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Creating an effective pay policy

Creating an effective pay policy

Editor’s note: This is part of the 2010 NRN and HVS salary study, “Just rewards,” from the Nov. 22 issue of Nation’s Restaurant News. To see the full report, available to subscribers only, go to’s Special Reports page. Excerpts, including this case study and data on the most underpaid and overpaid CEOs, as well as the methodology behind the study, are available to all readers.

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 given 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.

Have a compensation philosophy 

In a recent review of restaurant proxy data, I was quite surprised to see that many companies are “boilerplate” 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. It should vary based on a company’s level of maturity in the market — that is, depending on whether the company is emerging, stable 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 or exceeded. Such a program means the variable components — namely, annual cash bonus and long-term incentives — allow for an executive to earn superior compensation when predetermined company objectives are met or exceeded. 

Compare apples to apples 

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 in terms of revenue and number of units, as well as current and projected future performance metrics and the 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 peer groups that are too aggressive or are designed by someone lacking appropriate knowledge of the restaurant industry. I recently reviewed the proxy statement of a restaurant company that had a peer group consisting of organizations that were more than triple the company’s revenue size, influencing the compensation committee to set executive compensation levels at a much higher level.

Another problem is that too many restaurant companies are using the same compensation consulting firms. How can a restaurant company get creative and objective advice if their compensation adviser 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 advisers: Who are your existing clients? 

Find the right formula

The debate over how much a senior executive receives in the form of cash versus equity continues to be a hot topic. The general consensus among compensation consultants is that the appropriate mix for senior executives is 40 percent to 60 percent, with 40 percent in the form of cash compensation, including base salary and annual targeted bonus, and 60 percent in the form of equity such as options and restricted stock. But that ratio should not be adhered to unconditionally, as you could create an unnecessary risk, prohibiting you from attracting and retaining required talent for your organization.

In addition, 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 and operating strategy. 

Use your HR experts

At a recent hospitality conference, former GE head Jack Welch summed up the often-forgotten expertise of human resources professionals 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 perplexed that so many chain restaurant organizations don’t treat HR leadership as a critical internal partner. Ideally, the head of human resources should 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. HR should be able to communicate how senior leaders are progressing through the leadership pipeline to achieve succession-planning initiatives. And most importantly, HR should have the best pulse on employee morale and what is necessary to attract and retain the best and the brightest.

David Mansbach is partner, North America for HVS Executive Search, a division of Mineola, N.Y.-based HVS that specializes in senior-level searches, 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. He is a frequent lecturer on issues relating to executive recruitment, pay-for-performance and corporate governance.

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