Wayside Compensation Final

Compensation Issue Analysis
The Current System and its Purpose

In principle, a compensation package aims to influence the controllable behaviours of a
manger in ways which promote goal congruence. Wayside motels being profit centers, the
desired behaviours would be ones which maximize profit. The current package however fails to
account for the non-financial behaviours which undermine the corporate strategy and is capable
of rewarding managers for elements beyond their control.
RGMs have the discretion in recommending adjustments to the inn managers base
salary. The choice to recommend an adjustment is arbitrary, however a 20 point criteria which
takes into account the motels quality of service and other managerial elements has been
unofficially used to aid in this recommendation. Using non-financial criteria does provide
benefits in gauging performance; however the implementation of the 20-point criteria as part of
long-term salary adjustments is ineffective. A base salary is commonly used to provide
employees with basic and predictable cash flow and sets minimum standards of behaviour.
Exposing this salary to annual adjustments based on elements which are subject to rapid shortterm change fails to uphold the purpose of providing some predictability and security for the inn
manager.
The sales volume bonus acts as a long-term incentive to increase revenue from the
previous year. With no control over the room price a manager must increase occupancy rates
while still earning a profit to earn the bonus. The intended behaviour is one where the manager
ensures quality of service and motel environment. However, this bonus can be earned given a
substantial increase in room price from the prior year, even if no increase in occupancy rate
occurs. Furthermore, it can be unduly earned if a motel is located in a heavily trafficked area
where the manager can skimp on quality and rely on new clients. The ability to unduly earn this
bonus puts into question its ability to control behaviour.
An inn manager controls his ROI bonus through room occupancy rates, room expenses,
maintenance expenses, and selling & administrative expenses. However, this bonus can be
manipulated or given unduly if the room prices change at a rate unequal to the occupancy rate.
For example between 1990 and 1991 occupancy increased by 2.5% and the average room price
by 13%. The manager earned an ROI bonus of $9743 in 1991, however if the average room price
remained at the same 1990 rate, the bonus would be $6914, and if the room price increased by an
amount equal to the occupancy increase the bonus would be $7455 a substantial difference. If
this method (ROI exhibit) is extrapolated onto the 1992 expected figures and the room price
decreases at an equal rate to the occupancy rate, then the ROI bonus falls from the calculated
$10914 to $7598. This suggests the inn managers ROI bonus increase from previous years is
strongly influenced by an increase in room price. Therefore, given an increase in price there is no
incentive to maximize room occupancy. Furthermore, included in the operating income is the
restaurant rental revenue which the unit manager likely has little control over. There is certainly
evidence to suggest the ROI bonus is strongly influenced by factors not controlled by the motel
manager and should be subject to revision or adjustment. This lack of control over the ROI does
partially justify Layne Remberts concerns. Furthermore, an ROI measurement can have a
negative influence on the quality of the service provided by inn managers if they attempt to
increase the ROI bonus by underspending on motel upkeep.
Given the degree of control an RGM has over the elements of the income statement and
balance sheet, using an ROI to gauge his performance would be reasonable. Using the ROI as the
main influencer for an inn manager however does not seem wise, primarily because of the lack
of control over room prices.
Alternative #1: Status Quo
Given the past success and expected future success of Wayside it would be reasonable to
pursue no changes in the compensation package.
Alternative #2: 20-point Bonus
A Second alternative would be to replace the sales volume bonus with a bonus
based on the 20 point criterion and to use the percentage of change in occupancy rate as a means
to peg the change in room prices when calculating ROI. The price peg would prevent the
manager from relying on an uncontrollable factor, the room price as a means to receive his
bonus. He must therefore seek to increase room occupancy which is congruent with the method
used to decide on motel expansion. The 20 point bonus would ensure quality of service and other
managerial factors remain up to standard. This bonus would also prevent under-spending by the
inn manager as a way to alter the ROI if he fails in increasing room occupancy. Removing the
sales volume bonus would also remove compensation based on room price increases. This
alternative would permit financial and non-financial performance measures to act as a basis for
compensation.
Implementation
-
Implement starting in a new financial period to avoid confusion

20 point bonus would have to be higher than the sales volume bonus to compensate for
the decrease in ROI bonus
RGMs must reinforce the concept that room occupancy rates are more important than in
previous periods.
Offer criticism of the alternative
ROI Exhibit
Total Revenue
Operating Expense
Operating Income
Occupied room %
Average room rate ($)
Occupied rooms
Room Revenue
ROI Bonus
1992
1485859.0
861624.0
624235.0
0.8
30.1
47184.0
1420238.4
$ 10,914.00
% Inc/dec
41.55%
32.11%
57.04%
-4.47%
10.26%
28.80%
42.27%
12.02%
1991
1049729.0
652225.0
397504.0
87.3
27.3
36634.0
998277.0
$ 9,743.00
% Inc/dec
16.28%
12.04%
23.98%
2.50%
13.07%
2.92%
16.37%
1990
902785.0
582159.0
320626.0
84.8
24.1
35595.0
857839.0
24.06%
$ 7,853.50
If ROI uses % change in room occupancy as a basis for the average room rate, the
ROI would be:
Room rate
Room Revenue
Total Revenue
Operating Expense
Operating Income
ROI Rate
ROI Bonus
1992
26.1
1230544.1
1296165.1
861624.0
434541.1
0.2
$ 7,597.50
1991
24.7
904951.4
956403.4
652225.0
304178.4
0.2
$ 7,455.41

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Compensation Issue Analysis

The Current System and its Purpose

Implement starting in a new financial period to avoid confusion

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