Incentive Compensation By John Sibbald

Transcription

1 Incentive Compensation By John Sibbald In the course of our firm s executive recruiting efforts for club and golf properties, we interview more than 1,000 managers every year. Invariably the subject of base salaries and bonuses comes up, and we re often surprised by what we hear. Consider two recent real-world examples. While they may represent opposite ends of the spectrum of inventive bonus programs, they serve to highlight the primitive state of pay-forperformance systems in the world of golf properties. A leading investor-owned country club in the Southeast. This beautiful club has annual gross revenues of $3.5 million. At a time when most courses are fortunate to break even or show a small surplus, this one returns a net profit of $500,000 to its owner. What is the reward to the manager who presides over this success story? On top of what is only an average base salary, he receives an incentive bonus of a paltry one percent of the net profit, or $5,000. A relatively new daily fee golf course in a large Midwestern city. This course offers facilities that are unique among its competitors, yet its user growth has been below expectations. In recruiting a new manager, the owner instituted an incentive program with the bonus pool to be funded entirely by greens fees. The owner concluded that a reasonable first-year target would be total greens fees of $1,166,000 (not unreasonable in view of the market). Based on a percentage formula, the new manager s first-year bonus will range from a minimum of $69,000 to a maximum of $103,000. His minimum bonus is larger than his starting base salary. The majority of course owners are active or retired business and professional leaders. They know first-hand the advantage gained by an employer who offers employees tangible incentives to exert their best efforts on behalf of the employer. The better the performance, the more lucrative the payout. Assuming the criteria for measuring performance do in fact help the business thrive, the company and its owners benefit. Why, then, given course operators decades of experience with the efficacy of pay-forperformance systems, has the concept of incentive compensation for course managers not caught on? (It s important to note that incentive compensation as discussed here is entirely different

2 from the practice at many properties of paying a Christmas or holiday bonus or some other type of discretionary bonus to managers and their key subordinates.) Historically, course owners have tended to tie bonus payments to such quantitative factors as improvements in food and beverage percentages, labor costs, merchandise sales, greens and carts fees, and the bottom line. Little effort has been made to evaluate the qualitative dimensions of a manager s job, such as customer relations, staff development and creativity. When the payment of a bonus is based solely on quantitative criteria, there can be unintended negative consequences for both manager and course. A manager who seeks to earn a high bonus may reduce staff and labor costs, but the result will be a decline in the quality of service. Efforts to increase play simply for the sake of posting higher numbers may cause undesirable changes in the character of those who use the course. In cases like these, when patrons of long standing begin to complain, the whipping boy is likely to be the manager whose bonus is tied to the achievement of these measurable objectives. Because incentive compensation has not been well understood in the context of golf clubs, this powerful management tool has largely been disregarded. To be effective, an incentive compensation program must be linked to a sound system of evaluating management performance a system that considers both quantitative and qualitative criteria. The system should encompass four principal areas of performance evaluation: 1. Major responsibilities: These usually are ongoing, day-to-day responsibilities specified in the manager s job description. Because they tend to be fulfilled over relatively long periods of time, the accomplishment of these responsibilities often is more difficult to measure than objectives. Examples are: - Provide quality leadership and a fresh, upbeat image for the club and its amenities. - Take the lead in suggesting new programs, projects and events, and implement those that are approved

3 2. Major current job objectives: These are specific short-term and long-term projects that have been assigned to the manager. They often can be found in a club s annual or long-range plan. The accomplishment of objectives is easier to measure than the accomplishment of responsibilities because objectives are explicitly stated and usually have specific completion dates. Examples of objectives are: - Complete the retraining of all dining room personnel by August 1, Ensure that the new irrigation system is built within budget and is available for use by January 1, Skills and personal attributes: These are the manager s personal and professional traits that affect his or her relations with superiors, subordinates, patrons and suppliers. Included are administrative, managerial, communication and interpersonal skills, and characteristics like appearance, creativity, initiative, tact, and congeniality. 4. Overall summary and evaluation: This is the rating given to the manager s overall job performance as measured by the preceding three criteria, appropriately weighted to reflect the relative importance of each factor. One highly popular review program designed specifically for golf and club properties, now in use at over 200 clubs, provides for five rating grades or performance levels. They are: FE: Far Exceeds position requirements and expectations on a continuous basis; well above standard in all important aspects of the position. CE: Performs most duties exceedingly well and Consistently Exceeds the requirements and expectations of the position. Performance is consistently above standard, and there are no weaknesses in performing important aspects of the job. OE: Performs duties well; meets and Occasionally Exceeds requirements and expectations of the position

4 MM: Performs duties adequately and Meets Most requirements and expectations of the position, and DM: Performs some duties adequately and Does not fully Meet requirements and expectations of the position. How does the overall evaluation translate into bonus payments? Our executive search firm recommends a maximum first-year incentive bonus of 15 percent of the manager s base salary. Depending on the manager s performance over the year, the bonus could range from a low of zero to a high of 15 percent. To translate this into dollars and cents, let s take the hypothetical example of Mortimer Clubhead, manager of the mythical Old Termite Hill Club in Aardvark, Pennsylvania. This past year Mortimer s base salary was $80,000. He had a truly sterling year in terms of performance: when he was reviewed by his club owner, he received an overall rating of FE, or Far Exceeds. This means Mortimer should have earned the maximum incentive bonus of 15 percent, or $12,000. If Mortimer s rating had been CE (Consistently Exceeds), his bonus would have been 10 percent, or $8,000. Had the rating been at the OE (Often Exceeds) level, Mortimer s bonus would have been five percent, or $4,000. What if Mortimer had been rated MM (Meets Most job requirements)? This is essentially an average rating. This is the minimum that is expected of him, and his base salary is supposed to compensate him for it. He receives no bonus. And if he is given a rating of DM (Does not fully Meet job requirements), Mortimer should start to read the classifieds. The ax is not far from his neck. The impetus for a club to establish an incentive compensation program can come from either the club operator or the manager, because each has much to gain. In our experience the initiative frequently comes from the owners at the time they hire a new manager. In formalizing an incentive bonus program, the board needs to address three strategic questions: - 4 -

5 1. Who will be included in the program just the manager, or key department heads as well? 2. What is the maximum percentage payout? This determines the dollar amount of the bonus pool that must be budgeted as a line item. 3. Do we now have, or can we establish, a performance review program that will satisfy our interests as owners, as well as our manager s? While it is appropriate for the owners, as policy makers, to establish an incentive compensation program, we believe the manager is best qualified to identify the responsibilities, objectives, skills and traits that will contribute to the club s successful operation. Who should be included in the program? Ultimately, key department heads who report to the manager should become part of the incentive compensation program. For the first year, however, it is advisable to limit participation to the manager only. Both the owners and the manager need time to select performance criteria and to see how the program is working. The owners need to have confidence that the money budgeted for the bonus pool represents a sound return on their investment in the manager. As for the manager, he or she must believe that the performance appraisal has been fair, regardless of the size of the bonus. An effective pay-for-performance program benefits both owner and manager in several ways: It sets forth specific, achievable, measurable responsibilities for the manager. This establishes the basis for positive conversations about performance and compensation, without surprises or disagreements. It helps educate the owners in the highly varied aspects of a club manager s job. It creates a supportive climate for effective communication and enables the manager to appraise and reward key subordinates

6 It provides the documentation needed for the club to comply with fair employment practice laws governing wrongful dismissal and other actions that may create liability. John Sibbald Associates Inc 1. Executive Search consulting firm for the placement of General Managers, Assistant General Managers, Directors of Golf, and Golf Course Superintendents for the club industry. 2. Publications and programs include the Club Leaders Forum bi-monthly newsletter, A Club Board s Self-Audit, Club Manager Review, Career Management Manual, and the Platinum Clubs of America phone - 6 -