The "Dieselgate" had the effect of a bomb in the global car industry and especially in Germany, whose famous brand is one of the jewels for export. In September 2015, the US authorities, led by the US Environmental Protection Agency (EPA), accused the German brand of having equipped more than 11 million diesel cars with software able of distorting the pollution control standards
This unprecedented industrial scandal in the history of the automobile denounces the various practices used between 2009 and 2015 by the group, to fraudulently reduce the polluting emissions of certain diesel engines, but also gasoline, during official homologation tests. The Volkswagen, Audi, Seat, Škoda and Porsche brands are concerned by this affair, which led to the resignation of the group's chairman, Martin Winterkorn.
Four years after the fact, Volkswagen is trying to get back on their feet and decides to set up a new incentive compensation system for its executives. The iconic German firm, although shaken by this case of cheating pollution tests, tries to improve its image and capitalizes on the motivation of its employees.
In search of a new image after the “Dieselgate” scandal, the WW group has set up a new bonus model to develop more collaborative behaviors among company executives. By aligning this new compensation model with that of the members of the Executive Board, which focuses on collective objectives, the group hopes to focus more on collective performance rather than individual performance.
Introduction of collective objectives, sanctions for fraudulent acts with pay cut, or allocation of virtual shares via a performance action plan, discover in this article, an analysis of the new executive compensation system set up by Volkswagen!
1) A REdesign OF incentive COMPENSATION SYSTEM based ON EXECUTIVE BOARD model
A new model of incentive compensation to encourage cooperation between employees from different regions
The Volkswagen Group has opted for a redesign of the incentive compensation system by aligning it with its Executive Board model. This new executive variable pay system aims to strengthen the "group idea" and to encourage "co-operation between brands and regions. The attention of the variable compensation strategy is therefore more focused on the collective than on the individual.
Our expert opinion: a relevant variable pay compensation plan must be declined "from top to bottom" and consistent for all employees. To be effective, the plan must be broken down from the commercial strategy and cross the various levels of management to give direction to the organization. Thus, "mirror schemes" are created which make it possible to relay the incentive compensation strategy resulting from the company's strategy.
2) INDIVIDUAL PERFORMANCE BONUS WITHDRAWN
The group chose to remove the individual performance bonus and put in place a more collective-oriented system
The removal of the individual performance bonus is intended to strengthen team spirit and reduce the importance of personal and individual interests. In this context of valuing collective work, the group's objectives are strengthened and will now represent at least half of the incentive pay plan of senior executives, who until now accounted for only one third of their total compensation.
Our expert opinion: the company's willingness is clearly to promote better cooperation between its different brands, in different regions. However, making the choice to remove individual performance bonuses and introducing only a system of collective goals may have some disadvantages.
First of all, an evaluation system based only on collective criteria will struggle to distinguish and reward the efforts made individually by the most involved employees. Secondly, this system can be likened to profit-sharing, a system that already pays for the participation of each employee in the various collective projects of the company.
To be effective, an incentive compensation system must be able to produce motivation. In this way, he must not reward twice the same effort and therefore the same performance. In a context where individual performance would be difficult to measure, quantify and interpret, it is common to observe the implementation of collective objectives whose evaluation is based on common criteria of performance.
In the specific case of Volkswagen, we are in a configuration where it is quite possible to identify individual performance criteria for executives. Indeed, the group has an integrated CRM system able to take into account the elements of remuneration and evaluation of individual order. Thus, in setting up an incentive compensation strategy, setting up a collective share may be relevant, but basing only a compensation system on this aspect may, on the contrary, be counterproductive and no longer generate motivation for the employees.
Moreover, we can recognize the implementation of collective objectives some beneficial effects. The creation of a collaborative link can make sense, especially in a context where the expected results depend directly on the quality of work in common between several people with different functions. Finally, the introduction of collective objectives makes it possible to fight directly against individualistic behavior, sometimes exacerbated in certain working environments.
3) THE ESTABLISHMENT OF A VOLKSWAGEN SHARES ACQUISITION PLAN FOR EXECUTIVES
The share allocation scheme is not an incentive compensation system
Regarding long-term bonuses, the Volkswagen Group has chosen to allocate virtual shares to its executives every year through a performance share plan. The latter will receive, after a period of three years, a payment indexed to the increase in the value of the shares and the level of profits associated with them. The German company highlights the link between incentive compensation and equity value as a means of sending a "positive signal to investors".
Our expert opinion: this part of the scheme communicated by Volkswagen does not fall under a system of incentive compensation. This is a scheme for the retention of executives and aimed directly to retain them over the next few years. The essence of variable pay compensation is the valuation of performance, not the retention of talent.
Nevertheless, the interest of a system of remuneration based on the value of shares lies in an advantageous taxation. Indeed, compared to the system of traditional performance bonuses where there are a number of social and tax charges, this valuation scheme through virtual shares is relatively advantageous from a tax point of view.
