While GM and Chrysler have wallowed around in government muck and mire, Toyota has struggled to stop their steady slide toward becoming the next GM, and Ford is calculating their next employee buy out, Volkswagen has moved into first place in terms of global production levels … and now they kicked it into high gear.
I have been known to make a fairly radical prognostication from time to time and I will make one now – within few years Volkswagen will be increasing their lead over the rest, gobbling up Toyota and Ford market share, and they will emerge as the dominant auto maker of the next decade by a wide margin. While the press will attribute their success to some product or another, and the academics and economists will blather on about German culture, Volkswagen's acquisition strategies and the relative strength of the Euro, none of them will see the real impetus for the same reason they all missed the latest news from Volkswagen. There is a whole new ballgame beginning at Volkswagen that will change the rules.
"Starting next year, VW will introduce a so-called "long term bonus" plan, in which managers will be rewarded according to customer and employee satisfaction, as well as their achievements in sales and the company's rate of return. In addition, VW will no longer offer stock options." This according to Deutsche-Welle a few days ago. The article goes on to state that bonuses will be based on results in those areas over four years, rather than yearly or even quarterly stock values. Said VW Director of Human Resources Horst Neumann, "We want there to be a close relationship between bonuses and strategic objectives."
Fancy that – tying executive compensation to long term accomplishment of strategic objectives, including customer and employee satisfaction instead of having it driven solely on the basis of how much money can flow into an investor's pocket in the next couple of months.
The whole executive compensation flap that has raged over the last year missed the central point. The problem has not been how much these guys make – but what they make it for. Leaders who drive changes and improvements that create a great deal of value for all of the stakeholders – customers, employees, communities, suppliers as well as shareholders – ought to be paid a lot of money. The absurdity in the compensation systems has been the payment of outrageous bonuses and stock options to people for their short term manipulation of stock values accomplished by abusing the stakeholders – as well as the few remaining long term investors.
In one fell swoop, Volkswagen will be changing the scope of their management thinking, and taking it to a level most cannot fathom. Their managers will not only have to come up with good product ideas, but they will have to bring them to market and succeed with them in order to make money. They won't be able to simply outsource everything to some cheap place and collect a bonus- they wil have to follow through and be sure the output from the cheap place doesn't degrade the product and dissatisfy customers. They are turning the auto industry into a tortoise and the hare deal, and the smart money always goes on the tortoise.
The American business culture has long been based on image over substance. The name of the game in corporate life has been to conjure up a big idea - or embrace some superficial fad. Impress everyone with your insight and brilliance to make a splash, then collect your reward and move on long before the big idea plays out. The long term consequences of moving production to China and customer support to India have never been part of the compensation scheme. The mere announcement of such moves and rosy projections of millions to be saved can be relied upon to dupe the industry analysts (most of whom have never actually done anything in the industry) and rev up the stock values.
At the same time the Germans announced the new approach to incenting and rewarding management, a 17% stake in the company was bought by Qatar. Not too surprisingly, the common stock of VW has fallen, proving my point. You would think the average investor would be impressed – VW moves into the lead in global production, reaps a huge infusion of cash from a serious long term investor, apparently firing on all cylinders, but this is hardly a strategy to endear VW to Wall Street. Nobody is going to get rich churning VW stock in a matter of months. They have to wait years, but those willing to wait will do very, very well.