The performance of managers of McDonald's company owned restaurants is critical to the quality and efficiency of service provided by McDonald's. Over the past two decades, McDonald's has tried several incentive compensation plans for its company-owned restaurant managers. We describe five of those plans here.
◾ Plan 1: Manager's bonus is a function of the restaurant's sales volume increase over the previous year.
◾ Plan 2: Manager's bonus is based on subjective evaluations by the manager's superiors. Bonuses are not tied explicitly to any quantitative performance measure.
◾ Plan 3: Manager's bonus comprises the following components:
1. A bonus of 10 percent of salary is paid if the manager meets the budgeted costs. This budget is based on sales volume and the standard allowed per unit.
2. Management visits each restaurant each month and evaluates its performance with regard to quality, cleanliness, and service. Founder Ray Kroc identified these three key success factors for the company. Managers in restaurants receiving an A get a bonus of 10 percent of salary, managers of restaurants receiving a B get a bonus of 5 percent of salary, and managers of restaurants receiving a C receive no bonus for this component of the plan.
3. An additional bonus up to 10 percent of salary is earned based on increases in sales volume over the previous year. (The manager can still receive the bonus if volume does not increase because of circumstances beyond the manager's control.)
◾ Plan 4: Superiors evaluate the manager as to the following six performance indicators: quality, service, cleanliness, training ability, volume, and profit. Each indicator is scored 0, 1, or 2. A manager receiving a score of 12 points receives a bonus of 40 percent of salary, a score of 11 points provides a bonus of 35 percent of salary, and so forth.
◾ Plan 5: The manager receives a bonus of 10 percent of the sales volume increase over the previous year plus 20 percent of the restaurant's profit. Evaluate each of these incentive plans. Are there better alternatives? Be sure to consider the important things a manager and a restaurant should do to contribute to McDonald's overall company success.