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Ericsson to base managers' bonuses on cash flow
By Christopher Brown-Humes in Stockholm
Published: May 10 2001 18:13GMT | Last Updated: May 11 2001 01:57GMT
Ericsson, the Swedish telecommunications giant, has scrapped its normal annual bonus system and made this year's payment for its 3,000 top managers dependent on cash-flow objectives being met.
The move underlines the group's determination to restore positive cash flow, after a negative flow of SKr17.7bn ($1.7bn) in the first quarter. It has not indicated when it is likely to achieve positive figures.
One London-based remuneration consultant said it was rare for a company to use cash flow as the sole measure of a bonus scheme.
The scheme is part of a broader cost-cutting, restructuring and refocussing programme designed to get the group back into the black after the SKr4.9bn loss it suffered in the first three months. It has indicated it will cut as many as 22,000 jobs this year, 20 per cent of its workforce, to counter slower market growth.
Last year, under Ericsson's traditional short-term incentive scheme, top managers were able to gain up to 40 per cent of their salaries by beating four corporate or divisional financial and growth targets that were relevant to their jobs.
It has now replaced all four measures with a single cash-flow target on the orders of Kurt Hellstrom, chief executive. Some managers will have their bonuses linked to group cash-flow targets, and others to particular divisions.
Ericsson said it had to focus more on cash flow now that market growth was slowing. "There is an urgent need to change the way we are doing business," it said.
It stressed it would not be cutting investments in its core operations, having already indicated it intended to double investment in its third-generation systems business.
Slower customer payments are one of the main reasons for the group's cash flow woes. Ericsson said it had to wait an average of 82 days for payments in the fourth quarter of last year. In the first quarter of 2001, the figure rose to 116 days. Had it kept the 82-day level during the first quarter, cash flow would have been positive by SKr2bn.
Cash flow also worsened in the latest quarter because of a SKr2.6bn increase in inventories.
Analysts say negative cash-flow could prevent Ericsson from being able to offer vendor financing packages to telecoms operators, allowing competitors such as Nokia to increase their share of the telecoms infrastructure market.
Sten Fornell, finance director, ruled out any rights issue when the group presented its first quarter figures last month. |
