It's difficult to dispel the common belief that a bottom line structured bonus system is still the best approach for restaurant management. We’ve been conditioned for years that this is the best program, and once we get set in our ways it’s tough to break the “its-the-way-we’ve-always-done-it” syndrome. But read on with an open mind and perhaps you too will find the value in a top-line driven bonus structure as many club operators have recently discovered. These are club operators who are chalking new records in sales and profitability.
Here goes.
Bottom-line focused organizations and bonus structures invariably compromise value, customer perceptions and ultimately they result in customer attrition. When managers are given incentives strictly on the bottom-line, they look for ways to cut costs, and they usually do so in ways that cut value.
For instance, say a restaurant manager gets a weekly food cost report and sees that he ran a 35 percent food cost last week and his target is 33 percent. What do you think he’s doing to do next week? He’s going to shoot for a 31 percent food cost so that he gets back to his monthly goal of 33 percent. Now while this may seem good to the owner or to the corporate office to see the target met, let me walk you through what happens that next week. The manager pulls together his other management staff, 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 that’s supposed to have 20 pepperonis only gets 16 this weekend. Or somebody gives a mixed drink an ounce instead of the called for ounce and a half. Or the customer in the car at the drive-thru who wanted a handful of ketchup packets for his four orders of fries only gets three packets and two napkins because the manager has to hit his food cost.
Customers recognize the missing value. Longtime 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 percent, the manager hits a monthly or quarterly food cost at 31 percent and is hailed as a lean and mean bottom-line machine. He gets his bonus, becomes accustomed 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 who created this bonus structure is forgetting to consider the lifetime 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 food service industry. They have a check average of $8.50 and 32 percent of their customers visit once per week. Taking one of these loyal customers and extrapolating their expenditures 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 percent of their top-line sales.
The better approach to management bonuses is to create company-wide bonuses that everyone can participate in, including line level staff. Also, take the bonus beyond standard bottom line programs. It’s been said before very convincingly that sales cure all that troubles you. A healthy top line can solve issues very quickly. Focus on the top line and the bottom line will take care of itself. I’d much rather have a $1.5 million restaurant that’s running a 35 percent food cost than a $1 million restaurant running a 33 percent food cost. 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?
The fact is that you can’t 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 you’re willing to reward them for their improved performance.
Outback Steakhouse is a big believer in this theory. The chain targets a food cost that is in the high 30 percent to low 40 percent range. They know that less than that they cannot deliver the value they’ve become known for with their ever-growing customer base. And if it makes you feel any better, some companies target 50 percent food cost. Again, you deposit dollars and not percentages, so don’t let the old 32 percent number cloud your judgment on creating a bonus program.
So how should you go about creating this system?
1. 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.
2. Establish a weighted compensation model. For instance, you may consider the following scenario:
a. Miracle: This would be a 20 percent increase in sales with a 10 percent increase in profit
b. Great work: This would be a 10 percent increase in sales with a 5 percent increase in profit
c. Flatline: This would be sales and profit levels even with the previous period
d. Slippery slope: This would be sales and profit levels that are a determined percentage below last period
e. Highway to goodbye: This would be sales and profit levels that have reached or exceeded a “do not cross” line.
3. 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. It’s hard for them to get excited about an end of year bonus.
4. 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 they’re working like crazy or it’s slow and they’re not doing much. This creates an inequity and animosity 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 you’re going to do your part to drive in sales and any night that you do over $11,000 (or a number that you’ll need to achieve to reach your new top line sales goals), you’ll give them all a bonus on the spot. Also let them know that you’ll 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.
5. 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 they likely give more of them to their friends than random people at the supermarket? Probably. Does it matter? Absolutely not. 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 you’re only paying for new customers that redeem the offer and not paying traditional advertising costs to communicate an offer. This is a winner.
6. 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.
7. 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 don’t have people that can get excited and rally behind the objectives, it’s 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 top line 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, you’ll 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. It’s the idea that if you can’t measure it, you can’t 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 top line now and reap the rewards of higher profit contributions over time. Focusing them exclusively on the bottom line 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 percent 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. A good question to ask yourself is, “Do we have an organization of keyholders or stakeholders? What could this mean to the overall health of our company?
Contact us to find out how Quantified Marketing Group can help your restaurant.
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