Incentive Programs for Restaurateurs: Part 1
There are a number of ways to incentivize key employees at any restaurant operation. Over the course of this three-part blog post series, we will cover some of the incentive vehicles and plans used by restaurateurs.
Unique Issues Facing Restaurateurs
Regardless of the type of restaurant operator or segment, there are several key issues facing restaurateurs that are vital to master for effective operations and long-term success:
- Cash Flow: Restaurateurs are highly focused on whether there will be enough cash flow or if there’s enough growth in cash flow to support long-term plans. Whatever the case, when cash flow purveyors aren’t paid, neither is payroll. Beyond payroll, cash flow issues can impact other expenditures, including real estate obligations.
- Prime Costs: This is the total cost of service per guest, including labor and benefits as well as food and beverage costs. Since prime costs can total 50 percent or more of a restaurant’s annual revenues, this is an area where restaurateurs can fine-tune operations to balance profitability, guest service and planned investments.
- Employee Retention/ Turnover: Like other industries, labor for restaurants is critical to success. However, unlike other industries, the restaurants tend to have high employee turnover rates. For some operations, it’s not uncommon to turnover half of the work force every calendar year. Thus, attracting and retaining key employees is an important element in the design of an incentive program.
- Gross Profit: This is the total profit after you’ve subtracted the cost-of-goods sold (the total cost of each service per guest) from the total revenue (the total sale for each guest). For a number of restaurateurs, this determines restaurant operations for the next year.
These unique issues are also widely used performance metrics in designing incentive programs. However, it’s not as simple as incorporating metrics into an incentive plan, then standing back and watching your restaurant grow. Often, performance metrics can contradict each other. For example, how much of your cash flow do you invest to stabilize employee turnover, which will increase prime costs and cut into gross profit?
It’s important to bear these dynamics in mind when determining incentive programs.
Short-Term Incentives (STIs), one of the most popular plans, are incentives that are typically paid in one year or less for measured performance. They are sometimes referred to as an annual bonus. To make the most of STIs, the metrics and goals being measured are typically agreed upon before the performance period to ensure the individual is in a position to impact the outcomes. Therefore, it may make sense to use a prime cost target as a goal for your general manager, but not for an expeditor, for example.
At the end of the measured performance period, whether it be monthly, quarterly, or annually, the actual performance (prime cost, in the example above) is measured against the pre-determined goal. If performance meets the goal expectations, then an incentive, usually in the form of cash, is paid out. Restaurants experiencing cash flow issues can sometimes pay this incentive in the form of equity, stock or stock options, or in another form of pseudo-equity.
For many employees that you want on an incentive plan, a short-term incentive program can go a long way in reinforcing your operation’s goals. STIs are incredibly flexible and allow you to communicate what’s important for your operation in the next performance period by rewarding for that goal.
For example, imagine you’ve set a cash flow goal for your key employees in the first 12 months of your operation. After your first year of operation, you’ve experienced better-than-expected performance with higher average sales per diner and more foot traffic than planned, leaving you flush with cash. As a result, this turns your attention toward weighted performance on prime costs and less on cash flow, resulting in a slightly higher target for gross profit for the next performance period. This example illustrates how STIs can make sense for quickly evolving businesses that need flexible planning options.
Stay tuned for parts two and three of this series where we discuss equity-based and pseudo-equity long-term incentives.
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This article is intended for educational purposes only and does not substitute guidance from your legal, tax or accounting professional.