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.