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How much do I pay them?

When you’re pondering the age-old question of how much to pay your workers—and yourself—look at compensation as more than a mere expense, say consultants. How do you design a business plan that pays enough without paying too much?

T.J. Schier faced a common problem in the midst of a recession: how to cut costs. The 10-store franchisee of the Which Wich sandwich chain, headquartered in Dallas, Texas, found an uncommon solution: paying more.

He offered bonuses to his hourly supervisors for reining in expenses and improving customer service scores. Within four months, his costs of labor and goods sold had dropped 2 percentage points and customer satisfaction had climbed three points.

“It’s simple human nature,” says Schier. “When supervisors are paid hourly and not incentivized around labor costs, they want more people on duty. Now, if they see somebody standing around, they think, ‘It’s impacting my bonus.’”

When you’re pondering the age-old question of how much to pay your workers—and yourself—look at compensation as more than a mere expense, say consultants. It’s a strategic tool for changing behavior and achieving your business plan. Indeed, compensation strategy should be a key part of your business plan.

“If you don’t have a compensation plan, you’re probably paying 5 to 8 percent more than you need to,” says Craig Rowley, national service sector VP for the management consulting firm Hay Group in Dallas. “If you have seven restaurants, you can handle compensation programs on a sheet of paper, but by the time you hit 50 stores, it’s good to have a program.”

How do you design a plan that pays enough without paying too much?

Here are the key questions to ask:

What do your competitors pay? If you’re a larger chain, you can buy salary figures from firms like the Economic Research Institute. Or you can join the Chain Restaurant Compensation Association, which surveys 164 member concepts.

If you have just a few units, you can dig up plenty of free information. For hourly workers and managers, start with data from Salary.com and Payscale.com, much of it targeted to your city or zip code. Look to proxy statements of small public companies for figures on executive pay.

Ask workers at similar restaurants what they’re making, and ask applicants what they earned at their last jobs. Gather information from at least six different sources, recommends consultant Brent Longnecker of Houston, Texas, and look, too, at hotels and movie theaters. “Look at the businesses where you want to pull your talent from and where you lose your talent to,” he says. “The general manager of a hotel is very similar to a restaurant. He works 60 to 80 hours a week, and he’s on call all the time.”

Meet ’em or beat ’em? “You have to make the judgment, ‘Do I want to be a market leader or a market follower?’” says Thomas Zorn, restaurant industry reward consultant with Hay Group.

If you’re hiring from outside your company, plan to top the median salaries for your market, he recommends. “If you’re filling most management jobs from within, you can pay more conservatively, because you’re giving them more opportunity to improve their incomes through promotions.”

Paying less than local averages can turn out to be a false savings, warns CRCA president Liz Allison. “If you’re lagging the market, your employees can be easily picked off. Remember that it might cost you $25,000 to put a new manager through six to eight weeks of training.”

How much should I pay for performance? The higher your job title, the more your pay should reflect the fortunes of your company, says Rowley. A typical general manager gets 80 percent of his cash compensation in base pay and the remaining 20 percent in bonus, if he hits or exceeds targets. The share of variable pay can rise to 60 percent for an executive VP and 80 percent for a CEO.

Connecting pay to performance is especially helpful in a recession, when performance goes down. Hay Group figures show 2009 compensation for restaurant executives dropped 2.7 percent nationwide, as executives got fewer and smaller bonuses. In 2010, as the economy improves, it predicts bigger bonuses will boost compensation 3 percent.

What targets should I set? Incentives should change, depending on the rung of the corporate ladder. Schier rewards supervisors for controlling expenses, while he rewards general managers for profitability and guest satisfaction. “We want the bonus system based on things they can control,” he says.

At the same time, all targets should be in sync, says Allison. Don’t reward store managers for driving sales, while executives get bonuses for bottom-line profits. “Align the parties so that everybody is focused on the same goals, instead of working at cross purposes.”

In a down economy, set reachable goals, says Longnecker. If you expect sales to be down 3 percent, pay a bonus for hitting that figure, and pay extra if they’re only down 2 percent. “A lot of companies are recalibrating their targets to be where they were three years ago,” he says, “not where they were hoping to be right now.”

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