BSMA-Block C, MW 7:30-9:00am February 17, 2021 Group 1 Espina, Mary Elizabeth Resuera, Jeri Leigh Malayao, Lyka Suerte, Marianne Malinao, Josette Rochelle Tamayo, Jebrelle Miculob, Jhaia Yarot, Donalyn Isabel Pangatungan, Sherrie Jane ____________________________________________________________________________ In 2006, an investigative news program sent a TV reporter with a perfectly good car into a garage owned by National Auto Repair (NAR). The report came out with a new muffler and transmission and a bill for over $8,000. After the story was aired on national TV, consumers began avoiding NAR, and profits plunged. What is the problem, and how do you fix it? a) Who made the bad decision? Answer: The mechanic who recommended and performed the unnecessary repairs. b) Did the decision maker have enough information to make a good decision? Answer: Yes, we believe that it is only the mechanic who is the only one with enough information to know whether the repairs are necessary. c) Did the decision maker have the incentives to make a good decision? Answer: The use of quotas, commissions, or similar compensation provides incentives for the mechanic to make good decisions however, his judgment was clouded by his greed to earn more which lead him to make unnecessary repairs. NAR tried 2 different solutions but both failed. 1) The company reorganized into two divisions: one responsible for recommending repairs and the other responsible for doing them. 2) Those who recommended repairs were paid a flat salary but those who did the repairs were paid based on the amount of work they did. Why did NAR fail? The reorganization into two divisions was unnecessary because the one responsible for repairs is also capable of recommending them. And with the reorganization, it is possible that the two divisions would begin colluding and the issue would still persist. As the recommending mechanic would still make unnecessary repair recommendations in exchange for a portion of the service mechanic’s incentive pay for the repairs. The second solution also failed because although the flat pay removed the incentive for unnecessary repairs, it also removed the employees’ motivation to work hard which leads to employees giving a low performance. Since, they earn a fixed amount of salary regardless of their recommended and performed repairs. How can you solve this? 1. Moles or informants The quality of performance may be evaluated through the reports of secret informants or “moles”. These people will pose as customers who would bring in perfectly good cars for repairs in order to test whether mechanics would make unnecessary repairs. Mechanics who would make the unnecessary repairs will be given penalties and may be fired depending on the weight of the offense. 2. Incentives The company should separate the rates for consultations and repairing. Commissions and incentives are tied to the amount of repair work, because of this mechanics recommend unnecessary repairs instead of inspecting the condition of the car. Hence, in order to prevent unnecessary recommendations, the entity should incentivize the consultation process. For the reason that since the mechanic is not getting paid for just consulting or inspecting the condition of the car, he ended up giving unnecessary recommendations and performing unnecessary repairs. 3. Random/Surprise Performance Evaluation Supervisors should conduct a random performance evaluation to its employees/mechanic to see if they are doing their job well. Supervisors should also know how to perform the work so that he/she can understand and identify the strengths and weaknesses of the employees’ performance.
