Carmaker Volkswagen said today it has overhauled its executive pay to make managers think more carefully about investment decisions and boost their loyalty to the group.
VW said up to 40 per cent of this year's annual bonus for senior executives would be dependent on economic value added (EVA) - a measure of profitability that charts returns above the cost of capital.
"We've adopted this system so that investment decisions are made more cautiously," VW spokesman Mr Dirk Grosse-Leege said. "EVA helps ensure investments are made in the right place at a time when costs have to be cut."
VW, long known for its high levels of capital spending as a proportion of revenues, said the new pay structure was part of a drive to reach a group net profit that at least covered the cost of capital employed.
Its spending levels have remained high this year, putting pressure on profits as it launches a huge number of new and updated models, including the fifth generation of its best-selling Golf model and a new Touran minivan.
VW stock was up 2.7 per cent at €45.86 today outperforming both Germany's blue-chip DAX index and a 1.6 per cent rise by European peers.
Stern Stewart, the management consultants that pioneered EVA, claims the method is the measure most directly linked to the creation of shareholder value. It is also used as an equity valuation method by brokerages including Goldman Sachs and CSFB.
The new pay system also includes performance measures for the group rather than just the individual brands which include Audi, Seat and Skoda.