Profit-sharing and personnel policy at Audi

In December 1997, management and company works council at Audi AG in Germany concluded a works agreement on the introduction of a new permanent profit-sharing system for all employees from 1998. This is the latest in a number of new personnel policies that have been introduced since 1988.

In December 1997, management and company works council at the German car producer Audi AG concluded a works agreement on the introduction of a new permanent profit-sharing system for all employees, which comes into effect from 1998. This is the latest in a number of new personnel policies that have been introduced since 1988. Furthermore, both sides agreed the continuation of the 1996 agreement entitled Audi for work and maintenance of the production location (Audi für Arbeit und Standortsicherung).

Below, we look at the most recent agreements, and then provide a synopsis of the new personnel policies introduced at Audi during the last 10 years.

New works agreement on profit sharing

For the first time, Audi management and company works council have agreed on the introduction of a new permanent profit-sharing system for all employees from 1998. The profit-share will be paid on an annual basis for the previous financial year. The first profit-share, for 1998, will be paid in July 1999.

The new profit-sharing system consists of two components:

  1. a seniority-based fixed-pay component which is connected to pay grades associated with the employee's time of employment at Audi. The lowest grade corresponds to an annual minimum of DEM 1,000 per employee;
  2. a variable profit-sharing component depending on target figures which have to be defined annually. Indicators include the net income/turnover ratio, productivity, quality and absenteeism, all measured at enterprise level. This component can amount for more than DEM 1,000 per year and employee.

In 1998 all employees will receive a one-off lump-sum "jubilee" payment of DEM 1,200 and a seniority-based extra payment of between DEM 200 and DEM 1,200.

According to Andreas Schleef, personnel director at Audi, the intention of this scheme is to reward the good performance of employees and to foster motivation and identification. Xaver Meier, chair of the company works council, regards the new system as an appropriate means to reward the employees for their effort, especially regarding the recent introduction of new product lines.

Continuation of the works agreement on work and location security

Management and company works council also agreed to continue the 1996 works agreement entitled Audi for work and maintenance of the production location until 31 December 2001. This accord is associated with the decision to produce a new model at the company's production location at Neckarsulm.

The 1996 works agreement was valid until the end of 1998 and included the following:

  • a no-redundancies clause;
  • the maintenance of the number of vocational trainees;
  • the taking-on of all vocational trainees who successfully finish their apprenticeship;
  • the provision of qualifications in order to keep jobs; and
  • the further improvement of working time systems.

Audi's company and personnel strategy

The accords on profit-sharing and the continuation of the 1996 agreement have to be seen in close association with the strategic goal of the Audi Group to become a global company. According to Herbert Demel, chair of the management board, "opening up new markets, customer proximity and improving cost structure are the essential basis for [Audi's] competitiveness. Only this competitive strength allows [Audi] to protect jobs and create new ones."

Audi's business strategy is reflected in the three main goals of international competitiveness, growth and maintenance of jobs. In 1996, Audi was present on 120 markets (compared with 90 markets in 1992) and produced at eight production sites worldwide. Since 1994, Audi has produced high-technology engines at its production site in Györ, Hungary, and in 1996, it decided to move its engine production capacities from Ingolstadt (Germany) to Györ from 1997-8. Audi regards composite production of some of Audi's models in Germany and Hungary from 1998 on as a means of securing jobs in Germany while allowing it to benefit from the cost advantages of Hungary. In 1997, the Audi Group created more than 2,800 new jobs (2,200 in 1996), most of which were in Germany. Currently, the Audi Group employs a total of 38,000 people in Germany, Brazil, China, Hungary, Malaya and South Africa.

As regards Audi's industrial relations and personnel policy, a number of significant changes have taken place during the past 10 years.

  • The introduction of working time accounts (1988). All hours worked are collected in a "working time account". Payment is detached from the actual individual hours worked - ie, a constant monthly salary is paid on the basis of the working time specified in the employment contract, independently from the actual hours worked. Overtime can be exchanged for leisure time. This measure allows Audi to react flexibly to demand and production fluctuations, as well as to secure jobs.
  • The introduction of generous parental leave provisions (1990). If employees who have either completed their vocational training at Audi or graduated form a higher education institution want to re-enter the labour market after parental leave, they are guaranteed a job at Audi up to their child's seventh birthday. This is also valid for employees who finished vocational training in a training occupation which is also offered at Audi.
  • The abolition of white-collar/blue-collar distinctions in pay and the introduction of a unitary payment system ( Entgeltsystem) (1994). Since then there has been equal pay for comparable jobs.
  • The introduction of group work (1994). In order to improve quality and to secure jobs, group work in production was introduced. A precondition for this was the establishment of a unitary pay system (see previous point). Group work at Audi is characterised by flat hierarchies and the integration of several competencies in groups of six to eight employees. Each member bears more responsibility and is allowed to exercise different functions. The intention was to increase efficiency, productivity, quality and the international competitiveness of the company.
  • Increased flexibility of working time (1996). The works agreement on work and location security included provisions regarding the greater sophistication of Audi's working time systems. Flexibility of working time was achieved through changes in both shift systems and flexitime. In 1996, there were around 200 working time models at Audi. This reflects the intention to bring together employee preferences and company needs through specifically tailored working time models.
  • The general introduction of profit-sharing (1998). For details see above.

Commentary

The new accords have to be seen in close association with the general strategic goal of the Audi Group to become a global company and the related specific goals to improve (labour) cost structures as well as (cost) competitiveness. In order to achieve these goals, Audi has introduced a number of new personnel policies during the last 10 years, the most recent of which was the introduction of a general profit-sharing system. The seniority element in the scheme will favour older employees, whereas the variable element, tied to several collective enterprise-level performance indicators, means that employees will benefit from the overall performance of the enterprise. Since the individual contribution to overall enterprise performance is small and as such is not taken into account under the Audi scheme, the arrangement has to be seen as a morale-booster and loyalty-generator implying lower labour turnover and absenteeism, rather than operating as a direct productivity incentive.

Apart from the implications for Audi, from a broader industrial relations perspective this profit-sharing agreement leads us to the broader topic of profit-sharing for non-managerial employees in Germany. Folklore says that German industrial trade unions in general oppose profit-sharing systems for non-managerial employees, especially those schemes which focus on individual performance indicators. This opposition is said to be on grounds of: the variability of pay; the pay-performance link; the transfer of entrepreneurial risks to the employees; possible anti-solidaristic effects; the diminished relative importance of seniority in pay determination (younger and newer employees are less likely to be union members); the fear that the expected share bonus might be viewed as substitute for wages or wage increases; and the small say industry unions might have in establishing such plans at company level. In fact, most general profit-sharing systems were introduced by management-works council agreements with little if any direct union influence.

Nevertheless, more and more German companies establish profit-sharing schemes not only for their managerial staff, but also by works agreements for their non-managerial employees. Earlier in 1997, for example, Daimler Benz introduced general profit-sharing for all its vehicle production section employees. What are the reasons for this development? Here are some preliminary speculations.

First, in the last couple of years many companies and their works councils have concluded successful pacts for employment at company or establishment level, which in most cases included no-redundancy clauses in exchange for some sort of employee concession, such as working time flexibility. In most cases, the overall intention of such agreements was the desire of management and employees to "keep the boat afloat in heavy seas". As many companies are now over the worst, they may want to either reward their workforce for their cooperation and support during the storm, or to pay them for continuing to keep their demands moderate and/or to retain the flexibility arrangements.

Second, profit-sharing requires extensive communication of reliable information on the relevant performance indicators. Since management and works councils successfully worked together in difficult times, this might have fostered trust and thus have paved the way for further cooperation at company level. While in difficult times works councils might have examined the company's books to check that management was not "cheating" in order to improve profits by obtaining concessions, they now can perform an auditing function to ensure that the bonus formula is properly used and that the appropriate bonuses are paid. (Stefan Zagelmeyer, IW)

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