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NEVV ENGLAND

New England's Last Frontier: Part I
... planning for its development
Three different plans are being promoted for
the development of northern and eastern
Maine. This article discw,ses the advantages
and drawbacks of each plan.

Stock Options for Bankers
Stock options, long thought u:-,eful for attracting and retaining executives. ma, be rnon·
costly than other incentives .

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Federal Reserve Bank of St. Louis

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ANNIVERSARY*

1 9 6 4

New England's Last Frontier: Part

planning for its development
The forest lands and lakes of northern and
eastern Maine cover about 11 million acres or
about one quarter of the area of ew England.
A large part of this privately owned acreage is
isolated wilderness located more than 10 miles
from the nearest maintained graveled logging
road. Except when pulpwood and timber are
cut, few men set foot in the more remote parts
of northern Maine.
This area, however, is beginning to attract
more attention. Competing proposals for power
and recreational development are being put
forth by private, state, and Federal agencies.
Each of these proposals, in one way or another,
would encroach on the wilderness character of
northern Maine. Those who enjoy remote outThe New England Business Review is produced
in the Research Department. Robert W. Eisenmenger was primarily responsible for the article, "New England's Last Frontier: Part I planning for its development," and Prudence
Slitor Crozier for ''Stock Options for Bankers."
Some of the information for the latter article
was drawn from "Stock Options for Bank Executives," a thesis written by John Barrett for
the Stonier Graduate School of Banking. Copie-;
of the thesis may be obtained on request from
this Bank's Research Department.

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door recreation and other attributes of Maine's
existing forest economy oppose most of the
proposed changes. Those who are interested
in economic development and who are primarily concerned about the lack of employment
opportunities support proposals which they
believe will stimulate the local economy. The
best hope for the future, however, may rest in
the possibility that appropriate project design
and land use planning in the northern \1:aine
region may make economic development compatible with an attractive wilderness atmosphere.
The Advantages of Wilderness

To date, relatively little development has
taken place in the northern .Maine woods other
than minor recreational development and timber harvesting for the pulp and paper industry.
The harvesting of pulpwood has done little to
harm the landscape. Hundreds of thousands
of acres of lakes and a thousand or more miles
of lake frontage are remote and undeveloped.
Hundreds of miles of streams provide unique
fishing and canoeing experience for the hardy
visitor who has the physical endurance and
the time to penetrate this wilderness. If and
when this area is further developed, it will be-

September 1964
come less attractive to the recreationist who
wants a complete change from urban living.
Thus, a lack of development has advantages
for some individuals and private companies.
The existing situation also has important
tax advantages for landowners. Almost 9 million acres of undeveloped land in Maine are in
unincorporated townships. These townships
concentrated largely in northern and eastern
sections of the state have no local government.
Transportation is generally over paper company logging roads, communication via state
forestry department and paper company radio
and telephone systems. The few year-round
residents must look to the counties and State
of Maine for education, police, fire, anrl highway services. However, only a small fraction
of the roads is publicly owned and only a small
number of children live in the area. As a result,
property taxes are substantially lower in most
unincorporated townships than those in incorporated towns throughout Maine. Thus,
the landowners in much of northern and eastern
Maine have avoided the high tax rate situation
which exists in many of the cutover forested
areas in the United States. [n the South, the
Lake States, and Lhe Northwest, many families
have built homes in remote areas and local governments have been forced to bring education,
roads, and welfare services to them at a very
high per capita cost. Maine's fortunate situation might change if, as a result of economic
development, a large number of families established year-round residence in the area.
An important advantage of the existing
situation in northern Maine is that all forest
land is at least potentially productive. Most
hydroelectric power developments would permanently inundate many thousands of acres

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of forest land. Although this would create no
immediate shortage of pulpwood, it could conceivably slow the growth of the pulp and paper
industry in Maine in the long run. Some of
the proposed reservoirs have the additional disadvantage of fluctuating substantially during
the recreational season. These fluctuations
would destroy much of the recreational, wildlife, and fishing potential of the reservoir .
The Advantages of Development

In the coming decades the wilderness character in northern Maine will almost certainly
change. Higher incomes and the new interstate
highway systems enable more people to travel
to Maine each year. Already much of the
land surrounding the more accessible lakes in
the Maine woods has been leased or sold to a
variety of summer residents including a large
number of children's summer camps. Thus,
northern Maine is beginning to help satisfy the
rapidly growing outdoor recreation needs of the
population of northeastern United States.
Gradually, also, the paper companies are increasing their cut of pulpwood. Although the
annual cut on a 20-year cycle is still far less
than the annual growth, in the future pulpwood
harvesting will occur more frequently. Northern Maine will be helping to meet the ation's
growing needs for paper. However, the result
will also be more logging roads and a more
disrupted forest landscape.
Technology is also bringing changes.
ew
engineering techniques for building dams and
for moving electric power long distances have
encouraged governmental and private groups to
propose several large hydroelectric power projects for northern Maine. Each of these proposals calls for a high voltage transmission line
interconnection between the utility systems of

New England Business Review
Maine and southern New England. ln this
manner power users throughout New England
could benefit from what is thought to be northern Maine's low cost hydroelectric peaking
power. Additional savings would be possible
if utilities in Maine and southern ~ew England
could pool their efforts when they generate
power with conventional steam plants. This
cooperation would be facilitated if these groups
of uLiliLies were interconnected with a high
vol Lage transmission line.
.\orthern and easlern parts of \laine are
among the lowest income areas in :\ew England. i\s a resulL, public pressure for economic
developmen L is becoming increasing!~- insisten L.
Recent Federal Government proposals for
hydroelectric power insLallation are partially
justified on the basis of area redevelopment
benefits. \1 on'oHr. local interests are asking
the State of \lainc Lo build addiLional highwa~ s direct I~ through parts of the l\tlaine
wilderness so that northern \1aine can be
direct!~- linked to population centers in the
Province of Q11dH·c.
Comprehensive Planning

Comprehensive planning for multipurpose
development of lan<l and water resources has
been advoc-ated since Theodore Roosevelt's
Inland Waterways Commission Report in 1907
but has been more often discussed than ac-ted
upon. Cnfortunateh·. the characteristic-s of
land and water resources which make comprehensive planning desirable are also those which
crea Le difficu Ities.
The natural resources of any area can be
developed for a variety of purposes. These
purposes are sometimes complementary but
they are often contradictory. Federal, state,
and private agencies promote those projects

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for which they have functional responsibility.
They generally oppose those projects which
will interfere with their assigned mission. Similarly, individuals and business support those
agencies who e work benefits them; they naturally object to the ·work of an agency if it
affects them adversely.
Thus, resource development planning generally takes place in a controversial environment.
Development planning in Maine is no exception. As described below, three entirely different plans are now being promoted for development of northern and eastern Maine. The
issue is whether any one of these plans is
sufficiently comprehensive and efficient to
deserve the support of the general public in
Maine and in the Nation.
The Proposed Cross Rock Development

A private engineering firm has proposed that
the Maine legislature create a Maine Power
Authority to construct a 450-foot-high conventional h ydropower dam on the St. John
River near the town of St. Francis, Maine.
Total cost of the structure, power plant, and
associated transmission lines to the New Hampshire border, as estimated by the promoters,
would be $220 million. The height of the dam
and its location are important for several
reasons:
(l) Because of Lhe substantial flow of water
in the SL John River at this location, the Cross
Rock project would have an installed capacity
of 760,000 kilowatts of low cost peaking power
and would produce something over 1.6 billion
kilowatt hours of electrical energy annually.
Much of this power is surplus to presenL needs
in \laine and would be transmitted to benefit
power users in southern ~ew England. t\. byproduct benefit of the projecl is LhaL it would

QUEBEC

CANADA

NEW BRUNSWICK

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N. H.

MASS.

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Proposals for Resource
Development in Maine

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New England Business Review
tie together with a high voltage transmission
line the utilities of Maine with the Mari timtprovince of Canada and southern New England. Moreover, the Maine Power Authorit~'
would be required to pay the State in lieu of
taxes one mill per kilowatt hour generated. or
approximately $1.6 million annuall~--

check dams on the upper St. John River would
make possible a combination of existing canoe
trips. The dams would be operated so as to
release enough water during the summer to
provide in a wilderness environment a 215mile canoe trip on lakes and streams with substantial portions of rushing water.

(2) The proposed dam would largely control
the flow of water in the upper reaches of the
St. John River drainage basin. As a result,
electric utilities and paper companies on the
lower part of the t. John River in Canada
would benefit from the controlled relea e of
water for power generation purposes. In addition, minimum summer streamflows would be
augmented so that pollution problems in
Canada would be alleviated.

( i) The dam would inundate about 210,000
acres of land, 30,000 of which are now in lakes,
streams, and swamps. Although the flooded
land is less than 2 percent of the forested
acreage in northern and eastern Maine, this
rPduction might possibly slow the longrun
growth of the State's pulp and paper industry.
There is controvers~' as to whether or not the
reservoir would make it easier or more difficult
to transport pulpwood from the forests of
northwestern Maine to the pulp mills in
central \1aine.

(3) At the same time the Cross Rock Dam
proposed under the Maine Power Authority
would create a large new but entirely different
water recreational facility. The reservoir would
be composed of two narrow interconnected
bodies of water approximately 50 miles in
length which would cover an area equivalent
to about seven-eighths of the surface of Cape
Cod. The shore line of this artificial lake would
be about the same as the outer boundary nf
Cape Cod. Seasonal fluctuations in the waler
level would be minor and entire!~- compatible
with the development of man~- t~·pes of fish,
wildlife, and recreational areas. ~o provision
is made for controlled development or zoning
of any of the lands surrounding the reservoir.
However, the proposal does call for a 20,000acre park north of the dam site.
Finally, the propo al provides for developing
a canoe trip which would link the headwaters of
the St. John River with the east branch of the
Penobscot River. The construction of two

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(5) The proposed project would completely
inundate the Allagash River. This river provides a nationally known canoe trip taken by
over I 000 hardy sportsmen each year. While
the Allagash River itself is only 65 miles long,
the canoeist can travel more than 100 miles
along a network of lakes, streams, and river
with alternatingly placid and fast-moving water
in a wilderness environment. The Cross Rock
Development would mean giving up this unique
recreational re -ource.
The Passamaquoddy-Dickey Proposal

The United States Department of the Interior is responsible for Federal parks and
recreation areas. It is also one of the agencies
responsible for Federal power development.
This Department has proposed a plan which
would develop hydroelectric power and preserve
the Allagash:

September 1964
(1) The Federal plan calls for the development of a combination of two hydroelectric
projects, one conventional river hydropower,
the other tidal power, and a high vohage transmission tie to delivery points in Maine and
southern New England at a cost of almost $900
million. The tidal project would be a 500,000
kilowatt capacity dam and power plant at
Passamaquoddy Bay in eastern Maine. The
conventional hydro project would be located
at the Dickey site on the St. John River above
its confluence with the Allagash. When tied
together the two projects would produce about
3 billion kilowatt hours of energy annually.
Most of this power would be generated during
the two late afternoon hours of each day when
there is an abrupt peaking in household energy
usage. It is improbable, however. that because
of the high cost of the extensive rwtwork of
dams this power can be produced at a cost
competitive with other types of Federal!~·
financed power projects. As a future article
will make clear, it would be substantiallv
higher cost peaking power than that of Cross
Rock or pump storage.
(2) The Dickey hydroelectric project would
inundate almost 89,000 acres, most of it productive forest land. Moreover, the power pool
would fluctuate up to 30 feet during the recreational season. Shoreline conditions would not
be aesthetically pleasing and in general the
reservoir would be unsuitable for fish or wildlife.
(3) A 150,000-acre "National H.iverway"
would be established on the land immediately
surrounding the Allagash River. On this land
road access would be carefully limited. Motorboats and airplanes equipped with floats or
skiis would be excluded. Al though hunting
and fishing would be permitted, no timber
cutting or mineral development would be al-

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lowed. Altogether the combined Dickey an,l
National Riverwa~' projects would withdraw
more land from forest production than would
the Cross Rock proposal.
The
ational Riverway proposal also authorizes the Federal Government to purchase
a "scenic easement" zone for a distance of up
to one-half mile outside the "Riverway." The
private owners of this restricted land would
be expected to continue their present policy of
discouraging the general public, except hunters
and fishermen, from using their lands. Only
controlled timber cutting would be permitted
to preserve the aesthetic characteristics of the
wilderness.
Relying on New Technology

A third course of action for the development
of northern Maine is advocated by some conservationists as well as by paper companies and
private utilities. [n general, this segment of the
public opposes any public power development
in northern Maine. The private companies
generally oppose Federal land acquisition
as well.
These groups point out that nuclear power
generation is rapidly becoming the least cost
wa~· of providing baseload power in northeastern United States. Within about 20 years
all additional baseload power in ~ew England
probably will be provided by nuclear reactors.
As the use of nuclear energy to generate base
power increases, low cost nuclear power will
gradually replace higher cost conventional
plants, thus making available cheaper offpeak
power for use in pump storage operations.
During the early morning hours of each day
regular residential, commercial, and industrial
use of power always drops off rapidly. In the
future, utilities will have the option of shutting

New England Business Review
their reactors down during this period or, at a
very small incremental cost, providing energy
for the operation of pump storage generation
plants. During offpcak periods water would be
pumped Lo a high-elevation rese rvoir and
stored for release through a turbine at a lowelevation reservoir to produce po"rnr at peakload periods. Although energy is lost in the
conversion of offpeak to peaking power (about
three kilowatt hours of input for ever~· two kilowatt hours of output). this new ;;~·stem will
probabl~ be the most inexpensive method of
producing peaking power in the coming decades.

lt is unlikely that conventional hydroelectric
projects of the sort possible on the St. John
will be economically justified in the coming
decades. lf they are to be justified, they will
have to be built in the near future before these
new low cost technologies are widely put into
operation.
Generali~,, priva Le utilities see no need for
public power development. Similarly, paper
com.panies oppose FeJcral land use restrictions

in the same area. They question the need for
substantial Federal ownership dedicated exclusively Lo wilderness recreation. The~- point
out that foresters can arrange for selective
culling of timberlands and that as a result
timber cutting leaves very little longrun impact
on the forest landscape. The~· contend that
most areas of forest land can be rnanage<l for
multiple purposes - forest production, preservation of wildlife, and recreational uses. They
further argue that wildlife is almost alwa~·s
more abundant in areas where timber cutting
takes place than in areas where cutting is forbidden. The dense shade of permanently protected forest provides a poor habitat for most
types of wildlife.

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Comparing the Plans

These three competing plans for the development of northern Maine are difficult to compare
as each emphasizes benefits for a different segment of the public. A few observations are in
order, however.
The third course of action based on new
technology is not really a ~~plan." It points out
weaknesses in the other plans and presents
technical facts which are generally overlooked
by partisan conservationists and supporters of
public power projects. However, no mechanism
is provided for tying together the utilities of
Maine and southern New England with a high
vol Lage transmission line. It provides no
specific proposal for relieving the depressed
conditions in northern and eastern \ilaine.
Finally, it provides no scheme for bringing
about an integrated or comprehensive development of the northern '\1aine wilderness. As
mentioned earlier, recreational development,
i.e., camps, cottages, summer homes, is now
taking place in many of the fringe areas of the
northern \ilaine woods without any overall
development plan, highway and access plan,
or zoning. [n this way the wilderness atmosphere and scenic values in much of northern
\ilaine may be gradually lost without any substantial benefits accruing to the area. The
developments which take place in the years
immediately ahead will probably set the tone
for the economy of northern Maine in succeeding decades.
In many ways the Cross Rock proposal is the
most interesting one. It provides for relatively
low cost hydroelectric power and it proposes a
large new supply of recreational water in a
wilderness atmosphere. One weakness is that
no specific provision is made for controlling

September 1964
land use on the area surrounding the huge
recreational reservoir. The most difficult question is whether in the long run the loss of the
Allagash and almost 200,000 acres of forest land
are more important than the shortrun power
and development benefits and the longrun
recreational benefits of the giant reservoir.
The Department of the Interior's plan 1s
comprehensive in that it provides for power
development, the preservation of a wilderness
canoe trip, a high voltage transmission line tie
to southern New England, and substantial

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Federal construction expenditures which would
help stimulate, at least temporarily, the depressed economy of northern and eastern
Maine. The controversy regarding Interior's
proposals relates to their efficiency and whether
other Federally financed projects could accomplish many of the same objectives at a
substantially lower cost.
Additional technical aspects of power development and forest and recreational planning
will be discussed in future articles on ~~ ew
England's Last Frontier."

New England Business Review

Stock Options For Bankers
In the industrial world stock options have
for some time had their champions and detractors. This controver ial method of executive compensation has been investigated but
has never been widely used by the banking
community. Among the more important
factors to be considered by interested bankers
are what the plan is intended to accomplish,
how it is to be constructed, and what costs are
involved as oppo ed to the alternatives for
accomplishing these same objectives.
What Are Stock Options?

Stock option plans are designed to reward an
executive's efforts by giving him an opportunity
or Hoption" to buy ownership in the bank at
what is intended to be a price less than the
market value. Optionees, who are generally
high-level executives, receive an allotment of
shares that they may buy during the plan's
5-year term at the option price which is the
market price on the date the option was granted.
The optioned shares may be granted in lump
sum or on an installment basis. This latter
method allows the executive to buy his stock in
equal allotments each year or to accumulate
his allotment and purchase the stock at the end
of the 5-year agreement. Hopefully, the market
price of the stock will rise during this time permitting the executive to show an immediate
paper profit on his investment.
For example, suppose a banker is granted the
option to buy, within the next five years, 100
shares of his bank's stock at $50 per share, the
market price on the day the shares were optioned. If the price rises to, say, $60, the banker
will record a profit of $10 per share by exercising
10

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the option to purchase at $50. Moreover, his
profits are not taxed until he sells the stock and
then only at the lower capital gains rate.
In the last session of Congress laws regarding
stock options were tightened - largely due to
widely publicized abuses outside the banking
community. There is some evidence to suggest
that the bloom has been partially removed from
the stock option rose by these new, more
stringent laws and by lower ordinary income
tax rates. The new laws are framed with the
idea that the device is a privilege which should
receive special tax treatment only when used
as a true incentive. Accordingly, under current
provisions, to qualify for long-term capital gains
tax treatment, the option price must be 100
percent of the market price when the option is
granted instead of the more generous 85 percent which formerly applied. In addition, the
option price may no longer be reset at a lower
figure if the market price subsequently falls.
The stock now must be held for at least three
years, one year longer than under previous
legislation. The term of the stock option agreement itself has been shortened from 10 years
to 5 - thus reducing the span during which
the executive might benefit from market appreciation. Finally, favorable stock option tax
treatment ha been denied to ttsubstantial"
stockholders - that is, those holding 5 percent
or more of the voting stock.
What the Proponents Say

Proponents of stock options argue that they
provide important managerial incentives which
will help to attract the best executive talent to
the bank. They stress that executive stock

September 1964
ownership encourages a proprietary interest in
the business and creates a group of ~~ownermanagers" rather than mere employees. In
this way the stock option may be considered a
partial substitute for the ownership incentives
that originally created our free-enterprise system. Stock options offer the bank executive a
new stimulus to grow with his bank and do so
in a particularly attractive way since his eventual investment can be a hedge against inflation
and a building block in his estate. In addition,
judicious planning can defer the receipt of income to advantageous tax years.
At the same time, the bank need not incur
additional overhead costs of heavy salary payments to retain its top management group.
The employer can offer the stock option incentive and not pay it unless and until the executive has indeed improved the bank's profitability. Assuming that the stock's market price
is a meaningful barometer of the executive's
contribution - which it frequently is not he would probably not be exercising his option
until he had successfully performed as part of
the bank's management. This incentive has
been achieved at no cost to the bank until the
stock's market price rises attractively above
the option price and the option is exercised.
Moreover, the proponents believe that the
individual bank is strengthened by having stock
options as a tool for recruiting. They suggest
that this incentive puts the bank in a better
bargaining position to attract and keep able
personnel. From the standpoint of the entire
banking industry stock options are favored to
enable banks to compete more vigorously with
other industries for personnel.
Furthermore, for the smaller bank, stock options provide an opportunity to offer substan-

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tial rewards to needed key executives without
depleting necessary working funds. By using
unissued stock the extra compensation can be
paid without a drain on the bank's cash
position.
What the Critics Say

On the other hand, critics voice doubts about
the underlying justice of granting capital gains
tax rates to an investment which involves no
risk. Insofar as the optionee never has to pay
the full market price for the stock and incurs
no risk until after the option is exercised, they
would say there is scant justification for the
favorable capital gains treatment.
Opponents further contend that a bank's
unique fiduciary relationship could be jeopardized by the use of stock options. They fear that
profit-minded optionees might be tempted to
make marginal loans or investments for speculative reasons. Officers might be too interested
in increasing earnings, and thus the value of
the bank's stock, at the expense of the quality
of assets.
Another problem may arise when executives
need to borrow money to pay for stock acquired
under option plans. Bank stocks have not
customarily been listed on securities exchanges;
therefore, loans made by banks to finance
purchases of stock by optionees are not subject
to margin requirements. Imprudent use of
borrowing by optionees is one of the dangers
which must be considered in administering
such programs.
Furthermore, it is difficult to establish the
fair market value of a share of stock which is
not actively traded as is the case with many
bank stocks. Smaller banks in particular might
encounter problems in establishing an option
plan because of this dilemma of valuing the

New England Business Review
stock. In cases where values are disputed the
threat exists that at least some of the gains ma~·
be taxed at ordinary income tax rates.
Critics also argue that it often is difficult to
pinpoint an individual executive's contribution
or measure his impact on overall profitability.
As such the option may have little value to the
bank as a unique device for compensation.
Even if a careful evaluation of the executive's
performance can be made, the stock's market
price may be reacting to a variety of national
and industrial forces completely outside the
optionee's control.
Cost of Stock Options

Some critics point out that the twofold cost
of stock options is not given proper consideration. In calculating these costs the significant
date to consider is the earliest possible time
the stock can be resold (three years) and still
receive the favorable capital gains tax treatment. The difference between the option price
and the market value of the stock in three years
is one element of cost. This spread represents
the amount of capital lost by selling the stock
to the optionee rather than on the open market.
This difference is not classified as a compensatory payment to the optionee, and no deduction
is allowed on the bank's tax return. If the
same amount had been paid to the executive
as salary, however, it would have been deductible for income tax purposes. The critics
would say that this second element of cost, the
bank's loss of a 50-cent tax deduction for each
dollar of stock option incentive should be added
to the capital foregone to determine the total
cost to the bank. As a result, the net cost of
stock options to the bank can be greater than
other forms of compensation.
Moreover, for most middle bracket executives stock options are rarely as rewarding as

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other forms of compensation - such as bonus
payments. Assuming that the net costs to the
company are equal in both cases, these executives would receive more income after tax from
cash payments than from stock options. Only
if the executive has a taxable income of more
than $76,000 will he gain more after tax income
with stock options than with cash.
To illustrate, assume that a key bank executive receives a salary of $30,000. The bank
may deduct salary payments from its taxable
income. With the current 50 percent corporate
tax rate, therefore, the net aftertax cost to the
corporation of the executive's $30,000 salary is,
in effect, $15,000.
Suppose that the bank wishes to provide an
added incentive to the executive by granting
him either a stock option or a cash bonus. The
corporation foregoes a deduction amounting to
50 cents for each dollar of compensation paid
through a qualified stock option. Accordingly,
for each $100 of compensation provided through
such an option, the corporation could, at the
same cost to itself, make a deductible salary
payment of $200. The question is which incentive provides a more handsome reward to the
banker. Would he receive greater benefits
from a stock option or from a cash bonus?
In the first instance let us assume that he
receives stock option benefits of $5,000 in addition to his $30,000 salary and that he eventualJy
pays a capital gains tax on the stock option
benefits when he is still in the same $30,000
bracket. In this example the executive would
pay $7,505 in taxes on his salary and $938 in
taxes on the stock option benefits. lie enjoys
$26,556 of aftertax income.*
*These calculations are based on the assumptions that
the taxpayer is married, files a joint return, and takes
the standard deduction.

September 1964
If instead of the stock option benefits he
receives in addition to his $30,000 sa]ary a cash
bonus of $10,000 which could be paid at the
same cost to the bank as $5,000 of stock option
benefits, he wou]d pay ordinary income Lax on
the entire $40,000. The result would be a tax
bill of $11,855 and a greater aftertax income of
$28, 14S. Jn this e~ample. at the same net
cost to the bank, the executive would receive
greater benefits from the cash bonus alternative. Of course, the executive may choose to
defer seJling his stock until retirement years
when a lower taxable income would result in a
lower capital gains tax. For purposes of immediate income, however, the executive might
well prefer a cash bonus.
Since cash bonus plans are less expensive for
the company than stock option plans in the
majority of cases, why are stock option plans
stil1 advocated'? There seem to be several
reasons. First, some companies may look at
stock options as being almost costless since
they do not involve a direct cash outlay. The
stockholders are, in effect, giving up a share in
the company in an indirect way rather than
paying out cash directly. Thus, boards of
directors may vote more readily for such a plan
rather than commit the company to actual
cash outlays.
Second, some executives ma) prefer option
plans because they vie,v their diances of gain
as being greater than with bonus plans.
Stock prices often rise even if profit levels do
not increase, so the executive can make a good
gain even if the company's profitability has not
risen. This is especially likely in periods of
general advance in stock prices as has occurred
since 1950.

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Federal Reserve Bank of St. Louis

Stock Options in Banking
Stock options are a relatively new phenomenon on the banking scene. l t was not
until 1962 that a regulation by the Comptroller
of the Currency allowed national banks to use
the stock option device. Available evidence
suggests that they are, as yet, infrequently used.
A nationwide survey in 1963 showed that only
15 of 6,000 national banks had adopted a stock
option plan. There seems to be little increase
in the number since that time. In ew England, for example, one national bank in central
Massachusetts is the only bank with a stock
option program for its executives.

This same pattern is found among statechartered banks. Laws permitting these banks
to adopt stock option programs have been
passed by nine states - Connecticut, Lndiana,
Massachusetts, Michigan, Missouri, New York,
North Carolina, Pennsylvania, and Utah. Of
the nine states with specific authorizing legislation, only four have banks with option plans.
Missouri leads with seven plans, Michigan and
Tew York follow with three each, and [ndiana
reports two. Although two New England
states, Connecticut and Massachusetts, pioneered with stock option legislation passed in
1958 and L961 respectively, no New England
state-chartered bank has as yet adopted a stock
option plan.
Stock Plans in Operation in New England
Some banks use stock plans without the
option feature. A small state bank in Maine,
for example. has an informal system which
allows officers to buy stock at a price set below
the book value. A national bank in New
Hampshire has adopted an employee stock
purchase plan open to all officers and employees.
Under this program all participants are permitted to buy annually, at 85 percent of book

New England Business Review
or market value - whichever is greater share of stock for each 500 of salary.

one

even greater efforts toward the bank's success.
The Alternatives

The only full fledged bank stock option plan
m ew England was adopted in January 1964
and is designed primarily as an incentive for
the existing top management group. Participation is limited to a small nucleus of officers who
form the high-level management of the bank.
Its usefulness for recruiting is a secondary and
minor consideration.
To implement the plan the stockholders approved an increase of 20,925 shares of authorized capital stock, 5 percent of the bank's
common stock, with a par value of $10 per
share. The stock's option price, or fair market
value, was set at the midpoint between the
Hasked" and the ''bid" price on the day of the
agreement. To date, approximately one-Lhird
of the stock has been allotted Lo the participants. There have been, as yet, no purchases
under this relatively new plan.
In an interview an officer expressed concern
about the new tax laws which have removed
five years of potential market appreciation
from the option's life. However, he remained
confident that the option plan provided an
invaluable incentive for the key management
group to remain with the bank and to make

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Deciding for or against stock options is not
a simple matter. The complexities of such
plans often match the complexity of the purposes for which their use is intended. However, it remains clearly evident that they may
be a costly way of providing management
incentive. The need for incentives to attract
superior bank management is apparent; however, the use of stock options to provide these
incen Lives may be hard to justify on a cost
basis.
The interested banker, spurred by the cost
and uncertain tax future of stock options, must
consider the available alternatives for accomplishing the same objectives. For instance,
cash bonuses, which can be deducted from the
bank's tax liability, could be awarded to the
executive. As shown in the calculations above,
a cash payment would result in more immediate
income to the executive than comparable stock
option benefits unless his present taxable income is above $76,000. According to the Wall
Street Journal, programs of cash incentives are
enjoying increasing popularity among industrial concerns. This trend could well be repeated in the banking community.

September 1964

Here's New EnglandMANUFACTURING INDEXES (seasonally adjusted)
1957-59 = 100

NEW ENGLAND
pJuly '64
June '64
July '63

UNITED STATES
July '64
June '64
July '63

All Manufacturing

122

121

120

134

132

126

Nonelectrical Machinery
Electrical Machinery
Transportation Equipment

131
129
132

131
129
140

125
129
145

143
139
134

142
137
135

127
133
128

Textiles, Apparel, Leather

103
103
109
99

101
101
107
96

104
110
104
96

125
122
135
n.a.

123
119
134
97

119
118
126
100

118

115

116

132

130

126

Textiles
Apparel
Leather and Shoes
Paper

Percent Change From:

BANKING AND CREDIT
Commercial and Industrial Loans($ millions)
(Weekly Reporting Member Banks)
Deposits($ millions)
(Weekly Reporting Member Banks)
Check Payments($ millions)
(Selected Cities)
Consumer Installment Credit Outstanding
(index, seas. adj. 1957-59 = 100)

DEPARTMENT STORE SALES
(index, seas. adj. 195 7-59 = 100)

EMPLOYMENT, PRICES, MAN-HOURS
& EARNINGS
Nonagricultural Employment (thousands)
Insured Unemployment (thousands)
(excl. R.R. and temporary programs)
Consumer Prices
(index, 1957-59 = 100)
Production-Worker Man-Hours
(index, 1957-59 = 100)
Weekly Earnings in Manufacturing($)

OTHER INDICATORS
Total Construction Contract Awards* ($ thous.)
Residential

July '64
1,820

June '64
+ 1

July '63
+11

Percent Change From:
July '64
38,614

June '64
0

July '63
+10

142,874

208,258

+10

167.1

+11

n.a.

3,890

-3

+13

+ 1
-10

58,968

122

1,368

+ 3
-11

108.3

104. 1

-1

102.97

-1

4,581,595
2,015,569

+2
0

+
+

3
1
3

5,560

12,910

145.6

128

110.6
(Mass.)

94.0

94.16
(Mass.)

240,524
106,982

Nonresidential

77,688

6
+13
-13

1,436,669

Public Works and Utilities

55,854

-21

1,129,357

155

+ 5
+11

Electrical Energy Production (4 weeks
ending July 11, 1964)
(index, seas. adj. 1957-59 = 100)
Business Failures (number)

New Business Incorporations (number)
•3-mos. moving averages May, June, July

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Federal Reserve Bank of St. Louis

147

56
990

6
5

-11

p = preliminary

+10

1,096

-5

17,145

5
+

n.a. = not available

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~
l.,.J

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~

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--1

Full text of New England Economic Review : September 1964

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