Tuesday, October 27, 2009

Innovating Executive Pay

BMW has announced plans to link the pay of top managers to those of their assembly line workers. This innovative pay structure comes after much scrutiny over executive compensation during the current economic crisis. The compensation plan, starting in 2010 will use a common formula to link upper and lower level employees to the company’s performance. This means that management will have the potential to lose more than workers for poor performance. They believe that this will create a more transparent and sustainable organization.

This pay structure is an innovation in paradigm at BMW. There is a change in the organizational culture. Their old culture placed a greater emphasis on performance for the workers and now their culture will place performance emphasis on all employees. This shows they are concerned about creating sustainable personnel policies. Do you agree that this pay structure is innovative?

While I believe that this is a good idea, I also believe that it presents a lot of risks for BMW. One risk I foresee is that management will work towards the performance objectives that are measured and not the overarching strategic objectives of BMW. Do you think this a good idea? Are there any risks that you foresee?

Another risk I foresee is that it will discourage technical innovations in the firm. This compensation structure could cause both management and workers to focus on current production and financial numbers and not the future of BMW. However, I also think that it could encourage innovation by creating a more collaborative work environment. Do you think this initiative will affect technical innovations at BMW?

I believe that this type of pay structure, where pay is linked to performance, could be used in any organization. The difficulty lies in creating fair measures of performance. One industry that I believe this could be easily implemented is the banking industry where C.E.O. compensation has also been highly scrutinized. Can you think of other industries that this would work in? Do you think that other companies will follow BMW and create similar pay structures?


  1. I like the idea of linking executive's pay to the performance of workers as it encourages a more "hands on," involved approach to leadership. While I'm not sure of the details of BMW's executive compensation plan, I believe it would work best if clear, defined metrics were involved - also, do you know what portion of an exec's salary is this talking about, do they have it defined by percentages? Or is it just talking about bonuses?

    I definitely think this type of pay structure can be adopted by organizations across many different industries, to achieve major strategic goals that are considered most important. For example, I remember reading about a British grocery chain called Tesco which has launched enterprise-wide "green" initiatives to reduce the "carbon footprint" of its business. To ensure that employees at all levels are committed to being "green", and to make sure that its leadership walks the talk, Tesco now determines senior-management bonuses partly on meeting energy- and waste-reduction targets.

    Another organization where I can see this type of compensation structure work really well is Disney. Especially in their Parks and Resorts business unit, impeccable customer service is considered to be a high-priority goal. So, to ensure that this dedication to service was being displayed from the very top of the organization to the very bottom, Disney could design a compensation plan that links a portion of park executives' salaries directly to the level of service provided in the parks, based on customer feedback (not sure if they currently do this or not).

  2. I think this may discourage top BMW executives and managers from making big bets on risky “blue ocean” innovations. Because a considerable portion of their own pay is at risk, these decision makers may now prefer to focus on safe, small incremental innovations that guarantee success. I think the auto companies most in financial risk, such as Ford, are most likely to follow a similar sort pay structure. Their executives are now more personally accountable for poor performance and “innovation flops,” and I think their compensation will be measured accordingly.