We have talked about skimping on advertising and insulting the customer by underhanded surprise charges here on DailySpec. Many companies also make mistakes in a downturn with their workforce. Since pay is generally a big expense, it often gets shortsighted management by the numbers.

Here are a few shortsighted mistakes I've seen.

1. Cut the workforce too far, to the point of poor customer service. This quickly loses many of your best customers, since their business is more highly sought after in a downturn.

2. Firing or alienating the wrong employees, i.e. the most productive ones. Many wiser companies use downturns to poach the best employees. This has many causes that often boil down to socialism maxim: not judging or ignoring merit is the fairest system. A few examples: across-the-board pay freezes, vote on firing or pay cuts for everyone, firing by seniority, firing by division, region or department without offering any of the best employees opportunity to move within the company.

3. Clinging to and rewarding the failed "risk takers." "Risk takers" in quotes because this is how they justify their high salaries, but often it only the company's money or reputation on the line.
a. I've seen many poor, unprofitable or highly risky products not pulled soon enough, because the salesmen love them. Of course they do, anybody can sell $1 for 95 cents. Many companies fall for the old line "we'll make it up in volume" during a downturn.
b. In desperation of downturn, offer the most competitive commissions, attracting the lowest level salesman/conman. Often these salesmen are not happy unless somebody's been tricked by their cleverness. They need a clear loser, while they are winners. The customer, of course, will be second, but the company is a distant third.
c. Perhaps more common in the investment world is the golden parachute, or heads I win tails you lose, such as AIG's infamous contracts. But I've seen more than one terrible portfolio manager negotiate a big raise and promotion after the fact for the trauma they have endured during a downturn.

4. Ostracize or publicly hang the prophets. Rather than reward the wise for sounding an alarm during the bubble, ruin their career for being right, while the powerful where wrong. The Old Testament is full of prophets despised and hated by the corrupt and evil rulers because they shined the light on their immorality. We have already read of the many risks managers ignored and demoted for trying to temper risks during the housing boom. But many will likewise more quietly be found to come up short for some trumped-up charge as the prophets are reminders of great mistakes made by those politically powerful.





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