GE GE Aerospace

Procter & Gamble Co. is overhauling its incentive system for managers as part of an effort by Chief Executive David Taylor to cut through the company's bureaucratic morass and jump-start sales growth.

Starting Friday, annual bonuses for thousands of senior managers will be tied more directly to the performance of each leader's specific business unit instead of being based on the company's broader, regional operations.

"We are trying to get a clearer line of sight between an individual's responsibilities and their results and their compensation," Chief Financial Officer Jon Moeller said this week in an interview. Annual bonuses account for less than 10% of a lower-level manager's pay, while the senior executives may receive more in bonus pay than salary.

P&G executives have acknowledged recently that the maker of Pampers diapers and Tide detergent has been too slow to respond to changing trends, from a shift toward premium products in China to the phenomenon of subscription services for consumer staples such as razors.

The company's annual sales growth has sputtered since the recession, hitting a four-year low of $70.7 billion in 2015. The company has cut more than 20,000 jobs since 2012 and sold off more than $20 billion in brands it considered outside its core focus.

Mr. Taylor, who took over in November, and his lieutenants see the company's sprawling corporate structure and lack of accountability as a hurdle to change.

Under the P&G's old reward system, annual bonuses were doled out to managers based on how well P&G performed overall in their region. For instance, those in charge of laundry-detergent sales in the U.S. would receive bonuses if P&G performed well in the U.S. overall, even if detergent sales fared poorly.

"Now, they will get paid based on U.S. laundry-detergent results," Mr. Moeller said.

Incentive changes are part of a broader effort to change P&G's culture. The company also aims to move away from a strictly promote-from-within mentality and is working to keep the most experienced workers jobs where they have expertise rather then shifting them around the company.

"This is simply one brick in the foundation as we change our culture to drive the leadership behaviors we need to win," a P&G spokesman said.

In making the change, P&G is tackling a conundrum faced by many multinational companies: whether to emphasize the performance of individual business units, regional divisions or the larger company.

"It's a very fine balance," said Raffaella Sadun, a Harvard Business School assistant professor of strategy. "Incentives should reflect individual performance of the unit, but the subunits are part of the larger unit. How do you reward autonomy without jeopardizing the performance and the synergies of the larger business."

P&G is the latest corporate heavyweight to rethink entrenched employee reward programs. General Electric Co. and Goldman Sachs Group Inc. are among the companies looking to re-engineer how they evaluate and pay employees.

GE in recent years has made a number of tweaks to its compensation in an effort to better align incentives with outcomes, and to incentivize employees to work in teams. The company has been considering doing away with staples such as the annual raise and a five-category rating system for employees. Goldman Sachs recently said it would no longer rate staff on a scale of one to nine, and would provide more frequent feedback, though bonuses will still be tied to annual performance reviews.

At P&G, regional units have been getting more autonomy in deciding how to bring their products to market, from determining pricing to working with retailers on how goods will be arranged on store shelves, Mr. Moeller said. Major decisions around allocation of research-and-development funds and budget allocation will continue to be made by executives with global purview.

Sundar Raman, P&G's marketing director of fabric care in North America, said having more say over U.S. retail strategy helped P&G wean some big chains off profit-eroding buy-one-get-one-free deals.

Mr. Raman said he was able to use his new authority to set pricing locally to get retailers to agree to other types of promotions that would help them sell more laundry products without big giveaways.

"That was something that cannot be done by scale or by working across geographies," he said. "It's very specific to the Wal-Marts and the Targets and the Dollar Generals in the United States."

Write to Sharon Terlep at sharon.terlep@wsj.com

(END) Dow Jones Newswires

June 30, 2016 16:45 ET (20:45 GMT)

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