Survey

SURVEY: How Independent Operators Are Using Management Incentive Programs

For years, several highly successful chain restaurants have touted the benefits and results of their management incentive programs. We were intrigued by this and wanted to find out to what degree independent operators are using incentive programs for their management staff and what level of success they are having.

From the amount and content of the responses we've received from our members, a significant number of independent operators are already using management incentive programs to some degree and many other independents are seriously considering it.

One goal with this "special report" is to give you feedback directly from the front lines on what other independents are doing with management incentive programs, specifically what's working, what isn't and how you might go about establishing or improving your own program.

Our other goal is to offer some insights into the following questions:

• What does a good incentive program look like?
• How easy or difficult is it to administer?
• What are the chances that it will result in happier, more motivated managers and a more profitable restaurant?

We want to personally thank all of our members who so graciously sent information on their incentive programs. We were amazed at the level of creativity, time and thought that has gone into many of these. Thanks again for your willingness to share not only your successes but the shortcomings of your programs as well. I know both will be very valuable to others in various stages of implementing or evaluating the effectiveness of their own incentive plans.

Also, a special thanks to one of our contributors, Aaron D. Allen, for allowing us to reprint his excellent article on incentive plans entitled, "Topline or Bottomline Bonuses: A new bonus philosophy that defies convention wisdom is also delivering results that are anything but ordinary."

If you have comments or questions regarding this report or incentive programs please use the Discussion Forum so everyone can benefit from the discussion. Also, if this was helpful, please let me know what other topics you'd like to see covered in future special reports.

Why Have a Management Incentive Program?

In an industry historically known for its churn-and-burn approach to employing managers, many restaurant organizations large and small are designing incentive compensation programs that treat restaurant managers more as entrepreneurs with a stake in how well the restaurant performs.

The reasons independents are employing incentive programs are much the same as those given by the chains. Our members stated the following reasons for starting or continuing their programs:

• "Our primary goal with this incentive program is to pull the management of the restaurant altogether. We want them working closely together making them inter dependable on each other as to achieve company goals and standards."
• "I wanted my managers to think more like I do, like an owner."
• "We've found that our incentive plan appeals to the type of person who makes for a good manager. So it's been very effective management recruiting tool."
• "With our incentive program, my managers see our numbers, all of them. They know what's going on and they feel more involved in making the restaurant work. I believe that's why we've had almost no management turnover since our incentive program started 3 years ago."
• "Our goal was to create a win-win. More motivation for managers to produce better financial results and a more profitable restaurant for me and my partners."
• "It (incentive program) puts the opportunity to make more money within their (the managers) control."
• "It (incentive program) fosters teamwork since everyone has to be on the same page to provide great customer service, great quality and watch costs."

Key Characteristics of Successful Incentive Programs

While the details of individual incentive programs differed substantially the following characteristics were very common in most programs where the respondent (usually the owner) praised their incentive program as a very worthwhile and valuable endeavor.

1. Simple and easily understood. Several members' plans as described were quite involved and detailed. The results of these plans, as described, tended to be average. The most effective plans were simple in that they were based on the results of just 3 to 4 key areas which several operators referred to as "key performance objectives". These key performance objectives also tended to be activities or processes the managers had some degree of control over.
   
   A few operators who reported margin results from their plans admitted they probably "overcomplicated" the program with too many details and payment provisions.
2. Mutually agreed upon, achievable goals. Many operators with successful plans stated that performance goals in the areas of sales and profit are discussed with management and mutually agreed upon. The objective is to make the goals challenging, but at the same time, also achievable and realistic. Make the goals too easy to achieve and managers can get complacent, make them impossible to achieve and managers can get discouraged and quit trying.
   
   Particularly in the area of setting sales goals, it's important to be realistic and come to a mutual conclusion on achievable objectives. Owners need to understand that sales planning is not an exact science and while sales objectives need to be attained, they are not "set in stone" since circumstances beyond management's control can influence the plan. (example: 9-11)
   
   "You can have the best bonus program in the world, but if you don't have people that can get excited and rally behind the objectives, it's likely to fail." -- Aaron Allen
3. Cost goals based on "ideal" costs. In those plans where some part of the incentive formula is based on controlling costs, it appeared as though the most effective and fairest way to calculate the cost goals were based on an objectively determined "ideal" cost.
   
   While calculating "ideal" costs can take some time to set up several independent operators proved it's possible and once it's set up and understood by staff, it provides an accurate, reliable, and fair way to evaluate management's effectiveness at controlling these costs.
   
   (Calculating ideal food cost entails calculating the ingredient costs in each menu item using current cost of ingredients and standard recipe portions and also the sales mix in each reporting period -- the "ideal" food cost is then compared with the period's "actual" food cost. Many restaurants establish a "goal" of keeping "actual" costs within 1% of "ideal" cost.)
4. Incentives tied to "topline" improvements as well as costs and bottom-line profit. Operators with highly successful plans indicated that some portion of their incentive payment is based on improving or maintaining high levels of sales activity.
   
   One operator's plan calls for funding the "bonus pool" with a specified amount of dollars each week based on the week's gross sales. The higher the weekly sales, the more dollars are set aside for potential bonus payout. As sales decline the potential bonus payout is reduced.
   
   When incentives are based solely on cost control there is a risk that managers can become too short-term focused on costs at the expense of customer satisfaction. Several operators said that while their plan was effective in driving down costs, they noticed instances of managers becoming too frugal and referenced instances of reduced portion sizes and lower product quality to ensure their incentive payments.
5. Monthly or quarterly incentive periods. Operators with annual programs with an annual payment cycle only appeared to have less success than those whose programs were broken down to a 4-week, monthly or quarterly cycle.
6. Accurate, timely reporting. Having a reliable, speedy accounting process in place before implementing incentive programs appears to be very important. Several operators noted that interest and motivation from their incentive programs suffered because managers had to wait so long to get their numbers or that they lost confidence in the accuracy of the reports/P&Ls produced by their bookkeeper/accountants.
7. The incentive program is reviewed on a regular basis. Many operators with successful program reported that they revisit the terms and goals of their incentive program at least annually to keep it relevant with current operating conditions.
    
8. Weekly progress meetings. Nearly all operators with highly successful incentive programs indicated that they had some type of weekly management meeting to evaluate their key numbers from the previous week. The previous week's numbers were evaluated in light of whether they were hitting their goals as established by their incentive program.

Key Performance Criteria

The following is a list of the most popular performance criteria used in restaurant incentive plans:

• Sales. Incentives are paid by attaining certain sales levels. This could be on a weekly, monthly, quarterly or annual basis.
• Actual food, liquor, beer or wine cost as a percent of sales. The lower the cost percent, the greater the incentive amount paid.
• Difference between "actual" and "ideal" cost of sales. Incentive paid if the difference between "actual" and "ideal" costs is kept below a target, often 1% of sales.
• Hourly labor costs. Incentives based on keeping labor costs at or below certain levels relative to sales volume. Chefs and kitchen managers often have incentives tied to the control of hourly kitchen labor.
• Prime cost percent. Incentive based on the combined % of costs of sales and labor cost.
• Controllable profit. Incentive based on sales less cost of sales, less payroll, less controllable operating expenses.
• Net income. Incentive based on overall profitability of restaurant.
• Secret shopper scores. Some operators make the payment of any incentive contingent on acceptable shopper scores.
• Inspection scores. This could include detailed inspections covering cleanliness, food handling, general employee and guest safety and maintenance and condition of equipment, building and grounds.

Description of Successful Corporate/Multi-Unit Incentive Plans

Certain chain operators have long used management incentive plans as a tool to drive profit and reduce management turnover. Even thought chain environments can be significantly different than that of independents, chain operators have been the pioneers in this area, have put lots of time and resources into perfecting it and can provide some clues as to what works and what you might consider in your independent operation.

Here's an overview of 2 successful management incentive programs:

Outback Steakhouse

One of the most successful U.S. chains of all time has employed a management incentive for many years. Their General Managers (called "Managing Partners") are given the opportunity to purchase a 10% interest in the restaurant's cash flow (which is paid monthly) for $25,000. With a base salary of around $50,000, many Outback Managing Partners make in excess of $100,000 a year.

Managing Partners also sign a 5-year employment agreement which serves as a guarantee they won't be transferred to other restaurants during that time period and motivates them to do what's in the best long-term interest of the restaurant. This incentive program seems to work very well at Outback. Top management is always very complimentary about the quality of their management personnel, management turnover is well under 10% a year and their restaurants are, for the most part, highly profitable.

Sonic Drive-In

Operator of more than 2,700 company and franchised restaurants, Sonic gives its managers the opportunity to purchase an equity stake in their restaurant. For $10,000, a manager is then entitled to 20% of the restaurant's monthly cash flow.

Like Outback, Sonic is highly profitable, in fact as a percent of sales, Sonic has the highest net income of any large chain in the U.S. Top management at Sonic says their management compensation plan is a recruitment tool for enticing experienced managers away from other restaurants. It also motivates managers to maximize the profitability of their restaurants and it encourages managers to stay.

Description of Small Multi-Unit Operator Plan

Here's an interesting approach to an incentive program particularly if you own more than 1 restaurant or if you want to be more of an absentee owner. This operator owns 5 profitable family dining restaurants in and around a major metropolitan area. He has been semi-retired for some time and has considered selling out but his incentive program has allowed him to spend very little time being involved with the restaurants while continuing to provide him with a good salary and return on his investment.

Here's how his program works. Like many of the corporate programs described above, the incentive plan is structured to give the GM a major stake in the success of their restaurant.

The owner pays his managers a base salary equal to what they could make at a comparable chain restaurant in their area. Each GM's incentive is based on a 50/50 profit-sharing arrangement after the Net Income of their restaurant reaches a certain level. Here's how it's calculated.

First, every few years the owner has a formal appraisal conducted on each restaurant. He figures that if he can earn a superior rate of return by continuing to own the restaurants, he'll keep it, if not he'll sell it. For example:

Let's say the appraised value of Restaurant #1 is $300,000. The owner says that if he can continue to earn at least a 20% return on the restaurant he'll continue to own it, if not he'll sell it. A 20% return on $300,000 is $60,000. In this case, his baseline net income is $60,000 for him to earn his 20% return. After this restaurant earns more than $60,000 on an annual basis, he splits the excess with the GM 50/50.

The owner actually pays this incentive quarterly so here's how it would work:

It is up to the GM to decide what to do with the incentive. The GM can keep it all or can elect to share some portion of the incentive with the 2 other managers. He tells me some GM's keep it all, some distribute up to half of it with their managers.

The owner claims he spends very little time managing his restaurants. He meets with each GM at least once a month to discuss their financials and other issues and often that's it. He's had almost no GM turnover and says he constantly commends them on doing an outstanding job. He believes their motivation to perform well comes from the additional money they can make if the restaurant performs well and also from knowing the restaurant may be sold if it does not earn at least his minimum ROI goal.

Descriptions of Plans & Comments From Independent Operators

Here's a look into what fellow independent operators are actually doing in the real world with regard to incentive plans. All of them have been submitted by RestaurantOwner.com members. With the exception of some editing for grammar and spelling, this is how they were submitted. Hopefully, these glimpses will give you more ideas and reasons to implement or improve your own management incentive program.

Thanks again to everyone who responded and contributed.

I have 4 restaurants and use quarterly manager incentives in each. The chef's position gets a bonus of a percentage of the dollars saved by hitting numbers below our target for both food cost and kitchen labor. The targets were determined by looking at numbers from our history. I'm a chef, so I know firsthand what numbers are possible within my restaurants. There are also bonuses that are given, on my own discretion, for favorable reviews or public appearances (so as to keep a chef from getting tunnel vision on keeping food cost down).

GM are paid a bonus based on earnings before interest, depreciation and amortization (a percentage of "profit" above our target) and catering sales are also incentive driven. We do a weekly flash report that tracks everyone's progress. Most of my managers are very competitive and want to perform well. They're like me in that respect (as well as many others): "If we're keeping score, I want to win!" It makes the managers stay keenly aware of their relevant numbers and just the act of monitoring that helps make it successful.

I certainly believe in the system but it's not without its downsides. One challenge is to set goals at attainable levels. It takes the drive away if people see the goal as something unattainable or that the reward is not worth the extra effort. The other side of that, the "owner's side" if you will, is that you don't want to reward people for simply doing their job as expected (they're thanked every Friday for that). And I sure don't want to set a goal so low that I'm rewarding someone for behavior that actually does NOT make me money.

Another "flaw" in this system is that the GM's bonus is tied, in a huge way, to the chef's efforts. If the chef is less on board than the GM, it can (and does) get ugly. I have had to go outside the framework of the bonus structure to resolve that from time to time.

When it works well, though, I make lots of money, I share some of it with the people most responsible for making it and we're all happy! PLUS it makes them want to do it again next quarter!

We have an aggressive bonus program with all of our managers based on sales and our POS system reports. Based on an individual unit's sales, we throw money into a each individual managers pool on a weekly basis for calculation versus the P-Mix report (calculation of ideal costs).

For example:

At $40,000 per week the individual manager will get an extra bonus of $100 to $200. For every increase in sales $5,000 they get an extra $100 to $200. If they had a week where their sales were $75,000, that unit manager could make anywhere from $800 to $1600 extra a week on top of there base salary of $40,000 to $100,000 per year.

The only hitch is we take the entire bonus pool each month and break it into 5 categories. Labor, Liquor, Wine, Beer and Beverage. They must be within 1% point of the P-Mix report (ideal costs) or they lose that 20% of the bonus. Additionally, at the end of the year, the Chef and GM take 10-12% of the bottom line. After that it is stock ownership.

We used to give arbitrary year-end bonuses based on how we felt about the manager combined with how well we did financially. The problem is most managers think that if they got $1000 last year it should be more the next, regardless of how profitable the company was.

We went to a quarterly bonus plan. Each manager gets a % of the bottom line profits for the quarter. Anywhere from 1%-4%. Each quarter is a fresh start, so in the first quarter bonus isn't typically made but they're not penalized in future quarters. No making up.

I want to a set % of bottom line to take the emotion out of it. We all win together and lose together and if anyone complains about their bonus, they can look at themselves. It also fosters teamwork since everyone has to be on the same page to provide great customer service, great quality and watch costs. I can't say our managers are 100% profit-focused, but it's an easy formula to implement.

The challenges with labor/food cost/controllable based bonus models is that at some point it can get out of whack - meat prices soar (managers can't control), labor models change. What if I give a target that they blow out of the water, then I either overcompensate or piss them off for making adjustments.

I can tell you that in the 9-plus years of using this system everyone seems to be happy. The monkey's off my back and we always know the score. As managers get promotions or demonstrate their value to the organization, we increase the % of profits they get.

Also, by allowing managers to share in the complete P&L, their eyes are opened up to reality. The economy shrinks after 9/11, profits are down 25%, it's logically difficult for them to expect a 10% raise that year or a super-bonus.

And the opportunity to make more money is always within their control!

I'll be opening a fast-casual concept in Florida. While I don't have experience yet in the restaurant industry, I've owned several businesses in the past all of which had incentive programs.

The management incentive programs I've used were based on individual production as well as group/team production. I surveyed the managers in advance, asking them what incentive they would be most interested in. To a person, each elected money.

We set weekly and monthly targets with each manager. If the target was met, a bonus was given. If it was surpassed, the bonus was higher in proportion to the amount above the target that was reached.

In each case, once the system was put in place, production and morale increased. The managers made more money, the overall group morale was raised by several notches and the business thrived as a result.

Managers have a goal of keeping prime costs ( food costs and labor costs) below 66%. Managers receive a percentage of all saving (20%-30%). ie. if they hit a prime cost of 59%, they receive 20-30% of the 7% savings.

Managers must also receive an A rating on their Health Inspections. Managers must score a B on a secret shopper program ( right now I have friends doing this) Managers must meet a certain sales goal.

The key is to make the bonus system achievable. If they think there is no way to make bonus they won't try at all.

We are a 75 seat restaurant. Sales of $750K - $850K. We pay our Chef $33K plus health benefits. We're in a small tourist town and we pay higher than anyone. We shoot for cost of sales of 31% including liquor but as we are a steak house it's difficult.

To sweeten the managers' incentives, we offer the first four percent under 31% to the manager as "incentive" to keep costs down. We were running 35% for 12 months before the program, now we're running 29.7% - 30.2% for the last 4 months. I like the result.

I have had an incentive program for 4 of my managers for 4 or 5 years. The basic program is our goals for food and labor is 62 % of sales. Any amount below that is split 50/50 with the restaurant and the four managers. In other words, if the food and labor cost is 60% then there is a 2% savings, the managers get 1% and the restaurant keeps 1%.

This has been an effective tool in it has made them much more aware of labor cost, scheduling and food cost savings, ie better buying, less waste, etc. The bonus pool for the managers has been as high as $16,000. This year it is going to be around $8,000. We will not hit the 62% goal but I feel that they have worked hard and still deserve a bonus. We will pay this out to them at Christmas.

We also give our employees a $ 300 Christmas bonus, depending on their tenure. I have 60 employees and their average tenure with our restaurant is about 8 years. We generally have a turnover of about 5 or 6 employees a year. Longest employee tenure is 22 years.

We do have an incentive program based upon our management's ability to keep costs down. We do this every month because weekly proved to be unsuccessful. We do our inventory every week, our payroll every two weeks. Based upon a prime cost at 64% or below, we offer them an incentive of $100 for every two-week period. If they beat this to 60% or below, they are eligible for a $200 paycheck bonus for the same two weeks.

We also split yearly profit with them using a base amount that we have deemed possible and good for everyone. For example: If our managers bring 100,000 to the bottom line & our base is $50,000, they are eligible for the remainder in a split/split bonus.

Requirements:

• Employee must be in good standing with our company and be an employee at the time of the bonus.
• Employee must be in good standing with our company and be an employee for the entire calendar year to be eligible for the end of year bonus.

If any inventories are cooked in order to receive prime cost bonus or if restaurant is run on a deficit of labor or goods to make prime cost or artificially lower costs, or any other tampering, both programs will be dropped.

So far, we have been able to give periodic bonuses. We look forward to being able to split end of year profits some day.

As far as management compensation, our managers are bonuses quarterly based on a few milestones:

• Sales
• Cost of goods
• Labor

That total is then multiplied by the combined secret shopper score that they have received over the quarter.

So if your secret shopper score is 80% and you earned 1,000, you will receive 800.

That is the basics.

At my Steakhouses I don't use management incentives because my management turnover is next to zero. Friends of mine though at other restaurant mainly use a percentage of profits to managers on a quarterly basis. What this has done is to make managers run the business as efficient as possible in order to receive a higher bonus.

This system actually works and in fact if I didn't want to be as involved as I am at my restaurants I would use it.

I have a bonus program where the managers bonus off the profits after controllable expenses, between 1 & 2% of that number. This makes them pay attention to all the variables, not just some of them.

But you have to watch to make sure they don't cut corners or it can cost you quality or service

I recently worked for a group of nine restaurants that were owned by two partners. Because they could not be at every place day in and day out, an incentive program was started. It was a rocky start with exactly how to execute the program in being fair for all the restaurants in achieving their goals. All the restaurants were a different type of establishment, fine dining to very casual breakfast, lunch and dinner houses, Mexican and night clubs. We got better on finding the best ways to be fair with achieving goals and what was expected on inspections.

The four areas of the incentive program were -

1. Hourly labor
2. Bar and Food cost %
3. Controllables
4. Inspections of each establishment for health, safely, and cleanliness.

The goals were giving to the management teams before each quarter in order to be fair with understanding their requirements.

As the chef, I would receive anywhere from $2,000 to $2,500 per Quarter. Our sales monthly were $50-60,000. Asst managers, sous chefs and bar manager received about half of what the chef and GM made.

The program does work! The management teams in each restaurant became competitive with each other on achieving their incentive goals. They did not want the reputation among the group of not making their bonus.

Of the four groups for bonuses I described - labor, cost of goods, contribution to overhead and inspections, we were able to make part of the full bonus in each group. For example:

If our labor was set at 19%, and our quarterly hourly labor was 21% we may only receive 25% of the full allowed bonus for that category. In some cases exceeding a lower labor percentage would add extra $$$ towards the bonus.

My best experience has been when the manager's incentive is tied directly to store profitability. The more I make the more the managers make. I also include all assistants in this so that they have incentive to assist the general manager.

I have also tied incentives directly to sales volume with reasonable success.

The least successful incentives are when they are tied directly to food and or labor costs. It is too difficult to keep management focus on customer service and product quality. They tend to make more decisions based on their immediate incentive potential versus what makes sense for the business long term. With sales incentives they must be providing quality and service or they are not going to increase their sales and therefore overall acceptable profit levels.

Currently I am working as a Area Supervisor for a restaurant company in which the owner lives out of state. He has come up with an incentive program for his 3 area restaurants in which they are competing with one another on 6 different aspects of the restaurant.

1. Most improved sales from last year.
2. Most improved quality service evaluation (QSE) (in house critique, which I perform)
3. Closet to ideal food cost per your location
4. Closet to ideal labor cost per your location
5. Most improved secret shopper's reports
6. Most sales of gift certificates (being as the Holidays are here)

The way this works is that at the end of September we ran all reports, did QSE's and figured out our starting points. At the end of December we will do it all again and figure out where we have come from. It is up to the individual managers to come up with ways of improving from Oct. to Dec. The bonus is not given to the individual managers of the winning stores but split up between all employees actively working during the contest period based on amount of hours worked and effort put into improving. The total prize is $5,000 and with our average stores having 20 employees everyone at the winning store will get something sizable.

This is the first time that this company has done this, it seems to have motivated all our staffs to do their jobs better since they know they have a lot to gain.

Currently in the locations the general managers have a bonus structure based on profit where they get a certain percentage based on how well their store does. This is ok however sometimes money can still be made even if controls are not watched closely like food and labor cost. I think that once this contest is over it will probably show the owner that adding more controls to the bonus program will make him more money and everyone will benefit from this program especially the customer.

The problems that I have encountered in the past with bonus programs are when companies can not get their P&L's figured out in a timely manner and the managers don't get their report cards (bonus) quickly. This is unmotivating to do a good job.

The following plan is from a member who was a franchisee of a well-known chain operating in Croatia -

I'm sending you examples of my BONUS/WARNING schemes which I've adopted when I took over my restaurant. I've introduced this scheme one month after I took over the restaurant and I used it in my first year. The results were phenomenal, all managers got their bonuses after 6 months and they continued producing great results for another 6 months. After first year I've tailored this scheme more individually and I dropped the warning part from the previous scheme and we continued to produce the best results within the franchising community in Croatia.

Excerpts from the Store Manager's Bonus Plan --

1.Responsibilities:

• Sales projection update
• Analyzing all three parts of the Operation Report ( Sales, Inventory, Payroll)
• Follow up on all orders (are they correct, done on time ,.....)
• Management schedules to be done by 20th in the month for next month
• Floor plan is adequate for sales volume?
• Maintaining FAF service criteria (friendly, accurate and fast)
• Responsible for management development (training) + hiring new staff
• Organizing payrolls for crew, crew trainers and floor managers
• Looking after P&L lines (keeping them within budget )
• Checking up PAC ( over 31 % for next six month sales )
• Organizing and monitoring marketing promotions
• Helping other managers to complete their tasks

2. Discussion and presentation of the results in six month time (in written form)

3. If Profit After Controllables (PAC) is over 31 % and sales comps are + 5 % - reward of 3000 kunas=400$ will follow

4. If PAC is over 32.5 % (during six month time) extra bonus is due (400$).

5. If PAC is below 29% (six month sales) warning + salary reduction (10%) will follow.

We offer our Chef and GM profit sharing (2% & 3% of net profit after taxes respectively) on a quarterly basis as well as a good benefit package which covers 100% of their dental, eyeglasses, prescriptions, physicals, etc.

The positive side of this is our managers became more career oriented and genuinely care about costs, sales and productivity. We also give very generous Christmas bonuses to management and supervisors.

I have not seen a negative side yet since our Chef has been with us for 7 years and our GM for 2 years.

We currently have an incentive program for our kitchen manager to reduce our average monthly food cost. We pay him a bonus of $50 for each percentage point he reduces our food cost below 36%.

The advantage is of course to lower our food costs and also have a form of compensation for our manager that he has control over. The disadvantage we have seen is our manager sometimes being too frugal with necessary purchases, and also an occasional compromise in our food portion and quality. We as owners have to monitor those issues closely!

Why we do bonuses in quarters. So if the restaurant makes a net profit, then we take 10% of that and give it to our employees. Of that 10%, 30% goes to the GM, 40% goes to all other managers, and the last 30% goes to key employees.

For the employee to qualify for the 30% they have a couple of guidelines. They must rate acceptable in the areas of tardiness, cleanliness, etc. We are thinking about fine-tuning this by making sure food cost are where they need to be and other costs are in line with our yearly budget.