Ramon Martinez is the general manager of Classic Inn, a local mid-priced hotel with 100 rooms. His job objectives include providing resourceful and friendly service to the hotel’s guests, maintaining an 80 percent occupancy rate, improving the average rate received per room to $88 from the current $85, and achieving a savings of 5 percent on all hotel costs. The hotel’s owner, a partnership of seven people who own several hotels in the region, want to structure Ramon’s future compensation to objectively reward him for achieving these goals. In the past, he has been paid an annual salary of $72,000 with no incentive pay. The incentive plan the partners developed has each of the goals weighted as follows:
Measure Percent of Total Responsibility
Occupancy rate (also reflects guest service quality) .........40%
Operating within 95 percent of expense budget ......... 25
Average room rate ........................ 35
100%
If Ramon achieves all of these goals, the partners determined that his performance should merit a bonus of $23,000. The partners also agreed that his salary would be reduced to $60,000 because of the addition of the bonus.
The goal measures used to compensate Ramon are as follows:
Occupancy goal: 29,200 room-nights = 80 percent occupancy rate
x 100 rooms x 365 days
Compensation: 40 percent weight x $23,000 target reward = $9,200
$9,200/29,200 = $0.315 per room-night
Expense goal: 5 percent savings
Compensation: 25 percent weight x $23,000 target reward = $5,750
$5,750/5 = $1,150 for each percentage point saved
Room rate goal: $3 rate increase
Compensation: 35 percent weight x $23,000 target reward = $8,050
$8,050/300 = $26.83 per each cent increase
Ramon’s new compensation plan will thus pay him a $60,000 salary plus 31.5 cents per room-night sold plus $1,150 for each percentage point saved in the expense budget plus $26.83 per each cent increase in average room rate.
Required
1. Based on this plan, what will Ramon’s total compensation be if his performance results are
a. 30,000 room-nights, 5 percent saved $3.00 rate increase?
b. 25,000 room-nights, 3 percent saved $1.15 rate increase?
c. 28,000 room-nights, 0 saved $1.00 rate increase?
2. Comment on the expected effectiveness of this plan.