Reference no: EM133043526

Volkswagen Changes How It Pays

Volkswagen (VW) has an integrity problem. Volk-swagen was discovered to have installed software that sensed when an engine was being tested for emissions and (temporarily) reduced emissions to a level that would pass the test. In actual driving conditions, however, VW diesel engines emitted emissions up to 40 times the legal limit. VW's mar-keting campaign had emphasized the wonder of the diesel engine's performance combined with environmental benefits, even though it was not true. That campaign in turn was a vital part of VW's Strategy 2018 growth plan to bypass General Motors and Toyota to become the world's largest automaker. Employees were subjected to tremen-dous pressure and intimidation from the top cas-cading down to every level to do whatever was necessary to achieve this growth goal (and keep their jobs). This apparently included engineers "willing to commit crimes to defraud the public."As a result of this scandal, multiple legal actions have been brought against the company. VW has entered into settlements of civil lawsuits brought by drivers who found themselves stuck with noncompliant vehicles. This includes the largest class action settlement ever. The company has also paid criminal fines that together total nearly $25 billion (so far).In an effort to avoid such problems in the future and to "quell investor ire" that executives earned large bonuses (despite their role in the scandal and large VW losses), the company is changing the way it pays. No bonuses will be paid in the future if certain financial objectives are not met. Base salary will be increased 30 percent, but the total amount of base salary plus bonus that an executive can receive will now be capped at $10 million for the CEO and $5.5 million for other board members. Also, for the first time, executives will be given company stock, presumably in an effort to better align their interests with those of shareholders. It appears that this stock-based com-pensation is not subject to the caps. Thus, if share-holders do well, executives can still do quite well.

Questions

1. What caused the Volkswagen scandal? What can you infer about the nature of its former pay strategy and the role it may have played?

2. Consider Volkswagen's revised pay strategy. How well do you think it will succeed going forward? Do you have suggestions for other changes? Explain.