Monday, April 14, 2014

Getting Mechanic Performance Pay to Work Better


C. Kirabo Jackson and Henry S. Schneider have an interesting new paper, "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay." Mechanics work on commission but do not seem to be pointing out to the customer all of the repairs that could be done. In the experiment, management provided auto mechanics with checklists of possible repairs to be filled out when a customer arrived so that possible additional repairs were not overlooked. The checklists worked - repairs and mechanic performance pay both increased. This was quite profitable for the firm. However, the additional repairs increased the mechanics' hours to the point that, when the three-week experiment ended, the mechanics abandoned using the checklists. The extra income was not worth their time.

This suggests two possible solutions for the employer to keep mechanics using the checklists. They could simply require checklists be used and monitor compliance. Or they could cut into the profits and increase the mechanics' commission rate to make it worth their while.

14 comments:

  1. Wow what a great post. This is why I read this blog. This is very actionable and something a real business would do! I love it!

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    1. thanks for your insightful commentary

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  3. This blog post was great as it ties in many points you make in your book in the very first chapter with the example of NAR: bad decision making, having enough information to make decisions, and incentives to make good decisions. Later, chapter 4 brings up the concept of incentive pay and pay to performance. As a personal banker I can completely relate to this post and the section in the book where you state “Salespeople compensated on sales commission will earn less if the macro environment does poorly, through no fault of their own. (Froeb, McCann, Shor, & Ward, 2014) We have “checklists” of sorts as well; people were not really using but now they tally up how many of the items on the list customers “enroll in” this has also become part of our score card which directly affects our paychecks. So of course, we all use them not even though we don’t want to. It feels counter-intuitive that we spend more time completing paperwork than we do actually selling.



    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics; A problem solving approach (3rd edition). Mason, OH: South-Western Cengage Learning .


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  4. This was a very interesting experiment, because at first glance it appears to be a highly effective way of generating additional revenue for the company and additional income for the employees. The problem to me is that the company needs to cut into the profits and increase the mechanics’ commission rate to make it worthwhile. One thought is that keeping the list as compliance item, will just make for debate and not really generate the additional work that can actually be done to generate revenue. As stated in the text, it’s important to tie pay to performance measures that reflect effort. (Froeb, McCann, Ward & Shor 2014) The extra income for the mechanics were good for a short lived period and obviously the extra money did not significantly help their financial position or the additional compensation wasn’t a good enough driver for them to find the extra work. I say this because in my career, I have worked with folks who are happy to work from 9-5 and go home to their families and really don’t want to make the extra money unless they really need it for a specific time (e.g. Holiday season, unexpected expense item). As a manger or owner, I believe you have to find the right balance of those whom are willing to do the extra work and gear it so those individuals have the opportunity to make additional income for themselves and revenue for the company. It’s important to control the work at the same time, because as shared in the book there may be areas of sabotage, where the employees create additional work that is not necessary. This can lead to long term monetary damages to the company and loss of business if fraud is being committed
    Luke, F., McCann, B, Shor, M., & Ward, M. (2014). The One Lesson of Business. In Managerial Economics (3rd ed., p. 38). Mason: South-Western Cengage Learning

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  5. In chapter 4 of Managerial Economics it takes about incentives to pay and using the marginal analysis to help encourage employees to work hard. The test run of using the checklist to make sure all repair options were being covered was a well thought out start. But after the experiment ended, so did the checklists and the workers incentives. The company was not aligning the payoffs into the performance measures, in other words the amount of the employees had to do was not worth the extra money they were earning.
    Management needs to determine what incentives the employees are looking for. Money may not always be the answer, sometimes they have to think outside of the box and offer incentives such as extra paid time off. The manager needs to find balance between the amount work employees are encouraged to do and the amount the company needs to turn to make a profit.

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    1. The mechanics have, in this case, reached the point where the marginal payoff is just not worth it based on the drawbacks of working an inordinate number of hours. It seems like there should be a limit to the number of hours each employees works. There should be an average point that the incentives should be considered "inneffective". In other words there would be enough of a productivity dropoff that it is not financially beneficial to the company to push the employee any further. Once this point is found, other alternatives such as hiring additional employees or like you mentioned, thinking outside the box and offering other non-monetary incentives may produce a better return for the company. It seems that the incentives based on performance are highly beneficial to the company up to the point that its employees get burnt out. However, if this process can be managed properly, the extra services and associated revenues/profits would more that pay for the incentive program.

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    2. When the incentive program is abused or is abusive?
      What happens when the motivations for the incentive programs for auto repair are abusive? In the late 1980s – early 1990s a major department store (Sears Automotive) chain went under scrutiny for illegal and unfair business practices in California and New Jersey. The scam was based on the managers and mechanics systematically recommending unneeded and unnecessary repairs to customers. Both states investigated and pursued fraud charges after hundreds of complaints filed to the Department of Consumer Affairs. Employees (mechanics and managers) were required to “sell” specific number of unneeded parts and services such as shock absorbers and struts for every hour worked. Simple brake jobs were bumped up to included unnecessary services such as fixing or replacing master cylinders or calipers. In essences, ripping off the unsuspecting and uneducated trusting consumer. If the mangers and mechanics failed to produce enough extra business, they could have their work hours cut or be transferred to a different department.
      Undercover agents brought in test vehicles to document the practices. Formal charges were filed by the states as well as civil lawsuits. This caused a loss of confidence in Sears Automotive shops in those two states. Sears upper management, its chairman, denied all charges and allegations. However, the stores listed, had changes made in their advisory systems and payment arrangements.
      Reference:
      The New York Times, Business Day, June 23, 1992, Fischer, Lawrence M, “Sears Auto Centers Halt Commissions After Flap”

      Lee Lichtenstein

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  6. Very beneficial information. Thanks for informing.

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  7. This is fine anyway nice try guys keep on hard working, truly nice info! Auto repair in Arlingtonb Heights Illinois

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  8. If you adopt incentive pay, you get higher productivity but also greater inequality (Froeb ET all, 2014 pg. 46). Sadly not all employees are created equally. Incentive programs work well when the right metric is identified and the goal is reachable. As stated incentive pay promotes productivity and exposes inequality. At times it is as simple as the high performers will just separate themselves even further from their lower performing counterparts to earn the bonus. At other times the goals are just too out of reach for the general population of the workforce to ever achieve. Regarding front line customer facing employees it is best to incent based on functions that they can control, for example safety. Incenting employees to work safely will reduce accidents and injuries. The cost savings that result from reduced fender benders and lost days at work can be significant. Incentives related to safety can also show employees that the company cares, which can be motivational to employees resulting in higher productivity. How hard to work is an extent decision, so marginal analysis be used to design incentives to encourage hard work (Froeb ET all, 2014 pg. 44).
    JG
    Froeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.

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  9. With regard to mechanics compliance using checklists, clearly the intent was to generate more revenue and profit while incentivizing the mechanics to do so by rewarding them with a "commission". Without any resource management system, it is almost impossible for the mechanics to not over book themselves so I can see why it was prone to failure...they waved a carrot in front of mechanics, they bit and ate it but ate too much! Solution; manage how much you can realistically produce so they don’t overbook OR hire additional support staff for mechanics who are not on commission to help complete the workload.


    Romak, S. (2012, January 9). Performance Based Technician Compensation Really Works! | imageSource Magazine. Retrieved from http://www.imagesourcemag.com/ism-article/performance-based-technician-compensation-really-works

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