Paying a Bonus in Hospitality - How Does it Work?

So, you want to incentivise your managers… Great! An email we get quite regularly is:

“I want to put a bonus structure in place for my managers. I’ve told them that the top end bonus available is £5,000 a year and it’ll be paid quarterly. What should I be tracking them on and how can I do it? I know it needs to involve hitting GP targets, but what else?”

Firstly, don’t tell any of your team that you’re thinking about implementing a bonus structure, and definitely do not tell them how much they could earn, especially when you’ve yet to work out if it’s feasible, measurable, and manageable.

Rather than using hypotheticals, I’m going to use a real example of an email I received from a client recently and break it down into what needs to be considered, what should’ve been left out, and what needs to be implemented before even thinking about a bonus structure.

The most recent one we’ve had was:

“Hi Mate,

Just after a bit of advice. With XXXX being promoted, he’ll now be on an annual bonus of £5,000, paid quarterly. I’m just trying to work out the best way to structure it. The idea was for him to achieve 75% GP per menu item, but as we discussed, that’s not really possible on things like fish and chips or steak.

Also, do you think there should be a minimum turnover requirement before any bonus gets paid? I was thinking something like £500,000 annually, just to make sure the business is performing overall.

What do you reckon is the best way to set it up?”

First off, I think it’s great that I’m seeing more and more of these emails - it shows a genuine shift in the hospitality operator mindset from “you’re on the rota for 48 hours a week and you may (read: always) have to work extra when someone is on holiday… or sick… or we’re busy… or someone quits” to “I want to reward you above your salary for making my life easier/ more comfortable.” Ultimately, that’s why we hire people, right? To make our lives easier, and ultimately to give us a higher level of comfort. We’re at a stage in our business now where my ultimate role is to make my team’s lives easier - if they have an easy life then they’re happier, more motivated, and more productive, which then means that my life gets easier and I can spend more time doing the stuff that I enjoy doing in the business. I’m not in this to become a multi-millionaire, I’m in this to do something that I get joy out of doing and to provide myself and my family with a comfortable life.

Now, back to bonuses. Most of us will have learnt this in school, but we’ll have a quick recap. Before deciding on a bonus figure, you need to know your own figures, bonus criteria (targets), and the impact that you want these bonuses to have. For this, you need to set S.M.A.R.T Targets:

Specific - looking at the email from my client, the targets are definitely not specific. In fact, there are no targets in here other than a revenue target of £500,000.

Measurable - yes, this one target is measurable.

Achievable - I would say no; this target is not achievable. Not because the venue can’t hit £500,000 in revenue, but because the head chef in this case has zero control over revenue- he has no marketing budget, no access to social media, and has not been given any tools (or training) to increase revenue. He could increase his menu pricing, but it’s unlikely to have that big of an impact with making a dramatic change to both pricing and to the menu itself.

Relevant - again, I would say no. Increasing revenue- whilst related to- isn’t strictly relevant to hitting a GP of 75%. Increasing revenue may be a byproduct if menu prices are increased, but this is not a certainty- it’s more correlation than causation.

Time-bound - yes and no. The client mentions paying the bonus out quarterly, but they do not mention which periods will be checked- will it be a case of the head chef must hit 75% for 13 consecutive weeks, or will it be a cumulative target? What happens if this target is missed? Can it be rolled into the next quarter, or is that bonus lost forever? What about if they hit their target in the first 2 quarters but then the rest of the year drops significantly?

Bonuses aren’t “just a bit of advice”, they’re an entire planning session. Here’s what you need to know and prepare before even deciding how much of a bonus to give:

1.       Why are you giving a bonus? I know this sounds like a stupid question, but are you offering a bonus in order to increase the whole team’s performance? Or just the performance of one person? Will the results have a direct impact on your own wage? Or are you trying to create enough bandwidth for a new hire? You need to know what your own target is first before you can set targets and bonuses for others.

2.       Is the bonus commensurate with the impact that you’re expecting them to have? Let’s say that your kitchen turns over £100,000 a year in net revenue. If your kitchen is running at 72% GP and you want to target the head chef on hitting 75% with a £5,000 bonus, then they need to increase GP by 3% (£3,000). A £3,000 increase isn’t worth a £5,000 bonus. On the other hand, if you’re a venue with £500,000 of net revenue in food sales, then a £5,000 bonus for a 3% increase (£15,000) may well be worth it. My own rule of thumb is that the total bonus inclusive of all employer related costs (Employer’s National Insurance and Employer’s Pension Contributions) should be equal to 20% of the projected increase. I work with some operators who will pay out part of a bonus if someone gets close to their target with the idea that this will incentivise them to hit their top end target. I take a more cynical approach- if you don’t need the target, then you don’t get the bonus. It’s a simple yes/no situation. I’ve yet to meet an operator that implements a “partial bonus for partial results” scheme and has actually hit their original target on a consecutive basis.

3.       What targets do you need to implement? Using the example of the head chef (and depending on how big your venue is), you should be targeting; labour, gross profit, gas & electricity usage (not spend, but unit consumption- energy prices change, and your head chef doesn’t have control over this, but they do have control over whether or not the fryers are turned on at 6am rather than 10am), non-consumable spend, wastage, complaints, and so on. I’m quite wary of measuring bonuses against complaints and wastage if I’m honest- these are the first figures to be fudged when there’s money on the line. If you have a larger venue and employ a head chef, sous chef, and kitchen manager (or at least have a management structure in the business), then it’s good practice to put targets in place for several people as opposed to one person being responsible for all targets.

4.       What power and authority does the person have? To hit targets, changes must be made- what authority does the person have to make those changes? Can they fire staff (for the right reasons)? Are they allowed to change suppliers for better deals? Can they change the menu without running it by you? Can they close the kitchen early if it’s exceptionally quiet? If a person is given the responsibility of making change but has no power or influence to do so, then the target is unlikely to be met.

5.       What tools and training do you need to have in place? I’m well aware that a head chef should know how to cost a menu, but using the client from the email above as an example, the head chef had costed his menu, but he’d worked his GP out based on gross selling price as opposed to net- he had basically included VAT as part of his gross profit. Do they know how to cost out a rota including Employer’s National Insurance and pension contributions? Do you? Are there products that they shouldn’t be ordering from certain suppliers? E.g. blue roll might be cheaper to buy from supplier A than from supplier B- do you/ they have a list of what shouldn’t be ordered and where from? Do they know how to do a stock count? Are they doing this weekly, monthly, or (most likely) not at all? You can’t target what you don’t know how to monitor.

6.       What are your benchmark figures and how are you measuring the targets? You need to know what your baseline is across all the areas that you’re targeting. Set up a spreadsheet with all the areas that you’re targeting and the method in which you’re going to measure them (if it’s not already being done) e.g. labour and GP as a percentage of net revenue, gas and electricity based on the number of units consumed, and wastage based on the cost value. A lot of areas can be measured in different ways- find a way that makes sense and stick with it.

7.       Make time for reviewing and helping. If you’re not already, you should be having (as a minimum) weekly meetings with your management team- this is important, but doubly so when you’re monitoring targets. Review the targets with them for the previous week as early on as possible. Structure the meeting so that you have ample time to run through each target being measured, and ensure that you ask the manager what they need from you in order to meet it (hint: don’t ask them if they need any help, ask them specifically what help they need).

8.       What’s the timeframe? In the email scenario, the client mentions an annual bonus paid out quarterly. A quarterly timeframe is perfect- it’s far enough ahead that you’ll have enough time to spot trends and to average out cumulative effects and peaks/ troughs in trends, but it’s not so far in the future that become demotivated. Weekly bonuses can be great, but it’s an admin nightmare and forces people to think on a much smaller scale i.e. I didn’t get the bonus last week, but last week is over now and I’ll try to get it this week. Weekly bonuses force people to not think about the cumulative impact of their decisions.

9.       Lastly, make sure that you can afford to pay out these bonuses. If you’ve planned it all correctly then any additional profit generated by the targets being met should more than cover the cost of the bonuses and then some. Ensure that you put money away each week to cover the total bonuses that you may have to pay out each quarter.

If you’ve successfully managed to work through (or at least plan out) all of the above, then you’re now in a position to have conversations with your management team about their bonus structure.

On the other hand, if you’ve no idea what your gross profit or labour are currently running at, then , book an appointment and we’ll help you to get on the right track.