Tuesday, 27 October 2009

BMW Links Executive Pay to That of its Line Workers

While the salaries of UK FTSE-100 chief executives are rising twice as fast as salaries for shopfloor workers, in Germany, BMW has become the first major company to link the bonuses of its top managers to those of its assembly line workers.

The company stated that creating a fairer work environment was its reason for adopting this approach. Given BMW's size and weight in the global business market, other firms seem set to take notice.

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.

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 underclass, 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," said the spokesman during an interview with Spiegel Online.

BMW Links Executive Pay to That of its Line Workers
  • What are your view on such an approach?
  • How do you think that this approach will be viewed by (a) senior managers and (b) lower level employees?
  • Do you think that this approach is likely to spread beyond Germany?


  1. What a marvellous idea!! BMW should now stand for Blooming Marvellous Wemuneration or alternatively Bonus Mein Workforce (no good at German but you get the idea).

    Lower level employees I’m sure will be partying on down. As for Senior Managers, well a wake is a form of party, isn’t it?


  2. Profit sharing is not a new concept, although it is a good way for businesses to deal with recession. For example, Lincoln Electric of Cleveland Ohio had been linking bonus payments of line workers and management (as well as their pay) since 1934. They were Ohio's 2008 exporter of the year. Back in eighties there was even a book by Martin Weitzman “The Share Economy: Conquering Stagflation“ , main theme of which was profit sharing. Basically it is approach based on a base salary + spot bonuses depending on the profit taking, sales etc.
    During the recession it is a good way to motivate people and keep them employed. Especially if we consider that BMW went through massive layoffs during this crises, the numbers were in thousands. In long run though it will be tough for executives to justify such a sudden decrease. And there a few points that a CEO has to look at before taking this approach:
    1. What will be the base salary for line workers, managers, executives
    2. Will new ways of pay system be introduced like piece work
    3. The formula for calculating bonus being paid at the end of the period
    4. Grading of employees
    5. Define what behavior and actions are eligible for recognition
    6. KPI that will be rewarded for line workers, managers, executives.
    7. Establish who has the ultimate responsibility for administering the program
    8. Job security
    9. Identify exclusions, if appropriate
    10. Establish the program procedures and guidelines that will be used to recognize an individual.
    For instance, when Lincoln electric wanted to take over GM plant 84% voted against profit sharing system and only 16% voted for it. Not everybody is adapted for socialist system.

    Lets take a closer look at BMW today, the average salary of a worker on BMW's assembly line is around €40,000 a year while an executive board member's salary is around €1million. This can be calculated as a ratio of top executive to worker 25 to 1, ratio in Lincoln Electric is 14 to 1, a normal ratio in Japanese company is about 20 to 1, normal American ratio is 100 to 1. So, we can see that there are discrepancies, and they are not small.

    It seems like, when everyone in a large corporation knows that their income is based on an equal formula…from the CEO to the people on the assembly lines… the policy will promote a climate of team work and the perception of fairness. But is it so?

  3. Kirill:

    Excellent and detailed response, so many thanks