WMBA 6201 Week 1 Stated Versus Paid Values Post Example

Week 1 Discussion: Stated Values Versus Rewarded Behavior

The Wall Says Customers for Life; the Pay Plan Says Hours Billed: Published and Paid Values in a Dealership Service Department, Read From the Bonus Formula and the Last Promotion

I work in the service department of Cascade Ridge Auto, a composite franchised dealership in Boise, Idaho, with 14 technicians, five service advisors and a service manager. A sign above the service drive reads "Customers for life," and the dealership's stated values talk about honesty, fixing it right the first time and treating customers like neighbors.

The pay plan tells a different story. Technicians are paid flat rate: they earn a set number of hours for each job, whatever time it actually takes, so a technician who finishes a two-hour brake job in ninety minutes earns two hours. Advisors earn a small base plus commission on the parts and labor they sell. The only reward tied to "customers for life" is a quarterly bonus of $150 for advisors whose customer satisfaction scores exceed the manufacturer's target, which most months is less than a single day's commission.

The last promotion confirms the pattern. When the assistant service manager position opened last spring, it went to the advisor with the highest monthly sales, whose satisfaction scores were the lowest of the five. The report the general manager reads first each morning is service department gross profit, not comebacks, the vehicles that return because a repair did not hold.

People respond to the paid values. Technicians rarely take the time to diagnose an intermittent problem fully, because the job pays the same either way and the next car pays more. Advisors recommend fluid flushes and filters at nearly every visit. Comebacks, cars that return because the first repair did not hold, run about 4 percent of repair orders, which costs the department twice: the technician redoes the work unpaid, and the customer's trust falls.

Kerr (1975) gave this pattern its name: the dealership hopes for repairs that hold while paying for hours and sales, and then is surprised by what it gets. Holmstrom and Milgrom (1991) added that when a job has several tasks and only some are easy to measure, strong incentives on the measured tasks pull effort away from the rest.

What is one measure your organization rewards that works against a value it publishes?

Until the pay plan rewards the stated values, the sign above the drive will remain a description of what the dealership hopes for.

Reply to Dana

Dana, you said your hospital's values match its rewards because nurses receive recognition awards for compassion. I wonder whether those awards carry anything like the weight of the productivity standard you mentioned, patients per shift. If a nurse skipped the award for a year, would anything happen to her pay or promotion?

Reply to Victor

Victor, your example of a software team rewarded for features shipped while leaders talk about quality fits Kerr's argument well. Gibbons (1998) noted that the problem is often not bad intentions but that the measurable part of the work is easier to pay for than the important part. Has your team tried adding a measure of defects found after release?

References

Gibbons, R. (1998). Incentives in organizations. Journal of Economic Perspectives, 12(4), 115-132. https://doi.org/10.1257/jep.12.4.115

Holmstrom, B., & Milgrom, P. (1991). Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, & Organization, 7(Special issue), 24-52. https://doi.org/10.1093/jleo/7.special_issue.24

Kerr, S. (1975). On the folly of rewarding A, while hoping for B. Academy of Management Journal, 18(4), 769-783. https://doi.org/10.2307/255378