial talent. Bonuses, accordingly, served as direct rewards for such talent. Based on this theory, Sloan allocated 10% of the bonus pool to the management team. Later, this amount grew substantially—because the automobile industry then was as cutting-edge and lucrative as today’s internet sector, and GM’s performance and profits were extraordinary. Sloan subsequently extended bonus eligibility beyond senior management to include rank-and-file employees. The Bonus Plan later evolved further. After GM went public, DuPont realized he no longer sought merely profits—he aimed for stock market value appreciation. Yet DuPont reasoned: if he retained an overwhelming equity stake, why would managers exert effort to increase *his* shares’ value? Consequently, DuPont declared he must cease being an absolute majority shareholder—and began selling off his GM stock. How dominant was DuPont? Early on, DuPont had invested heavily in GM when it needed capital. Later, however, he deliberately reduced his GM stake to under 30%. How did he achieve this? DuPont established a separate company using part of his own GM shares, then sold those shares to GM’s management at below-market prices. He also directed GM to allocate its annual dividends to this newly formed company. Thus, the holding company received GM’s annual profit distributions—and executives received dividends proportionate to their shareholdings therein. Moreover, if the stock appreciated, they could benefit from that gain too. Yet GM prohibited free trading of these shares, retaining repurchase rights: upon retirement or job change, GM could buy back the shares—paying executives only the appreciation, akin to Huawei’s current restricted stock plan.

DuPont, the arms conglomerate.

Using massive loans, DuPont founded five explosives factories—the Tennessee plant being the world’s largest smokeless powder facility. DuPont’s foresight proved astonishingly accurate: during World War I, nearly half of all explosives used by the Allied Powers were supplied by DuPont. As hostilities intensified, DuPont reaped $45 million in extraordinary wartime profits—thereby cementing the colossal DuPont empire. Fueled by WWI, America’s industrial titans seized the opportunity to amass enormous war-related fortunes. Though President Wilson declared U.S. neutrality, both warring blocs—the Allies (Britain, France, Russia) and the Central Powers (Germany)—placed massive orders with American firms. Beyond explosives, belligerent nations procured vast quantities of military trucks and automobiles; domestic U.S. auto demand surged as well. At this juncture, General Motors (GM)—a conglomerate integrating Buick, Oldsmobile, and Cadillac—expanded so rapidly that it faced acute cash shortages, even struggling to pay employee salaries. GM’s president, William C. Durant, sought bank loans—but Wall Street banks, controlled by J.P. Morgan & Co., refused to lend without Morgan’s explicit approval. Durant was nearing desperation. On April 6, 1917, the U.S. declared war on Germany. The government classified steel as a strategic war material and imposed a special wartime tax on it. Since automobiles require steel, GM’s plight worsened dramatically—its stock plummeted. Seizing the moment, DuPont purchased $25 million worth of GM stock. Durant had no choice but to cede the GM chairmanship to DuPont, who thereby acquired a 23% ownership stake. DuPont then expanded into the dye industry, leveraging TNT production byproducts to manufacture chemical dyes. That same year, Japan’s globally dominant artificial silk stockings were decisively displaced. On September 1, 1939, Germany invaded Poland—triggering World War II. By then, DuPont—aged 69—had stepped back from day-to-day leadership but remained involved in major corporate decisions. Both Nazi Germany and the United States secretly pursued atomic bomb development. Albert Einstein—German-Jewish physicist and refugee in the U.S.—wrote to President Roosevelt urging accelerated nuclear research. Roosevelt approved the top-secret ‘Manhattan Project,’ placing it under Army Department oversight. The Army entrusted the entire Manhattan Project to DuPont. Its contract stipulated that, beyond cost reimbursement, DuPont’s profit would be exactly one dollar. To execute the atomic bomb project, DuPont relocated its entire 60,000-strong workforce over 4,345 kilometers—from east to west—yet demanded only a single-dollar profit. Why? DuPont sought to shed its tarnished reputation as a ‘war profiteering arms dealer.’ More strategically, DuPont anticipated long-term gains: the project would attract legions of elite scientists, and postwar applications of this advanced technology promised boundless commercial opportunities. On August 6, 1945, the uranium-235 bomb—manufactured by DuPont—was dropped on Hiroshima, Japan. Three days later, on August 9, the plutonium-239 bomb was dropped on Nagasaki.

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