Leaders Manage Compensation Programs
Overview of Compensation and Stakeholder Concerns
Compensation includes all financial (money) and nonfinancial (nonmoney) payments and rewards provided to employees in exchange for their labor.
Managers face the challenge of balancing the conflicting concerns and expectations of different stakeholders:
Employees: Seek maximum possible compensation for their work.
Owners: Seek maximum profits from the operation.
Managers: Function as the bridge between employees and owners, managing these competing interests.
Costs in a restaurant or foodservice operation are categorized as:
Controllable Costs (Labor): This includes salaries, wages, tips, bonuses, merit pay, and commissions.
Uncontrollable Costs: Costs that the manager cannot directly influence through daily operational changes.
Prime Costs: These are the largest categories of costs in an operation and include:
Labor costs (Salary or Wages + Benefits).
Product purchases.
Compensation Formula: Total Compensation is defined as (Salary or Wages) + Benefits (e.g., sick leave, vacation time, health insurance).
Major Components of Compensation
Wages:
Compensation paid based on the actual hours worked per day.
These are heavily influenced by Federal and State laws as well as competitive rates offered by other employers.
Salaries:
Compensation paid on a weekly or monthly basis that does not fluctuate based on the specific number of hours worked.
These roles are typically "Exempt" from overtime pay requirements according to the Fair Labor Standards Act (FLSA).
Tips:
Money paid directly by the customer to the employee in return for services provided.
These must be reported for tax purposes, and relevant taxes must be paid.
Bonuses:
Extra payments provided to employees based on the achievement of specific targets or goals set by the operation.
Benefits:
May include sick leave, vacation time, and health insurance.
Often available only to full-time employees after they have completed a specific period of employment.
Some benefits are mandatory under federal and state law, while others are voluntary.
Employees are often unaware of the significant costs incurred by the employer to provide these benefits.
New York State Minimum Wage Specifics
Every worker in New York State is entitled to receive the New York State hourly minimum wage rates.
The specific rate varies based on:
The region within the state.
The type of work being performed.
Employees are encouraged to use the "Minimum Wage Lookup Tool" provided by the Department of Labor () to find their specific rate.
Federal and State Compensation Laws
Fair Labor Standards Act (FLSA):
Establishes the standards for minimum wage, overtime pay, record-keeping, and child labor.
Conflict of Laws Rule: If state and Federal minimum wage rates vary, employees are entitled to the higher benefit.
Tipped Employees: Employers may pay lower than the standard minimum wage provided that the combination of tips and wages equals at least the minimum hourly wage.
The Equal Pay Act:
Administered by the Equal Employment Opportunity Commission (EEOC).
Mandates "equal pay for equal work."
Jobs do not need to be identical to qualify, only "substantially equal."
Covers all forms of pay: salary, overtime, and benefits.
Employers are strictly prohibited from lowering a salary to comply with the act.
Family and Medical Leave of Absence (FMLA): Establishes rights for employees to take leave for specific family and medical reasons.
Worker’s Compensation:
Provides financial assistance and covers medical bills for employees who are injured or disabled while on the job.
Unemployment Compensation Programs:
Based on both Federal and State laws.
Provides partial wage replacement for a specific period to workers whose jobs are terminated through no fault of their own.
Individual eligibility, the amount of compensation, and the duration of benefits are determined by both Federal and State regulations.
Funding is provided by employers through payments into a specific fund.
Factors Affecting Compensation Costs
Revenue Levels: The amount of revenue generated directly determines the available labor budget.
Payroll Standards: The actual amount spent on labor, expressed in cash and as a labor cost percentage.
Local and Regional Pay Levels: Information on expected pay rates is published by the US Department of Labor, State Restaurant Associations, and Local Chambers of Commerce.
Competition’s Pay Levels: What other local businesses are paying for similar roles.
Knowledge and Skills Required: Pay varies based on the expertise needed (e.g., an Executive Chef in fine dining vs. a shift leader at a quick-service restaurant).
Collective Bargaining Agreements (CBA):
A legally binding contract between managers and employees represented by a union.
Covers employment conditions, pay rates, and dispute resolution procedures.
Managers must negotiate compensation directly with union representatives.
Other Factors:
Benefit trade-offs: Employees may accept lower pay if high-quality health benefits are offered.
Location-based subsidies: For example, an operation in a downtown office area might subsidize parking costs.
Economic Adjustments: Compensation guidelines should be reviewed annually to account for inflation, marketplace fluctuations, and general economic shifts.
Labor Cost Calculations (Examples):
$180,000 \times 0.30 = 54,000\n - $200,000 \times 0.30 = 60,000
The Compensation Control Process
Monitor factors: Keep up to date on external compensation issues.
Analyze and Establish: Analyze factors affecting compensation to establish standards and procedures for the organization.
Train: Train the staff to strictly follow the established standards and procedures.
Monitor Performance: Observe employee performance and compare actual performance against the established standards.
Take Action: Resolve any deviations found during the monitoring phase.
Compensation Policies and Performance Management
Typical Compensation Policies:
Direct deposit of paychecks.
Garnishment (a legal procedure for debt collection from wages).
On-call pay and payments for work performed when called in.
Pay raises, promotions, and reclassifications.
Strict confidentiality of compensation information.
Merit Pay Plans: Incentives designed to encourage employees to improve performance and productivity.
Factors for Merit Decisions:
Job performance according to standards.
Accomplishments recognized beyond the immediate work team.
Current pay rate.
Overall contribution to business goals.
Economic performance of the business (merit pay may decrease in a "bad year").
Cost of Living: Monitored via the index developed by the US Bureau of Labor Statistics, reflecting changes in the price of food, housing, and transport.
Compensation Exceptions:
Applies when an employee is at the top of their pay range and cannot receive a standard merit increase.
Could be due to excellent work accelerating their progress to the top or being hired at a high rate due to experience.
Managers should seek to make exceptions or provide alternative rewards where possible.
The Peter Principle: A warming against promoting employees into roles they are not suited for or do not desire, which frequently leads to frustration and failure.
Performance Appraisals:
Typically the time when employees are informed of compensation increases.
Frequency is often annual, occurring on the employee's anniversary join date.
Aligning appraisals with budget preparation allows for better payroll planning (e.g., planning for a general increase).
Payroll Processing and Technology
Record-Keeping Tasks:
Determining gross pay (total pay before any deductions).
Calculating withholdings for taxes and charges.
Calculating mandated benefits to be paid to each employee.
Calculating the employee's share of voluntary benefits.
Completing government forms and submitting payments to agencies.
Outsourcing vs. In-House:
Small operations: Tasks usually completed by the manager.
Large operations: Tasks are delegated to a specific employee or outsourced to a professional payroll company.
Critical Management Responsibilities:
Managers must ensure hours worked are accurate (actual hours vs. scheduled hours).
Securely document employment dates as they serve as the basis for vacation and sick time eligibility.
Ghost Employees: Managers must be vigilant against "ghost employees" (fraudulent entries on the payroll for people not actually working) and use detection methods.
Human Capital Management (HCM) and AI:
Technology centralizes payroll, benefits tracking, and employee info into one system.
Automation handles wage calculation, tax withholding, and regulatory compliance.
AI-driven systems monitor data for accuracy and flag discrepancies in real-time.
Cloud-based platforms ensure records are secure, accessible, and compliant with all laws.
Questions & Discussion
8.1 Knowledge Check:
What are some examples of nonfinancial compensation that might be offered to employees in a restaurant or foodservice operation setting?
How can the way compensation is managed affect a restaurant or foodservice operation’s culture and profitability?
Why might it be challenging for managers in the restaurant and foodservice industry to balance compensation decisions while maintaining the operation’s vision and mission?
8.2 Knowledge Check:
What are the two types of costs in a restaurant or foodservice establishment and how can managers influence each type?
What are the three broad types of labor costs in a restaurant or foodservice operation and how are they defined?
Why is it important for managers to be aware of the benefits offered by competitors, and how can this knowledge benefit their operations?
8.3 Knowledge Check:
What are workers’ compensation laws and who administers them?
What is the primary requirement of the Equal Pay Act, and what forms of pay does it cover?
How do state minimum wage laws interact with the federal minimum wage law?
8.4 Knowledge Check:
What are the key factors that restaurant and foodservice managers must consider when determining employee pay rates?
What is the concept of “economy of scale,” and how does it relate to labor costs in a restaurant or foodservice operation?
Why is it important for managers to be aware of local and regional pay levels when establishing pay ranges?
8.5 Knowledge Check:
Why is fairness an essential element in establishing employee compensation policies and procedures?
What are some of the factors that managers should consider when determining pay increases?
What alternative tactics can managers consider when an employee is already at the top of the pay range and cannot receive a traditional merit increase?
8.6 Knowledge Check:
How often should performance appraisals be conducted, and what is the most common frequency of appraisals in restaurants and foodservice operations?
Why might some operations align performance appraisals with an employee’s anniversary date?
What are the two approaches managers can take when discussing pay during performance appraisals? What is a benefit of each?
8.7 Knowledge Check:
How can human capital management (HCM) software and AI enhance the payroll and recordkeeping process in restaurant and foodservice operations?
What does it mean to outsource payroll tasks, and what are some common options for outsourcing?
What is a ghost employee, and how can managers detect them?
Key Terms
Anniversary date (employment): The yearly recurring date of an employee's hire.
Benefits: Non-wage compensation such as insurance or paid time off.
Bonus (compensation): Monetary reward for reaching specific goals.
Collective bargaining agreement (CBA): Contract between management and a union.
Compensation: Total of all rewards (financial and nonfinancial) for work.
Competitive employers: Businesses in the same market competing for the same labor pool.
Defined benefit pension / Defined contributions: Specific types of retirement savings plans.
Equal Pay Act: Law requiring equal pay for substantially equal work regardless of gender.
Exempt employee: An employee not entitled to overtime pay under FLSA.
Fair Labor Standards Act (FLSA): Federal law governing minimum wage and child labor.
Garnishment: Legal seizure of wages to pay a debt.
Ghost employee: A fraudulent person on a payroll who does not actually work for the company.
Gross pay: Total earnings before taxes and other deductions.
Medicare / Social Security: Federal programs funded by payroll taxes.
Merit pay plan: A system linking pay increases to performance quality.
Outsource: Contracting an outside company to handle internal tasks like payroll.
Paid time off (PTO): Compensation for time not worked (vacation, sick days).
Performance standard: A benchmark used to evaluate employee efficiency and quality.
Prime cost: The sum of labor costs and product purchase costs.
The Peter Principle: Theory that employees are promoted to their level of incompetence.
Tip (compensation): Discretionary payment from a customer for service.
Unemployment insurance: System providing income to workers who lose their jobs.
Withholding tax: Money taken directly from an employee's paycheck for the government.
Workers' compensation: Insurance providing medical and wage benefits to injured workers.