BMW (BMWG.DE) became the first major blue chip German company to link the bonuses of its top managers to those of its assembly line workers, amid growing global criticism of executive compensation. The move sends a strong message to other firms also examining their compensation practices, as the world's largest banks in particular have come under fire from politicians, shareholders and the public over excessive bonuses during one of the worst economic crises the world has seen.
BMW plans to tie executive bonuses to those of its blue-collar workers, in a bid to create a fairer and sustainable compensation environment within the company. Starting in 2010, the company will use a common formula to ascertain and award bonuses to its upper and lower level employees, based on the company's performance as measured by profit, sales and other factors. That means that upper level management could potentially lose more money than their lower level counterparts for bad performance, BMW said.
A spokesman for BMW said the company's goal was to create fair and transparent compensation practices and to prevent a gap between management and the workers, as the under class, from developing. "We don't just want to build sustainable cars. We also want to have sustainable personnel politics. We think this is good for the company culture," the spokesman told SPIEGEL ONLINE. He declined to be more specific on how the formula will work.
BMW May Set Trend on Executive Pay
Other companies may follow BMW's example as pressure grows on firms to curb excessive bonuses in the wake of the financial crisis. German Chancellor Angela Merkel has been outspoken about her dislike for excessive bonuses, calling them "inappropriate." In September, she penned a letter with French President Nicolas Sarkozy and Prime Minister Gordon Brown of the United Kingdom ahead of the G20 summit in Pittsburgh that proposed a cap on the total amount of bonus money a bank could pay out. They didn't stipulate how much banks could reward a single individual.
"Our citizens are deeply shocked at the revival of reprehensible practices, despite taxpayers' money having been mobilized to support the financial sector at the height of the crisis," the letter stated.
US President Barack Obama has also been outspoken about excessive compensation. In June, he appointed attorney Kenneth Feinberg to oversee compensation practices at seven companies that received bail-out funds from the government. To that end, Feinberg has devised a plan to cut the total compensation for these companies in half. This month, Feinberg pushed Kenneth D. Lewis, outgoing chief executive of Bank of America Corp. (BAC), to give back $1 million in compensation and forgo any additional salary this year, arguing his retirement benefits and stock, worth millions, was enough.
Firms Re-Assessing Pay Structure
Joseph Sorrentino, managing director with Steven Hall & Partners, a US-based executive compensation consulting firm, said a combination of factors including political pressure, government bailouts, public pressure and the declining stock market has led to many companies re-examining their compensation practices to make sure they are effectively paying for performance and not encouraging excessive risk-taking.
"Companies are trying to make sure they balance the public outcry with what they need to make sure they are able to attract and retain their employees," Sorrentino told SPIEGEL ONLINE. He added that often when big companies such as BMW change their compensation practices, other companies take notice.
To be sure, the BMW spokesman said the company has been discussing its compensation practices for months, and that its announcement has nothing to do with the larger debate over executive compensation circulating through governments currently.
However, Harald Krüger, BMW's human resources director, was critical of the bonus structure of banks and other businesses. "If employees need the money or bonuses for motivation, it encourages harmful developments inside a company," the executive told Frankfurter Allgemeine Sonntagszeitung newspaper on Sunday.
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