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Rafi Hamid AutoExecutive

Rafi Hamid AutoExecutive President-CEO

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Times are tough and we all know it. Along with other cuts, some jobs are being lost. For the employees that you do have, make sure you don't do anything to create perverse incentives during an already challenging period. By definition, perverse incentives create undesirable, unintended consequences. If you stop giving any real raises, for example, make sure to think through the possible consequences. You may think what you're doing is improving the bottom line, and it might in the short term, just make sure it's not going to hurt you in the longer term.

A client recently shared a cautionary tale about the unintended consequences of the elimination of any significant merit raises. The management at a large dealership decided to help combat declining sales by not allowing anyone, under any circumstances, to receive more than a 3% annual raise. They didn't communicate the policy to employees ahead of time and it wasn't clear if this policy would be applied to management. When the annual reviews began taking place, employees started talking. They quickly figured out that no one received a raise of any significance-- including the super stars. And still, there was no discussion from management about it.

Well, guess what started happening? Almost immediately, most people started performing at a lower level, not low enough to lose their jobs, but just doing what needed to be done and no more. And most of the dealership's rock stars started looking for jobs elsewhere. Instead of saving the dealership money, it cost them a fortune in lower productivity and job turn over. Within six months new management was brought in and the unspoken, unwritten policy was reversed.

A temporary tightening of the belt that is clearly articulated to everyone affected is one thing. "We're all in this together and the decrease has nothing to do with your overall performance and management is under the same policy as staff members." Most people can understand and accept a temporary policy in tough times, especially if it applies to management, too. And, be sure to let employees know about it ahead of time. This just goes back to eliminating "surprises" in performance reviews. Give people the time to understand and accept what's going to happen before it actually happens. Someone who did exceptional work and produced for the dealership should know that they will be rewarded in some other way for now, and also how you will reward them in the future when times are better.

Straight commission roles are easier: you sell, you make money. Positions that are a mix of salary and commission, or just salary can be trickier and you can more easily motivate people to behave undesirably. Just think seriously and critically about the consequences of financial policies changes before you enact them. Will they really save the dealership money, or are they merely a quick fix that will cost you in the end?

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