In efforts to better address mounting product quality concerns, Michigan-based automotive giants Ford (NYSE:F) and General Motors (NYSE:GM) are now tying staff bonuses to the quality of its products, essentially making the number of units sold or produced irrelevant when it comes time to calculate how much to give the tens of thousands of employees working for the two companies. Now, instead of relying on volume or growth gains, bonuses will be factored on the improvement in quality in the vehicles using a combination of internal and external data as a measuring stick.
“Many of the companies are trying to do whatever it takes to increase their quality level,” David Cole, chair emeritus at the Center for Automotive Research, told The Detroit News. “Companies have generally focused on profitability, but right now quality is a center-stage item. If you have better quality, you’ll likely have better financial performance.”
About 26,000 salaried Ford employees around the world, from administrative assistants to engineers right on up to CEO Alan Mulally, could potentially earn smaller bonuses this year if the company fails to meet its own quality standards, the site said, adding that 20 percent of bonuses paid for 2014 (which are paid in early 2015) “will hinge on the company meeting quality standards, which include the number of what the industry calls “Things Gone Wrong” — a standard metric that measures problems in vehicles — as well as the costs of warranty claims and customer satisfaction.”
That’s up from just 10 percent from the bonuses paid for 2013, The Detroit News pointed out. “It shows how serious we are about improving quality at the company,” Ford spokesperson Todd Nissen told the publication.
“Clearly, [Ford and GM] both have issues but they’ve definitely improved their quality over the years,” said Michelle Krebs, an independent auto analyst. “It’s a good example of them trying to make the top people accountable for quality and not passing the buck on down the line.”
For GM, those issues are manifesting themselves in the form of enormous recalls, including the now infamous 2.6 million vehicle ignition switch problem that is the subject of many federal investigations. Ford hasn’t been completely immune either, as its Escape crossover SUV has been particularly troubled in the last few years for various reasons, mostly one involving fires; rust has also been a perennial enemy for Ford’s older models.
The decision to base bonuses on quality also represents a shift in how the automakers think about driving sales. Specifically, Ford’s compensation committee said it “increased the importance of the Quality metric because of its criticality to [Ford’s] business, and included a customer satisfaction component to emphasize the Quality metric’s relation to [Ford’s] reputational value,” The Detroit News said.
The view is more of a long-term investment in future sales and shies away from the potentially harmful ‘sell more vehicles now’ mode of operation that can land a company in a mess not unlike GM’s ignition debacle.
Though it’s a fairly straightforward and sensible move for improve one’s product, it may have come too late for the sake of their reputations; over the years, despite some decent efforts, American automobiles have often trailed in quality behind many international companies in one regard or another. It was able to get away with this by not being the worst, as budget brands like Kia and Hyundai seemed to fill that gap, but those two brands have made significant gains in quality, and American firms are finding itself plagued with quality issues from years past.
That tide may be changing, though, even if slowly. “We’re really pleased with the quality levels we’re seeing, literally all time record highs in some parts of the world,” Ford Chief Operating Officer Mark Fields said during a first-quarter earnings call last week. “And even here in the U.S., we’re starting to see some encouraging quality data.” Ford hit 88 percent of its quality goals (up from 68 percent in 2012) worldwide last year, but met zero percent of its goals when it came to “Things Gone Wrong” in both the Americas and Asia-Pacific-Africa,” The Detroit News said.
The big question now is whether tying the bonuses to quality improvements will have a real-world effect; quality issues may not become apparent within a year, and take time to incubate before the problem is realized and addressed. We imagine it will take some trial and error to hone the method, but if it leads to better built products, then that’s something that everyone can benefit from.