Pay attention or pay the price

As the stalled economy forces chain executives to focus on cost cutting, fine-tuning operations and chasing elusive sales, they are spending less time on matters like executive compensation, benefits and total rewards packages—and that will come back to haunt them, according to search experts.

When more jobs become available during the rebound, many companies will risk losing their best talent to competitors that maintained their employee focus, said recruiting consultant David Mansbach at HVS Executive Search.

“So many companies are in survival mode right now,” Mansbach says. “They are focused on the critical components like ops or sales, but one area that some people lost sight of is their internal customers, their employees.”

To document the changing landscape of executive compensation at chain restaurant companies, Nation’s Restaurant News and HVS Executive Search partnered earlier this year on a new and comprehensive study. The survey, conducted in September and October, covered the latest payment and benefit offerings—mostly from fiscal 2008—from 78 responding companies, 55 of which are private enterprises and 23 of which are publicly traded firms. Of the respondents, 20 were multiconcept companies and 58 were single-brand operations.

HVS-NRN 2009 Chain Restaurant Executive Compensation StudySeparate median results by category

The study covered 22 senior leadership positions including but not limited to chief executive, chief financial officer, head of human resources, president or chief operating officer, multiunit operations and other positions in the areas of finance, human resources, purchasing and supply chain and development. Findings cover all segments of the industry including cafeteria and family chains, quick-service companies, fast-casual operations, and casual-dining firms.

The biggest surprise, Mansbach said, was the lack of long-term incentives offered among the respondents. The median amount of long-term compensation packages, encompassing stock options or other incentive grants, only hit six figures in a number of cases, the data show, and for some positions, such incentives were not even granted.

KEY TERMS

BASE SALARY—Annual payANNUAL BONUS—A sum of discretionary and/or performance-based awards made in addition to base salaryTOTAL CASH COMPENSATION—Base salary plus annual bonusOTHER COMPENSATION—Additional pay including but not limited to car allowance, use of aircraft and life insuranceLONG-TERM INCENTIVES—The value of all long-term incentive grants. The values of public-company stock options were calculated using the Black-Scholes valuation method. For the purpose of this study, findings for long-term incentives include data on only the companies that reported awards.TOTAL DIRECT COMPENSATION—The total sum of base, bonus, other and long-term incentive compensation

“People started thinking very short term,” Mansbach says. “The problem is that a lot of senior executives now don’t feel part of the team, and are not as beholden to a company.… It could create an effect—employees don’t forget, just like customers don’t forget.”

In determining the best long-term incentives, several factors come into play, including corporate strategic metrics, vesting and distribution mechanisms, resources available, and the cost, said Valerie Davisson, executive vice president and chief PeopleWorks officer at Brinker International Inc., the Dallas-based casual-dining company.

“How to set each of those levers will depend on the needs of the company,” she says. “For example, if retention is at issue, the vesting period might be longer or spread over time.”

Many companies today are facing the added pressure of underwater stock options, or options granted to executives that hold exercise prices higher than their current market value, making the option less desirable. While only 19 percent of the companies in the survey said their executive equity program was underwater, the depressed market is no doubt affecting more companies in the industry.

Davisson says a differentiated approach to stock options can help weather the storm.

“There are several strategies a company can take regarding underwater options,” she says. “We deliberately chose to provide a mix of equity—restricted stock units, performance shares and options—to help balance market volatility for our team members.”

Not surprisingly, the HVS-NRN study showed that salaries increased as company size grew, with chief executives at companies with revenue of less than $200 million earning a median base salary of $250,000, and chief executives at companies with revenue greater than $500 million earning a median base salary of $770,000.

The study also found that bonuses, both their targets and caps, escalated as seniority in the organization grew. For example, a chief executive’s bonus target, or what is achievable when expectations are met, averaged 70 percent of base pay, and the bonus cap, or the highest level achievable, which is typically set to protect companies from unforeseen events like a massive spike in stock price, was 140 percent of base pay. In comparison, general managers’ average bonus target totaled 25 percent of pay, while the bonus cap totaled 30 percent of pay.

The HVS-NRN survey was created by an advisory board of leading human resources professionals in the foodservice industry and covered compensation statistics like base salaries, annual bonuses and long-term incentives. Detailed bonus information, including targets and caps for each position, as well as benefit information on health care, 401(k) programs and deferred compensation trends were collected. All of the data has been analyzed by revenue, segment, number of units and public versus private companies.

The respondent group’s median revenue totaled $207.3 million; its median number of units totaled 104; and its median employee base totaled 3,675 people. There were 11 family-dining or cafeteria respondents, 39 casual-dining firms, 19 quick-service companies, and nine fast-casual operations represented in the study.— [email protected]

This story is part of a special report providing benchmarking and best practice analysis of industry compensation. To read more of "Pay attention or pay the price," pick up the Nov. 16 issue of NRN or click here to purchase a downloadable PDF version of the report on RetailNet.

To purchase the 2009 Chain Restaurant Executive Compensation Report from HVS Executive Search, click here.