Generally speaking, restaurant groups that tie their manager bonuses directly to "inventory variance" do not have inventory or revenue losses from their bar. Conversely, many bars that do not track inventory variances and include management in the accountability of shrinkage lose 15-30% of their inventory and sales. In this article, I will show you exactly how structuring a restaurant bonus plan effectively will eliminate bar losses and provide you with a bar manager bonus plan template to get you started.
The Motivation to Focus on Profitability
Properly executed Bar Manager Bonus Plans (MBP) keep your management teams laser-focused on the most valuable, controllable and profit-enhancing elements of your business. Inventory variance fits in this category nicely as one of a few numbers that can have the biggest impact on a restaurant's bottom line. With the right balance, you can structure an MBP to pay a portion of salary according to performance, giving you the flexibility to recoup losses when they occur.
The Keys to Successful Incentives
Successful MBPs start with the right objectives, and they include an appropriate and adequate financial reward. The plans that motivate are applied fairly and consistently, and they involve regular monitoring and communication.
An effective MBP will give your manager a sense of ownership, providing the motivation to focus on controllable measurements, despite the many distractions of a busy restaurant.
When incentive plans set unrealistic objectives, pay out only once per year, or lack regular discussion and revision, the effect can be quite different. Handled without due care and attention, an MBP can become demoralizing and demotivating to your staff, and fail to accomplish the primary objective of improving profitability.
A Valuable Recruitment Tool
Implementing an MBP places you in a competitive position so that you can tap into a prospective employee’s entrepreneurial spirit. It will help you attract and retain the best talent available, because top performers welcome the opportunity to control salary, and thrive on the motivation to earn more by reaching objectives.
Each Plan is Different
Common MBP's have fundamental elements that reward managers who control losses and expenses, as well as increase sales. However, each operation will have priorities and circumstances that dictate the finer details. Success lies in creating a customized plan that reflects the unique characteristics of your business, and the managers who work for you.
Best Practices and Targets
1. Losses and Controllable Expenses
The lion’s share of your restaurant bonus plan should aim at limiting losses and controllable expenses. These will directly impact profitability and, more importantly, is something a manager can directly influence, given the right tools and motivation.
- Consider allocating 50% of your MBP payout to Losses and Controllable Expenses.
Avoid Using Fixed Cost-of-Goods-Sold Targets (Pour Cost %)
You should not include fixed Cost of Goods Sold or Pour Cost % (PC%) in your MBP unless you make the calculation based on your moving Ideal PC% - a variable rather than a fixed target. This is critical.
I have seen several examples of popular restaurant chains that lose 15% or more of their inventory and sales because their reward system is based on hitting a fixed pour cost. For example, during our discovery audit process we might find large losses but the GM's do not take action to resolve the issues because they are already hitting their PC% target.
Rewarding fixed pour cost targets will hurt your business in several ways:
- Your PC% target will often be too high, leaving thousands of dollars in losses undetected each month, with no motivation for a manager to react.
- Your PC% target could also be too small, depending on your product mix each period, which will make your target impossible to hit. This risks demotivation in the face of objectives that are impossible to achieve.
- A manager could manufacture a lower PC% by discouraging up selling. Although premium products have a higher PC%, they also have a higher contribution margin. Cocktails bring in more money than Well drinks. So, while discouraging up selling might lower your pour cost, it will also hurt your bottom line.
- A manager trying to earn their bonus unfairly could engineer a low PC% by using cheaper ingredients in your recipes, which will impact customers’ perception of your value proposition. In this scenario, you risk cutting costs until there’s nothing left to trim.
Rather than use COGS, use loss-variance targets, such as Revenue Variance, Efficiency Ratings, and Unit Variances.
The bottom line is this: Operations that use "variance targets" as a substantial portion of their bonus plans have managers that are motivated to ensure there are no variances.
Revenue Variance is the retail value of losses as a percentage of sales. By conducting precise weekly inventories with proper bar control software, and comparing units used against units sold, according to your establishment’s unique recipes, you will be able to include this valuable measurement in your MBP.
One of the benefits of using Revenue Variance as a measure is that it creates a culture of accountability, whereby the lost product is valued at retail rather than cost.
- A typical Revenue Variance target range is <1.5 - 3%, and the amount of bonus associated with Revenue Variance and/or Efficiency Rating (described below) should be weighed heaviest.
The Sculpture Efficiency Rating
Sculpture's inventory service provides a liquor inventory control system that can either be operated independently or used in house with the Sculpture bar inventory app. One of the features of the Sculpture reporting is the Sculpture Efficiency Rating.
The Sculpture rating is another good way to measure and control losses because it compares "Actual PC%" to the ever-changing "Ideal PC%," illustrating how much of the used product was sold. A perfect Sculpture rating score is 100%, and a frequent bonus target for many bars is 97% or higher.
- If you use POS keys that are not brand specific, such as Domestic Beer or Well Liquor, an efficiancy rating should be your primary method of loss measurement. This is because Revenue Variance and Unit Variance are only reliable measurements when sales are recorded as brand specific through an itemized POS system.
Unit variance is represented by how many portions, shots, ounces, bottles are short/over. In the example above, the unit variance on Fireball is -14.62 ounces.
By including Unit Variance in your MBP, in addition to Revenue Variance and The Bevinco Efficiency Rating, you can discourage under-portioning, as well as reward or penalize performance in specific categories: liquor, wine, bottled beer, draft beer, and food.
For example, if your bonus range for liquor pours is +/- 2%, you can deduct from the bonus if liquor is “over” from short pouring. By separating portion variance from other bonus metrics, you can also reward or penalize based on performance in each class.
Common Unit Variance bonus targets are: Liquor <1.5 - 3%, Wine <1.5 - 3%, Bottled Beer <1%, Draft Beer <2-4%.
Including Guest Comps, Spills, and Void Percentages in your MBP prevents the padding of losses through overuse of the comp and spill tabs. Spills are inevitable, but keep them under control by including them in your MBP.
Common targets for these categories: Guest Comps <2.5% of net sales, Spills <0.4% of net sales, Voids <3%.
2. Sales Increases - Revenue Targets
Every MBP should have a mechanism in place that motivates managers to take actions to increase sales.
Including revenue targets in an MBP keeps a focus on driving sales, and provides a payroll cushion in the event of a drop in revenue. I would caution against weighting this portion too heavily, as many factors can affect sales, and some of them will be beyond a manager’s control. If a manager’s bonus closely linked to sales performance, and sales are down, it will significantly affect motivation to hit targets in other areas.
A typical weight for sales increase targets is 25% of MBP payout, with the objective of achieving a 3% increase over the previous year or period.
3. DiscretionaryConsider reserving 25% of your MBP for measurable; value-added management behavior, such as avoiding health code violations, maintaining on-hand inventory levels, or achieving good attendance records. You can also add other qualitative measures to reflect the unique characteristics of your business. Not only is this a great way to shine the light on a wide variety of behaviors, but it is also helpful to have part of your MBP in reserve to reward variable achievements.
How to Structure Your Bonus Plan
You can either incentivize your managers with a bonus expressed as a percentage of profits from the P&L or as set bonus amount. There are advantages and disadvantages to both but, in most cases, the most successful is based on a set figure. Managers who are incentivized on profits may not make a bonus at all, despite working hard to hit predetermined targets. MBPs are at their most successful when people know how much money is at stake and believe there is a realistic chance of consistently making bonus. Basing incentives on salary also means you can budget for a predetermined bonus allocation. Equally, if your manager doesn’t make target, you can recover some of the losses.
Start by outlining the basic structure of the MBP to ensure that all the best practices are in place. The next step is to get an agreement to the terms of the incentive program and ask your manager to help develop the finer details. This consultative process increases the chances of success, and in many cases enriches the program by uncovering more
ways to add value.
Regular Rewards, Fair Assessments, and Frequent Updates
Timing and communication are critical when you’re creating a Management Incentive Plan. Don’t make the mistake of putting together an annual bonus plan. In an industry with high turnover, incentive periods need to be more frequent, with the prospect of reward shortly. When you’re measuring performance against target, make sure you apply the rules consistently, and that you’re scrupulously fair. Then communicate results quickly. Schedule unmovable quarterly meetings with your management team to review MBP plans and results, so you can highlight exceptional performance, and act fast to make improvements in areas that need attention.
Sculpture Hospitality, an inventory service firm with offices throughout the world, specializes in setting up bar and restaurant manager bonus plans and making sure our clients have reliable data to administer their Bonus Plans.
To download a free bar & restaurant manager bonus-plan template, follow the link below: