Exercise 20-38 Incentive Pay in the Hotel Industry
Ramon Martinez is the general manager of Classic Inn, a local mid-priced hotel with 100 rooms. His job objectives include providing resourceful and friendly service to the hotelâ€™s guest, maintaining an 80 percent occupancy rate, improving the average rate received per room to $88 and achieving a saving of 5 percent on all hotel costs. The hotelâ€™s owners, a partnership of seven people who own several hotels in the region, want to structure Ramonâ€™s future compensation to objectively reward him for achieving these goals. In the past, he has been paid an annual salary of $72,000 with no incentive pay. The incentive plan the partners develop has each of the goals weighted as follows:
Occupancy rate (also reflects guest service quality)
Operating within 95 percent of expense budget
Average room rate
Percentage of Total Responsibility
If Ramon achieves all of these goals, the partners determined that his performance should merit a bonus of $23,000. The partners also agreed that his salary would be reduced to $60,000 because of the addition of the bonus. The goal measures used to compensate Ramon are as follows:
Occupancy Goal: 29,000 room-nights â€“ 80 percent occupancy rate x 100 rooms x 365 days
Compensation: 40 percent weight x $ 23,000 target reward- $9,200
$9,200 /29,000- $ 0.315 per room-nights
Expense Goal: 5 percent savings
Compensation: 25 percent weight x $23,000 target reward-$5,750
$5,750/5- $1,150 for each percentage point saved
Room Rate Goals: $3 rate increase
Compensation: 35 percent weight x $ 23,000 target reward – $8,050
$8050/300 – $ 26.83 per each cent increase
Ramonâ€™s new compensation plan will thus pay him a $ 60,000 salary plus 31.5 cent per room- night sold plus $1,150 for each percentage point saved in the expense budget plus $ 26.83 per each cent increase in average room rate.
1. Based on this plan, what will Ramonâ€™s total compensation be if his performance results are
a. 30,000 room-nights, 5 percent saved, $3.00 rate increase?
b. 25,000 room-nights, 5 percent saved, $1.15 rate increase?
c. 28,000 room-nights, 0 percent saved, $1.00 rate increase?
2. Comment on the expected effectiveness of this plan.