You might consider an incentive structure to ramp up compensation and inspire commitment from your team.
Our co-founder, Roy Phillips, spent over 20 years with one of America’s largest casual-dining chains where an incentive structure played a key role in their company’s growth, individual store success, and team culture. This system has also been implemented in the sushi restaurant group, Wasabi, co-owned by Roy and our CEO Bo Davis.
Around the virtual MarginEdge office, we’ve chatted about how this same incentive structure may be beneficial for restaurants who want to fast track their teams to pre-Covid pay, while also maintaining a healthy cash position for the long-term success of the company. We thought we’d put our thoughts together in this piece, in case it’s helpful for your business. (And with that being said, we know this isn’t a one-size fits all approach that’s useful for any restaurant, just an idea.)
Proposed Incentive Structure
This is a structure with GM’s, FOH managers, Kitchen managers/chefs in mind.
Fixed base salary + X% Total Controllable Income (TCI) of their respective location(s)or
Fixed base salary + X% EBITDA of their respective location(s)
The base salary should be an amount that’s doable – of course your team-members need to know that they can pay their bills each month. Consider a fixed salary around 60% of their pre-Covid salaries. We recognize this really depends on your restaurant’s situation.
On top of the fixed base salary, you can bonus them on a percentage of either EBITDA or TCI.
It should be a percentage where they would make the same salary as before Covid, or, even more motivating, a percentage that puts them at a higher salary than they made before Covid. Here’s how those two scenarios could play out.
Let’s say you wanted their salary to ramp up even to pre-Covid, here’s how you would find the correct percentage.
For instance, you want to re-hire your GM Jack and get him on this incentive structure. You decide to give him a fixed base salary at 60% of his previous salary and bonus the rest based off of TCI.
Say Jack was making $60,000 at a restaurant with $800,000 annual TCI before Covid. His base salary becomes $36,000. Here’s how you calculate what percent of TCI he would make:
Since his base salary is 60% of his previous salary, then 40% of his previous salary needs to come from this bonus:
40% * $60,000 = X * $800,000
$24,000 / $800,000 = X
0.03 = X
To let his salary return to the pre-Covid amount once TCI returns to the pre-Covid amount, Jack should make 3% of TCI.
Until then, his salary will be less, but not too much less. Check out what happens if the restaurant is at 50% of their TCI during Covid. The GM is still making $48,000 in this case.
($400,000 * 0.03) + $36,000 base pay = $48,000
What would be even more motivating to your teams is if you pay a higher percentage of EBITDA/TCI so that their salary at pre-Covid EBITDA/TCI is higher than it was before.
Let’s say you gave that GM 4% of TCI. Then, when TCI returns to $800,000 he or she would be making $68,000. That’s an $8,000 raise! That’s going get even more buy in from your team.
Let’s say you gave that GM 4% of EBITDA. Then, when EBITDA returns to $800,000 he or she would be making $68,000. That’s an $8,000 raise!
$36,000 + ($800,000 * 4%) = $68,000
Other Key Components of This Structure
Timing of the Payout
The percentage of EBITDA/TCI is paid out after the end of each 4-week period. It can be added to the next paycheck.
If you go through with this structure, we recommend you always pay out on EBITDA/TCI on the same day (i.e. 7 days after the end of a period). This provides some consistency, while the amount isn’t as consistent. Obviously, this means it’s important to always close the books on the same number of days after the period.
Roy recommends this payment is paid pretty quickly after the period closes. If you’re consistently uploading invoices throughout the period, it shouldn’t take much time to close at the end. If you’re not making these bonus payments until weeks after the period, it’s less likely to drive behavior.
Clarity Around Amount
Roy has found that it’s also helpful for employees on this payment structure to have insights into performance throughout the period. If you’re using MarginEdge, users with access can see controllable profits on a daily basis.
It’s also beneficial to make sure the amount is clear by providing math formulas so once employees know how TCI/EBITDA is shaping up, they can do a quick calculation to estimate the amount they’ll receive.
Benefits of This Structure
We know your staff would like to be paid their pre-Covid pay and we know that’s what you’d like to be paying them too. If that’s not your reality, we feel like this is a viable alternative because while staff may be frustrated with the lower pay, they are given some control of earning higher pay.
While sales regrowth has become a more crucial goal, this structure ensures that goal is going to be top of mind for your team members too.
“With this program, we saw managers take ownership and treat everything like their own. It creates a synergy in the restaurant where everyone is pulling in the same direction.”
– Roy Phillips