|Topline or Bottomline Bonuses?|
By Aaron D. Allen
Friday, 3rd November 2006
A new bonus philosophy that defies conventional wisdom is also delivering results that are anything but ordinary. Dispelling the common belief that a bottom line structured bonus system is still the best approach for restaurant management is a difficult proposition.
Weíve been conditioned for years this was the best program and once we get set in our ways itís tough to break the ďits-the-way-weíve-always-done-itĒ syndrome. But read on with an open mind and perhaps you too will find the value in a topline driven bonus structure as many restaurant operators have recently discovered. Restaurant operators that are chalking new records in sales and profitability.
Bottom-line focused organizations and bonus structures invariably compromise value, customer perceptions and ultimately they result in customer attrition. When managers are incentivized strictly on the bottom-line, they look for ways to cut costs and they usually do so in ways that cut value.
For instance, lets say a manager gets a weekly food cost report and sees that he ran a 35% food cost last week and his target is 33%. What do you think heís doing to do next week? Heís going to shoot for a 31% food cost so that he gets back to his monthly goal of 33%. Now while this may seem good to the owner or to the corporate office to see it average back out, let me walk you through what happens that next week. The manager pulls together his other management staff and explains the missed target and tells them to button down the hatches and get their butts in gear reducing food costs. They all in turn scrutinize every possible variable and staff action that could lead to above target food cost. So what happens is the pizza thatís supposed to have 20 pepperonis only gets 16 this weekend. Or somebody shies a mixed drink with an ounce instead of the called for once and a half. Or the car at the drive through that wanted a handful of ketchups for their 4 orders of fries but only got 3 packets and two napkins because the manager has to hit is food cost.
Customers recognize the missing value. Long time customers and first time customers alike are given a perception that erodes confidence in your product and restaurant. So, at the end of the next week food costs comes in at 29%, the manager hits a monthly or quarterly food cost at 31% and is hailed as a lean and mean bottom line machine. He gets his bonus, gets use to the comfortable lifestyle of getting those bonus checks and will settle for nothing less on the next go around. After all, he also has a reputation to consider. And so the cycle continues.
Good for business? No. Why, you ask? Because the person that set up this bonus structure is forgetting to consider the life time value of the customer.
Let me give you an illustration of what this means using research we recently conducted for a client in the quick casual segment of the foodservice industry. They have a check average of $8.50 and 32% of their customers visit once per week. Taking one of these loyal customers and extrapolating their expenditures out over a year we see that this guest is worth about $442 per year. At their average unit volume of $600,000, they have to lose only 27 customers to lose 2% of their topline sales.
The better approach to management bonuses is to create companywide bonuses that everyone can participate in, including line level staff. Also, take the bonus beyond standard bottom line programs. Itís been said before very convincingly that sales cure all that ails you. A healthy top line can solve issues very quickly. Focus on the top line and the bottom line will take care of itself. Iíd much rather have a $1.5 million restaurant thatís running a 35% food cost than a $1 million restaurant running a 33% food cost Ė the difference in gross profit is $975,000 versus $670,000. If you would too, why put a bonus structure in place that does nothing to reward top line sales growth?
Fact is that you canít operate yourself to a profit. You have to drive in top line sales. To do this effectively, you need to enroll the entire organization in the process and make them all part of the sales building team. Having good people is a start, but you also have to demonstrate to them that youíre willing to reward them for their improved performance also.
Outback Steakhouse is a big believer in this theory as well. They target a food cost that is in the high 30% to low 40% range. They know that less than that they cannot deliver the value theyíve become known for with their ever growing customer base. And if it makes you feel any better, some companies target 50% food cost. Again, you deposit dollars and not percentages, so donít let the old 32% number cloud your judgment on creating a bonus program.
So how should you go about creating this system?Call your managers in and establish a set of criteria that is most important to the success of your restaurant over the next 12 months. I believe it should be based on top line sales improvement, bottom line performance, Internal Customer (employee) ratings and overall customer ratings. The Internal Customer and customer ratings can be achieved through surveys and research at the unit level conducted by an independent third party. There are several resources for this type of research and rates typically range from $1,500 to $10,000 per restaurant.
Establish a weighted compensation model. For instance, you may consider the following scenario:
Determine weekly, monthly and quarterly milestones. This will help keep everyone in the game and they can see their progress in relation to their objectives clearly to make adjustments as necessary. Determine the bonus you can offer based on reaching each level of objectives. Take a portion of that potential bonus and put toward a staff-wide incentive. When creating staff level bonuses, think in shorter periods than you do with your management. Itís hard for them to get excited about an end of year bonus.
- Miracle: This would be a 20% increase in sales with a 10% increase in profit
- Great work: This would be a 10% increase in sales with a 5% increase in profit
- Flatline: This would be sales and profit levels even with the previous period
- Slippery slope: This would be sales and profit levels that are a determined percentage below last period
- Highway to goodbye: This would be sales and profit levels that have reached or exceeded a do not cross line.
Put in staff level bonuses that are awarded on the spot. For instance, your kitchen staff makes the same hourly compensation whether the restaurant is busy and theyíre working like crazy or itís slow and theyíre not doing much. This creates an inequity and atimosity when front of house staff walks out with big tips on high volume nights. I encourage clients to communicate a sales threshold to the kitchen staff and any night that it is exceeded, give them all on the spot bonuses of $20 or $50 at the end of their shift. For example, if you do $10,000 in sales on a busy Friday night, inform the staff that youíre going to do your part to drive in sales and any night that you do over $11,000 (or a number that youíll need to achieve to reach your new top line sales goals), youíll give them all a bonus on the spot. Also let them know that youíll need their help in reaching these new sales goals and educate them on how they can help. This gets them bought into the sales building process and goes a long way in helping you hit your numbers.
Develop internal programs that all of your employees can participate in to help drive sales. For example, consider giving all staff members that have been with you for 90-days or longer their own business cards and print a free drink or appetizer offer on the reverse side. Explain that they can give them out how they chose and that the purpose is to help bring in new customers to try the restaurant. Will likely give more of them to their friends than random people at the supermarket? Probably. Does it matter? Absolutely not Ė their friends money will deposit in your registers every bit as good as the next person and now you have a team of marketing ambassadors helping you drive in new customers. And the best part of this type of program is youíre only paying for new customers that redeem the offer and not paying traditional advertising costs to communicate an offer. This is a winner.
Hold regular meetings with all of your staff to let them know how their piece fits into the bigger picture. Communicate successes and setbacks. Show them how their efforts can make an impact and what it means to you, them and the community when they apply their efforts to this cause.
Praise lavishly and reprimand privately. Some of your staff will do more than others just as some of your managers will do more than others. There is a possibility you may need some new people in some places for this to take hold. You can have the best bonus program in the world, but if you donít have people that can get excited and rally behind the objectives, itís likely to fail. Look for the top performers and get them to be the cheerleaders for the program. Line level staff can have a great impact because they have credibility. If only management is harping about topline and bottom line performance, the entire staff will think it is just about making the management rich and they will be more resistant to helping. If they see how being involved can benefit them, youíll create an organization focused on shared goals. This type of bonus program is a double edge sword. Managers and staff have increased opportunity for higher levels of reward for higher levels of performance. However, to be fair, it must also have commensurate levels of risk for your staff if commitments that they agreed to were not met.
A properly designed bonus program is based on the philosophy of Management by Objectives. Itís the idea that if you canít measure it, you canít manage it. And also that with increased performance comes increased reward for all levels of the staff. In adopting this philosophy, you begin to create a meritocracy where rewards are based on contribution versus entitlement, seniority, tenure and other outdated systems.
If you want your managers to deliver sustainable and long term net profit increases, get them focused on building the topline now and reap the rewards of higher profit contributions over time. Focusing them exclusively on the bottomline now and take the quick gains now will lead to decreased sales and profits in the future as current value is compromised.
Restaurant companies that have adopted this new bonus approach and successfully integrated it have reported comp store sales gains of 35% and higher with equally remarkable profit improvements. The reason is because their people feel part of the problem sales building process and see their roles as stakeholders versus keyholders. Which is a good question to ask yourself Ė do we have an organization of keyholders or stakeholders? What could this mean to the overall health of our company?
Aaron Allen, Founder/CEO, Quantified Marketing Group, www.quantifiedmarketing.com