Compensation Strategy in the Restaurant Industry

In step with the industry as a whole, compensation for restaurant managers and professionals is evolving faster than ever to support increased focus on–and demand for–enhanced customer experience. Restaurants are re-calibrating their compensation practices to respond to the competitive environment and attract career-oriented staff in an increasingly tight labor market.
Average hourly wages of restaurant industry employees increased at a 3.7 percent rate on a year-to-date basis through late 2015, according to figures from the Bureau of Labor Statistics. To contend with these increases, it's important for restaurants to put a plan in place.
What's the key to having an effective compensation program in this environment? Preparing a well-articulated strategy that serves as a guide for making compensation decisions. Furthermore, building a management compensation package will ensure that a company can attract and retain talent that will contribute to the company’s growth.
The following are key components to consider when creating your compensation strategy:
Market Definition: Most companies use both local and regional markets to benchmark compensation levels for positions such as restaurant manager and regional manager.
Market Comparisons and Market Position: Consider and define target total compensation, including base salary, bonuses and long-term incentives for each job group. It’s worth noting that in the most competitive markets, a target total compensation at the 75th percentile of the market can be essential for retaining top talent.
Pay Mix: Based on our research, about 75 to 90 percent of total pay for management positions, such as general manager or restaurant manager, typically comes in the form of a base salary. The rest is variable pay, like annual performance-based incentives and possibly long-term compensation.
Annual Incentives: Annual incentives are typically determined by more than one performance metric. For example, one popular incentive program among restaurants is profit sharing based on regional or restaurant profits after controllable expenses. After a specific profitability threshold is met, the percentage of “sharing” accelerates.
Long-term Incentives: There is a growing trend of including regional managers and high-performing restaurant managers in long-term incentive programs to promote loyalty and boost retention. Equity programs are preferred, but aren’t always viable. Of course, the company must have an ownership structure that is willing to share a piece of the pie with top performers.
Another program gaining in popularity, regardless of the equity structure of the company, is a three-year performance unit plan. Units, which have a cash value, are awarded after three years. The value is often based on both the performance of the group receiving the unit (e.g., a region) and the appreciation in the value of the company over three years.
A key goal of these programs, whether equity or cash-based, is to provide a sense of ownership in the company, helping management feel more vested in the business and its successes.
Deferred Compensation/Benefit Programs: Some benefit and deferred compensation programs have historically been viewed as entitlements with little relationship to individual or corporate performance. However, amid heightened competition for mid-management talent, these programs can promote long–term retention in an industry notorious for turnover.
401(k) with Vesting Match: 401(k) plans are a traditional—yet still effective—incentive tool to encourage retention. A discretionary match with a vesting schedule can serve as an incentive for key employees and management to save for retirement and stay to earn the benefits of vesting. For example, a plan can start with zero vesting for the first three years of employment and then jump to 100 percent cliff vesting, or it can be a gradual schedule of 20 percent per year with full vesting after 5 years.
Retention Bonuses: Retention bonus programs run the gamut among restaurant companies and can take a number of different forms. Essentially, they stipulate a promise to pay a lump sum after a period of employment (e.g., three years). The amount is usually established as a percentage of base salary at the beginning of the vesting period.
One of the key differentiators among companies in this industry is the ability to both attract and retain talent. The fluid nature of the talent pool makes job changes in pursuit of a few additional dollars an ongoing reality that's unlikely to fade. A well-developed compensation strategy can not only help mitigate this risk, but also bolster loyalty and strengthen the commitment of an employee to their company.
Have questions about compensation plans? Contact Tom Ziemba at [email protected], and be sure to keep up with the Practice's latest thoughts by following us on Twitter at @BDORestaurant.