Too Many Incentives at General Motors

David Kiley
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#GM, #Ford

As General Motors tries to climb out of the hole of recalls that have soared to 29 million cars worldwide this year, and cost the automaker more than $2 billion so far, the situation dogging new CEO Mary Barra highlights the tensions among financial executives, lawyers, and engineers inside car companies.

The GM recall train started out with a recall of 2.6 million vehicles, cars and trucks, finally fixed after clear evidence tied at least 13 deaths to a defect that was known at least in several corners of GM, if not at the top of the organization, for a decade. But the recalls have snowballed to 25.7 million in the United States, and about 29 million worldwide, as the automaker makes up for vehicles it should have designed better, fixed, and/or recalled over the past decade. And it’s only a little more than halfway through the year.

How does an organization get so turned inside-out that defects worthy of recall get buried, lost, or hidden for so many years? Read the reports on the GM issue, but it boils down to this: Finance executives face heavy incentives to keep the piece cost of vehicles as low as possible, even if it results in thousands of dollars in later incentives to lure buyers to vehicles with crappy interiors and bad reviews. Those costs are someone else’s problem -- usually the sales chief’s. Lawyers and quality control executives, likewise, are incentivized to keep recalls down and keep quality scores up by organizations such as Consumer Reports and J.D. Power and Associates.

Cost-cutting should not be encouraged or rewarded in a vacuum. But that is often the case unless a strong, circumspect CEO steps in to make decisions about what is best for the company—and not just for the next quarter.

Take the example of Ford. In 2006, according to “American Icon,” by Bryce Hoffman, Chief Financial Officer Don LeClair, who was the architect behind Ford’s massive $23 billion life-saving recapitalization months before the markets crashed in the fall of 2008, was hammering Ford Americas President Mark Fields to slash advertising as truck sales softened. LeClair had blocked Fields’ earlier attempts to offer longer product warranties on vehicles to build customer confidence in the brand as well as to offer carbon offsets for Ford vehicles. LeClair’s team also ordered cutbacks on standard features on some vehicles: a¬ll too costly, in LeClair’s book. Fed up with LeClair dictating such moves instead of offering counsel, Fields lunged at the CFO at a meeting and was halfway across the table before Chairman Bill Ford intervened.

It is up to a CEO and his or her regional chiefs to set the tone, culture, and incentives at a company so that financial executives don’t wreck the products, brand, and reputation of the company for the sake of a few nickels per car and the next quarterly report. And, as any finance exec will say, saving a new nickel per car is considered a huge victory. Likewise, lawyers and quality control staff have to be told that the goal is not to keep recalls to a minimum but to make sure every GM vehicle on the road is as safe as possible. Plant workers also ought not to have throughput objectives, which too often result in vehicles with known problems shipping out on car carriers.

Having the right incentives for people is critical. Consider the perverse incentives at Veterans Affairs that led to the recent scandal. Hospital heads were rewarded for keeping wait times short, driving them to keep sick veterans on the outside of the system looking in, so treatment delays were never even logged. It had to be hard to anticipate that people could be so morally bankrupt to manage the process that way, but let’s be prepared to see the worst in people.

The cost of cheapening products at the design and procurement stage, and not acknowledging defects early, is much larger than not doing the right thing. Consider that Ford executives all but cut Goodyear Tire out of sourcing Ford Explorers tires in the late 1990s for the sake of less than 20 cents a tire. It’s arguable, but that level of penny-pinching probably had a role to play in the high failure rate of Firestone tires on Explorers in the late 1990s, billions in losses attributed to the Explorer-Firestorm fiasco, and the ouster of CEO Jacques Nasser. Consider the costly fate of the Dodge Caliber, Jeep Compass, and Patriot when Daimler executives suddenly cut the costs for interiors by 40 percent, with no apparent concern about scathing vehicle reviews and third-party ratings that cost thousands per vehicle in discounts.

If GM CEO Mary Barra wants to truly change the culture at GM to put product quality and reputation ahead of quarterly warranty and recall costs, and convince the world that it is a new GM, then she is going to have to change the whole structure of incentives at the company. Financial and engineering executives must be held accountable for seizing and correcting quality and design failures rather than minimizing their number. More heads have to roll, especially in GM’s legal department, to show a GM workforce that bad actions get punished with termination.

If you are going to change bad culture, then you have to get rid of the staffers perpetuating the old one.

baconpope
Despicable. It's almost as bad as writing an op-ed about a topic of which you obviously have only a passing knowledge.
How many cars have you designed and built? Can I assume that it is somewhat less than GM? What GM CEO Mary Barra needs to do is make good products AND good profits: satisfying auto journalists might be third on the list.
zdkibler
@baconpope Yeah, and the author is positing one way in which she might do that.

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