Brain Flex: You Own a McDonald's Franchise - How Much Would You Pay For 10% More in Revenue?

Skin in the game - a ubiquitous term to describe the fact that someone has a vested interest in the outcome you desire - would seem to be a worthy goal of any incentive comp plan.  Of course, things like figuring out how much impact someone has on business outcomes are usually the biggest barriers to truly linking performance with pay.

Once in awhile, though, you get a clean shot at what someone is actually worth.  Take the example of the Manager position at McDonalds, responsible for all operations of a single McDonalds location.  BusinessWeek sets the stage for evaluating the value of the high-performing McDonalds manager as follows:

"Inside the McDonald's (MCD) off Interstate 270 in suburban St. Louis, manager Sadie Travis is hustling. Amid the beeping and buzzing of fry timers, Travis at any given moment is voiding orders at the register, handing out cups for drinks, wiping trays, or stuffing toys into Happy Meal boxes.

If only the fast-food titan could get more people like her to run its 6,700 company-owned restaurants. While an average McDonald's grosses $2.2 million a year, seasoned managers who motivate employees and keep customers coming back can add more than $200,000 to that total. "Restaurant managers are in the most important position in our company," says Richard Floersch, McDonald's chief human resources officer. Yet despite generous salaries—up to $62,000 plus bonus and company car, say insiders—turnover is a constant concern in an industry that typically sees 43% of its staff leave each year."

So, a high performing manager who cares nets you an additional 200K in revenue (roughly 10% more revenue) per location, if you own a franchise or a block of franchises.  That sounds good.  The real question is what would you offer that manager above and beyond the 62K salary, bonus and car (total package 80K) to hang around and help you access the additional 200K?

To come up with a good answer to that question, you need the net income figures for the average store.  McDonald's locations are widely reported to have an average profit margin of 6-8%.  With that in mind, I'm going to assume that the profit margins for the additional 200K in revenue are higher, since most of the embedded costs (lease/mortgage, labor, marketing, franchise fees) are already booked, and it's the skills of the manager that deliver the additional 200K.  I'm going to guess the margins on the last 200K, above the store average, are at a profit margin of 12%, although it could be higher.

So, with the 12% profit margin number, the additional 200K means 24K in additional earnings to you the owner.  How would you bring the store manager into that?  Me?  I'd determine the baseline for the store, and assuming it was similar to the national averages, I would implement profit sharing on the 200K that delivered half of the earnings to the manager.  That would equate into an additional 12K in earnings for the McDonalds manager above and beyond the 75-80K in total comp they now receive.

Why such a high percentage?  I want them to stay.  Sure, I want to keep some of the earnings myself, but getting the revenue as high as possible is important for the valuation of the business, an important factor if I want to sell at some point, which every business person has on their radar.

Your thoughts?  Too much, not enough?  It's a Retention 101 question.

Comments

[Rob]

I agree with your logic 100% - you need to return a large amount to the manager to incentivize them to stay, which will in turn motivate them to continue to try and increase revenue. I may even bump it up a bit or set bogeys where the percentage could increase. The long-term benefits can be huge.

[Tim Sackett]

Having some knowledge of the industry - I think the arguement is missing one important fact. A good manager can bring in an additional $200K to the bottomline, but a bad manager can cost upwards of $1M or more. So, the true value of a great Manager (in this industry - and you could argue many other industries as well) is not just what additional they bring in.

If MCD's avg. profit per store is $2-2.5M - they have many poorly run locations that are losing money. How valuable would a good manager be at these locations - taking them from negative to $1M to $1.5M. I could argue you should pay those people $150K and they would still be a great deal.

I agree that coming up with an equation where someone has some skin in the game, and gets a chance to reap what they sow is probably the largest motivating factor for managers in this type of environment.

As leaders we really get caught up in comparisons, instead of relative worth. Great - you're a strong manager for us, in a good store, in a good environment - your worth "X". But a manager that has the skills to take bad location, bad environment, bad history and turn it around is worth "X" squared!

[Corey Harlock]

Great article. I deal exclusively in the Hospitality workd here in Canada and fight this battle regularly.

I think part of the problem stems from the Franchisee's. They are probably boomers or gen x's and have that earn it mentality. I know you currently make $50, but I am going to start you at $45 so I can see if you are worth my hard earned dollars that I have worked 80 hours/week for the past 10 years for.

They expect a manager to ahve the same level of dedication they do and even at $80k/yr it can be a "suckers bet."

[Sean Conrad]

I think that kind of a deal makes great business sense.

I'd pay even more - additional bonus - to have that person train his or her replacement.

Then I can buy up the money-losing franchise on the other side of town - move my super-star manager to that one to turn it around - and while I'm at it ensure this super star get the opportunity for some equity in the new franchise.

This gets a whole lot tougher when you don't have direct responsibility for revenue to make the math easy. In a more complex business, how do you get "skin in the game" in a meaningful way for something like an office manager? Or do you even try?

[Human Resource Philippines]

I think that's enough to retain such skilled managers. Yet turnovers are happening in McDo still concern. And I agree with these motivational/incentive plan. Managers do some works that is beyond their duties. Like the example. Business are make sense if you value the people you have. Making them like your partners, they will ensure you great performance. That's how business succeeds.

[The Cube]

I love your work... but isn't this a recycled article?
You've published this before right?

[Michael Henry]

Interesting. A store with a gross revenue of $2.2 Million and an 8% profit margin yields annual profit of $176,000 above all operating expenses including labor. I agree any amount above that should be heavily invested in the manager, however as a general idea, a great majority of that "normal" $176,000 profit can be used more justly than going to executives of organization (i.e. living wages and training for other employees, or community health initiatives). I wonder how justified or legitimate it is for executives of a large corporation to receive the majority of profit of each franchise or location. A bigger issue is our economy and the structure of our corporations. Business models like this could never end or even alleviate poverty just make it worse.

[Leach28Patsy]

I think that to receive the loan from creditors you ought to present a firm reason. Nevertheless, once I've got a car loan, because I was willing to buy a house.