As the hotel and restaurant industries see a growing link between compensation and performance, David Mansbach advises organizations on the fundamentals of designing effective compensation programs.

When it comes to senior level executive compensation within the chain restaurant industry it is critical for organizations to understand that the game has changed. In this reset economy of greater shareholder/owner scrutiny and the importance of attracting and retaining top talent, designing effective compensation programs is critical to a company's success.

If you are a private equity firm, board director or an owner of an emerging restaurant chain the information below will provide you with sound compensation strategy fundamentals.

Compensation Philosophy

In a recent review of restaurant proxy data I was quite surprised to see that many companies are "boiler plate" when it comes to articulating their compensation philosophy. In fact, I identified two organizations that had almost identical language when addressing this topic. An effective philosophy should be well thought out and customized to an organization's short and long-term initiatives and vary based on a company's level of maturity in the market (i.e. emerging, stable and/or declining).

I believe ideal programs should incorporate pay-for-performance models that align with the interest of the ownership/shareholder community. For example, pay fair base salaries (at or around the peer group mid-point) with strong upside when company objectives are met and/or exceeded. Therefore, the variable components (annual cash bonus and long-term incentives) allow for an executive to earn superior compensation when predetermined company objectives are met and/or exceeded.

Peer Group Analysis

When designing a compensation program it is necessary to determine an appropriate peer group for comparison purposes; understanding critical factors such as existing and future company organization size (revenue and number of units), current and projected future performance metrics and complexity of operation are very important. It is also necessary to identify organizations that compete for similar human capital talent.

I have seen too many companies create/utilize peer groups that are too aggressive and/or designed by someone without appropriate knowledge of the restaurant industry. For example, I recently reviewed the proxy statement of a restaurant company that had a peer group consisting of organizations that were more than triple their revenue size; influencing the compensation committee to set executive compensation at a much higher level.

Another problem is that too many restaurant companies are using the same compensation consulting firm – how can a restaurant company get creative and objective advice if their compensation advisor is working with several of their direct competitors? During the compensation consultant selection process I encourage restaurant companies to ask a very simple question of their potential advisors: Who are your existing clients?

Compensation Mix & Setting Incentive Objectives

The debate over how much a senior executive receives in the form of cash vs. equity continues to be a hot topic. While the general consensus amongst compensation consultants is that the appropriate mix for senior executives is 40/60: 40% in the form of cash compensation (base salary and annual target bonus) and 60% in the form of equity (options, restricted stock).

This matter should not be taken lightly as you could create an unnecessary risk prohibiting you to attract and retain required talent for your organization. Additionally, when setting short and long-term metrics it is critical to understand where the subject restaurant organization is in its life cycle. For example, a private equity owned organization looking to exit over a shorter period of time should have different reward metrics than an emerging organization that is looking to set a longer term development/operating strategy.

Human Resources – The Unforgotten Partner

At a recent hospitality conference Jack Welch summed it up best by stating "The problem with some businesses is that the human relations department is relegated to picnics and birthdays".

I am in agreement with Mr. Welch and am astounded by the number of chain restaurant organizations that do not treat HR leadership as a critical internal partner. When executed correctly, the head of human resources will work closely with the board and/or ownership to determine if the right people are in place to meet the current challenges of the organization; and communicate how senior leaders are progressing through the leadership pipeline to achieve succession planning initiatives. Most importantly, HR has the best pulse on employee morale and what is necessary to attract and retain the best and the brightest.

This article first appeared in Nation's Restaurant News on November 22, 2010 as part of a Special Report on the growing link between compensation and performance. Read the full report here:

www.hvs.com/emails/execsearch/020111/DesigningEffectiveSenior.pdf

About David Mansbach
David Mansbach is Partner, North America for HVS Executive Search specializing in senior level executive search, compensation consulting and performance management for the restaurant, hotel and gaming industries. He is also an investor in GrowthPoint Partners, an investment firm specializing in early stage restaurant companies including Chop't Creative Salad.

David is a frequent lecturer on issues relating to executive recruitment, pay for-performance and corporate governance.

www.hvs.com