Editor’s note: This is part of the 2010 NRN and HVS salary study, “Just rewards,” from the Nov. 22 issue of Nation’s Restaurant News. To see the full report, available to subscribers only, go to NRN.com’s Special Reports page. Excerpts, including this case study and data on the most underpaid and overpaid CEOs, as well as the methodology behind the study, are available to all NRN.com readers.
Pay-for-performance has been the standard method of compensation at Domino’s Pizza Inc. for the past decade because it works, said Patti Wilmot, chief people officer at the parent company to more than 9,000 pizza delivery locations.
“True pay-for-performance means there is a lot of skin in the game for individuals, from the CEO on down,” Wilmot said. “They have to have an ownership piece of the business.”
In a new study by HVS Executive Search and Nation’s Restaurant News, the companies with the strongest pay-for-performance compensation packages were most likely to have underpaid chief executives. Whether a chief executive was overpaid or underpaid in this new survey was based on a company’s performance, stock appreciation and other standard indicators. See Methodology here
Former Domino’s chairman and chief executive Dave Brandon was considered underpaid by 12.58 percent in total executive compensation, according to the study based on 2009 data. Current chief executive, J. Patrick Doyle, succeeded Brandon in January.
Wilmot, who helped establish the pay-for-performance model, shared with Nation’s Restaurant News her insights on how to make pay-for-performance work effectively.
First, the base pay has to be practical — neither excessive nor insignificant. It also needs to be competitive.
“We strive to pay in the 50th percentile, which means 50 are paid more, 50 are paid less,” Wilmot said. “When our shareholders look at overall compensation, base salary is reasonable and not over the mark. Our executives like that. It’s a competitive base salary with the upside in the short-term and long-term bonuses.”
Short-term bonuses are based on corporate earnings before income, taxes, depreciation, and amortization. A bonus will be a percentage based on an EBITDA target.
“We pay over the market with short-term bonuses,” she said. “For an executive, when we perform and reach our 'stretch' goals for our total company, we will pay more than the 50th percentile.” When they reach their goals, their pay can reach into the 75th percentile.
Stretch goals are financial or management targets that are achievable, but will require hard work and effort to reach.
“It’s possible to make them, but it’s a stretch; it’s not a layup,” Wilmot said. “Every other company is doing the same thing. We have to be better than everyone else.”
Long-term incentives are all about corporate equity, but even there an executive has to meet performance targets each year for three years for that equity to vest.
“What the real carrot, the uniqueness about our pay-for-performance, is the more money you make the more you share in the wealth,” she said. “If you don’t perform, you don’t get paid. It’s that simple. It’s that black and white.”
Pay-for-performance is not just for senior-level executives but also for all company employees. Goal setting and rewards are for everyone, Wilmot said. For example, employees can benefit through the Team Achievement Dividends, or TAD, which are paid out when the company meets certain objectives for the year.
“There is a lot of unity in that,” she said, “and a lot of communication about where we are against the target and what role everyone plays in hitting the target, whether they are a secretary or accountant.”
Wilmot has seen employees create their own initiatives to help the company reach its goals. One year, all the administrative assistants came up with the idea to cut transportation expenses by using one taxi cab driver for the corporate office and negotiating a better rate. The savings were then applied to the TAD.
As simple as the concept is for pay-for-performance — perform and get paid — it requires a lot of attention to detail to enact it successfully, Wilmot said.
“It requires you to be diligent in writing objectives and communicating to the organization,” she said. “Everyone understands what part he or she plays and their roles. You have to reinforce consistently where you are in the progress.”
A company also must be committed to conducting regular and productive performance reviews so employees know where they stand in achieving their goals. Team members are responsible for making sure they receive a review and participate in discussions about their performance.
“I go in ready to discuss all of my accomplishments with [chief executive] Patrick,” Wilmot said. “I come prepared not on what the boss will say to me, but what I’m going to say.”
Doyle will do the same in his own review with Domino’s board of directors. He will go over his 2010 corporate objectives what he achieved or didn’t achieve, Wilmot said.
“It’s not rocket science,” she said. “It’s not unique. But it’s real and it works and it’s right for our culture.”
Dina Berta is a contributor to NRN. Contact editor Sarah Lockyer at [email protected].