Reference no: EM13840764

Book: Cost Management by Blocher

Management compensation, Business analysis, and business valuation

Incentive Pay in the Hotel Industry

Kristin Helmud is the general manager of Highland Inn, a local mid-priced hotel with 100 rooms.  Her job objectives include providing resourceful and friendly service to the hotel's guests, maintaining an 80% occupancy rate, improving the average rate received per room to $88 from the current $85, achieving a savings of 5% on all hotel costs, and reducing energy use by 10% by carefully managing the use of heating and air conditioning in unused rooms and by carefully managing the onsite laundry facility, among other means.  The hotel's owner, a partnership of seven people who own several hotels in the region, want to structure Kristin's future compensation to objectively reward her for achieving these goals.  In the past, she 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) Operating within 95% of expense budget Average room rate Energy use	20%   30 30 20 100%

If Kristin achieves all of these goals, the partners determine that her performance should merit a bonus of $30,000.  The partners also agree that her salary will need to be reduced to $60,000 because of the addition of the bonus.

The goal measures used to compensate Kristin are as follows:

Occupancy goal:	29,000 room-nights=80% occupancy ratex100 rooms x 365 days
Compensation:	20% weight x 30,000 target reward=$6,000
	$6,000÷29,200= $0.2055 per room-night
Expense goal:	5% savings
Compensation:	30% weightx$30,000 target reward = $9,000
	$9,000÷5 = $1,800 for each percentage point saved
Room rate goal:	$3 rate increase
compensation:	30% weightx$30,000 target reward = $9,000
	$9,000÷300=$30.00 for each cent increase
Energy use goal:	10% savings
Compensation:	20% weight x 30,000 target reward=$6,000
	$6,000÷10 = $600 for each percentage point saved

Kristin's new compensation plan will thus pay her a $60,000 salary plus 20.55 cents per room-night sold plus $1,800 for each percentage point saved in the expense budget plus $30 for each cent increase in average room rate plus $600 for each percentage point saved in energy use.  The minimum potential compensation would be %60,000 and the maximum potential compensation for Kristin would be $60,000+$30,000=$90,000.

Required:

1. Based on this plan, what will Kristin's total compensation be if her performance results are

a. 30,000 room-nights, 5% saved, $3.00 rate increase, and 8% reduction in energy use?

b. 25,000 room-nights, 3% saved, $1.15 rate increase, and 5% reduction in energy use?

c. 28,000 room-nights, 0% saved, %1.00 rate increase, and 2% reduction in energy use?

Comment on the expected effectiveness of this plan.  In what way, if at all, would you change the compensation weights?