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RGM / AC Bonus Guide

RGM / AC Bonus Guide. Purpose and Report Contents. Serve as an educational resource for HR and Finance within YRI BMUs Outline design parameters for the implementation of the Yum RGM / AC Bonus Provide detailed design steps and techniques for modeling the Yum RGM / AC Bonus

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RGM / AC Bonus Guide

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  1. RGM / AC Bonus Guide

  2. Purpose and Report Contents • Serve as an educational resource for HR and Finance within YRI BMUs • Outline design parameters for the implementation of the Yum RGM / AC Bonus • Provide detailed design steps and techniques for modeling the Yum RGM / AC Bonus • Provide support for a YRI Q1 2005 implementation • As such, this document includes the following sections • Bonus design and implementation process • Data to be collected as “pre-work” to modeling the bonus • Outline of principles and objectives of the bonus to assist in communication and education within the BMU • Steps for modeling the bonus including an outline of design parameters for each bonus component • The examples and methodologies outlined in this presentation and Bonus Modeling Tool are intended as a starting point for modeling; each BMU must consider what makes sense for restaurant performance and objectives within the BMU

  3. Bonus Design and Implementation Process

  4. Work with Finance & Operations to validate design Execute Communication and training plan Develop Field-ready bonus & training materials Test design & revisions within TPM tool Engage Finance & Operations Go Live Model the bonus Finalize design and develop communication plan Test design within TPM tool Gain BMU Approval Bonus Design and Implementation Process Q3 Jun - Aug Q4 Sept - Nov Q1 Day 1 Pd 1 Q2 Mar - May Tools • RGM / AC Bonus Guide • Bonus design tool Outcome • Proposed design • Become familiar with TPM tool capabilities • Experiment with design & data • Experiment with reports Tools • TPM tool • Report templates Outcome • Preliminary understanding of how the bonus will be administered through TPM • Identification of issues/barriers Tools • US templates Outcomes • Bonus communication materials • Training materials

  5. Pre-Work

  6. Pre-Work • Collect a full year of data for the following key Yum! performance measures • Sales and Profit (RCP) data • Plan for 2004 • Plan and Actual results for 2003 • Flow-Thru • Results for 2003 • Target for 2004 • CHAMPSCheck • Results for 2003 • Target for 2004 • Results from Strategic Initiative measure • e.g., Team Member turnover results for 2003 and target for 2004 • To ensure you have a full year of data, you could collect current YTD data and estimate the balance of the year (e.g., using plan data) • Collect the data for each restaurant including restaurant number and area number

  7. The Strategic Component should be determined by the BMU. For this example, we have assumed Team Member Turnover is the strategic component. 3... Pre-Work - Tips • “Clean” the data • Use annual data for design work • Remove partial store periods and use “Full Store Periods” only • Remove extreme data points • For example, sort the data by sales and delete extremely high or low sales figures…repeat for RCP and other data points • The modeling technique outlined in this document uses full-year data, when validating the design you may want to consider what the bonus will payout for each quarter

  8. Bonus Design Principles and Objectives

  9. Strategic Strategic Initiative (e.g., Turnover) Customer 100% CHAMPSCheck Sales & Profit Make Plan Matrix and Flow-Thru “Beat Year Ago” Bonus Design Principles • Motivate RGMs and ACs to meet and exceed performance target • Aligned with other programs (e.g., BSC, PA) and across Operations & BMU • Achieve a balanced emphasis on Customer, Sales, Profits & Strategic • Drive operating Blue Chips • Building people capability • Driving customer mania through 100% CHAMPS • Grow profitable sales • Improve RCP & margins

  10. Design Objective Design Element to Achieve Objective Engage employees through short-term incentives Quarterly payout Higher volume restaurant = Higher value to Yum! and higher rewards for RGM/AC Volume-based financial rewards Fixed $ payout based on satisfying customers 100% each time (RGM only) Customer Mania focus Flexibility to focus on strategic initiative Business Unit focus Performance-based • Competitive payout for on-target performance • Increased payout for exceeding target • Limited payout for below target performance Leveraged to encourage higher performance Bonus Design Objectives

  11. F/T P&L Reports Recognition Examples: Period: CHAMPS Cards Quarter: Team Celebrations Yearly: Champions Club Trip & Prizes High Impact COACHING Aligned RGM Bonus Customer 100% CHAMPSCheck People Strategic Focus e.g., Team Member Turnover Sales “Make Plan” Matrix Profit Flow-Thru Balanced Scorecard Customer 100% CHAMPSCheck Speed of Service People Turnover Core Training Retention Sales Net Sales to Plan Profit Profit to Plan Flow-Thru Performance Appraisal Customer BSC + Process (CER, 1-800) People BSC + Leadership/Culture (Safety, Staffing, Team Development) Sales BSC + Leadership/Culture/Process Profit BSC + Leadership/Culture/Process Long Term Incentive

  12. Balanced emphasis on People, Customer, Sales & Profits • BMUs will adjust weights based on overall strategy • Bonus will reward results and carries heavier weightings on financials compared to the BSC to minimize funding risk Long term Process-oriented Short term Focused on business results

  13. RGM Bonus - Modeling the Bonus

  14. RGM Bonus -Steps in Modeling the Bonus Step 1 Determine the target payout for each performance measure Step 2 Calculate Sales growth Step 3 Calculate average RCP and RCP growth Step 4 Develop the Sales & RCP “Make Plan” Matrix Step 5 Develop theFlow-Thru Chart Step 6 Develop 100% CHAMPSCheck Chart Step 7 Develop Chart for the Strategic Component

  15. 100% Perfect CHAMPSCheck 20% - 30% 3 Weight Parameters Sales & RCP Make Plan Matrix 30% - 40% 1 20% - 30% Flow-Thru 2 Strategic Initiative 15% - 30% 4 RGM Bonus - Step 1 - Target Payouts • The following are the performance measures and weight parameters • BMUs should determine the appropriate strategic measure initiative and adjust weights based on overall BMU strategy • A bonus can be earned for achieving targets on each measure, separately *Note: In markets that do not have Flow-thru, the Flow-thru component may be omitted from the bonus design. The weight from the Flow-thru component should be redistributed to the other components.

  16. Comparison of Yum! Total Cash to Market Total Cash In this example, Yum Total Cash should be between $44.3 and $47.4 $47.4 $50.0 $46.0 $44.3 $42.4 $6.0 $8.9 $5.8 $3.9 $40.0 Annual Dollars (000) $30.0 $38.5 $38.5 $38.5 $40.0 $20.0 Example Data $10.0 0 Yum! RGM Average 25th Percentile 50th Percentile 75th Percentile Market Data - Restaurant/Unit Manager Base Pay Target Bonus Amount RGM Bonus - Step 1 - Target Payout • Use market data to establish the overall bonus target amount • Market pricing – target Total Cash at the 50th percentile base salary and 75th percentile bonus taking into consideration the following: • Appropriate “mix” of base pay and variable pay • Financial ability to pay at the desired market level Tips and Advice • Avoid major target changes from year to year

  17.  2 1 RGM Bonus - Step 1 - Target Payout • Worksheet Tab in the Bonus Modeling Tool • Calculate the target payout for each bonus component using the weight parameters 1_TargetBonus From Market Assessment Change to reflect your bonus weightings. Calculate a bonus target amount for each component. 6,000 x .30 = $1,800

  18. Calculate 2004 Sales Growth (245,314,938 - 239,100,390)  239,100,390 = 2.6% Make sure this number aligns to the BMU goal!  1 Calculate sums: 2003 Sales Actual 2004 Sales Plan  Collect Sales Plan data for the upcoming year 1  3    2 2 2   3 3 3... RGM Bonus -Step 2 - Sales Planning • Worksheet Tab in the Bonus Modeling Tool • 2004 Sales Growth will be used to set the minimum value at which a bonus will be paid (“threshold”) for Sales vs. Plan on the Make Plan matrix 2_SalesPlan

  19. 1  1  2   2 2 • Work with Finance to ensure that the overall RCP growth percentage is aligned to the BMU goal. Tips and Advice RGM Bonus -Step 3 - Profit (RCP) Planning • Worksheet Tab in the Bonus Modeling Tool • Average 2004 RCP Plan will be used as a basis for modeling on the Make Plan matrix and Flow-Thru chart 3_ProfitPlan Collect RCP data for the upcoming year Calculate averages: 2003 RCP Actual 2004 RCP Plan 3...

  20. RGM Bonus -Step 4 - Develop the Make Plan Matrix Design Parameters • Based on actual RCP results (volume-based) • Bonus increases with increase in profitable sales • Quarterly calculation (i.e. payout based on quarterly results) • Weight of component can vary between 30% – 40% Objective • Fuel “Beat Year Ago” mentality • Sales vs. Plan is the Fair Pay measure • Plan assumes growth over prior year • Plan normalizes prior year peaks/valleys and addresses quarterly anomalies Targets and Thresholds • Business Unit establishes thresholds • The lowest point for bonus payment (e.g., payout 50% for “nearly hitting plan”) should be set such that performance exceeds prior year on a national basis • Payouts will vary by BMU to fit strategy and financial planning • % RCP pool figure will vary based on component weight and average RCP for the BMU • 100% factor within the matrix should correspond to 100% Sales to Plan and 100% RCP to Plan • 300% factor within the matrix is the maximum upside potential and should typically reward 5-10% of performers

  21. Make sure to include your Operations and Finance partners to tailor your design to the BMU. The information on the following pages is intended as guidelines to assist you in decision making around the Make Plan matrix. Judgment is required to focus appropriate behavior within the BMU. RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) • Basic steps • Calculate the Make Plan bonus target as % of the average 2004 RCP Plan • This number will tell you the percentage of profit that should be paid for achieving RCP and Sales plans • Set up the spreadsheet to model the matrix • Establish thresholds (the minimum level of performance for which a bonus will be paid) and maximums on the matrix • Adjust Sales and RCP scales to determine the cost of the bonus • The modeling tool will calculate the average payout that the matrix will provide compared to the bonus target that you are trying to achieve based on prior year’s performance • Adjust matrix payouts to ensure bonus is affordable

  22. From Step 1 From Step 3 (1,800  410,420) x 100 = .44% RGM Bonus -Step 4 - Develop the Make Plan Matrix • Worksheet Tab in the Bonus Modeling Tool • Calculate Make Plan bonus target as % of the average 2004 RCP Plan • Make Plan Target as % of RCP Plan is the percentage of profit that RGMs would be paid for achieving sales and profit plans. The number will be used as the basis for calculating the payout on the Make Plan Matrix. 4a_MakePlanMatrix

  23. l l l l 2 4 5 3 l 1  1   2 3  4  5 l 6 RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) • Set up the spreadsheet to model the matrix • Worksheet Tab in the Bonus Modeling Tool 4b_MakePlanMatrix Calculate estimated 2004 RCP Actual based on last year’s result 1.1 x 327,000 = 359,700 Calculate .44% of 2004 RCP Actual for each restaurant .0044 x 359,700 = 1,578 Identify the appropriate matrix multiplier from the Make Plan matrix using 2003 Sales vs. Plan and 2003 RCP vs. Plan Calculate payouts by multiplying .44% of RCP by the Matrix Multiplier 1,578 x 2.0 = 3,156 In the bonus modeling tool, include your prior year Sales and RCP data as well as current year RCP Plan Create a column for “Receivers” and for those RGMs who earned $0 bonus, leave the cell blank.

  24. Average Payout for "All" 2,130  Average Payout for "Receivers" 3,183 2 Estimated Pay-out if Last Year's Performance l 2 Pay-Outs 2003 2003 2004 Store Sales vs. RCP vs. RCP 2004 RCP .58% of Matrix Count ID Plan Plan Plan Actual RCP Multiplier All Receivers 1 1,000 107.5% 110.0% 327,000 359,700 1,578 200% 3,155 3,155 2 1,002 103.0% 101.7% 223,733 227,435 997 125% 1,247 1,247 12 1,022 102.2% 90.6% 372,887 337,806 1,482 0% 0 RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) • Calculate averages • Worksheet Tab in the Bonus Modeling Tool • There are two averages that should be calculated: • “All” is the average of bonuses paid to all RGMs, even those who received $0. This number would be used to gauge the overall cost of the bonus. • “Receivers” is the average of the bonus paid for only those RGMs who received a bonus (e.g., excludes those who received $0). This number would be used to assess how competitive the bonus is relative to the labor market. 4b_MakePlanMatrix l 1  Calculate the average payout for “All”, including payouts of $0. 1 Calculate the average payout for “Receivers”, excluding payouts of $0.

  25.      RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) Guidelines - Setting Sales and RCP Scales For setting both Sales and RCP scales, you may want to consider aligning the scales to the Balance Scorecard targets. Set Sales minimum for payout – To ensure “Beat Year Ago” is achieved, the minimum should be set such that achieving the minimum level of performance will result in improvement over the prior year. In this example, sales growth is targeted to be 2.6% (from Step 2) so payment should be made only when that level of performance is achieved (98% of plan).  Set RCP minimum level of payout – Work with Finance to determine the expected level of RCP if 98% of Sales is achieved. A rule of thumb used in the US is to assume that RCP will be 33% of Sales. This number will vary based on the country's margins. For example…  Formulas: 2004 Sales Plan x .98 X .33 = Expected 2004 RCP Expected 2004 RCP  2004 RCP Plan = Threshold Example of an average store 1,226,575x .98 X .33 = 396,674 396,674  410,420 = 96.6% The first increment is typically from the threshold amount (i.e., 98%) to 99.9%.   Model the scales using the bonus modeling tool (see next slide)

  26. 2  3   1 1   1 1  2  3 RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) • Worksheet Tabs Average Payout for “All” would be the number used for accrual Average Payout for “Receivers” would be the number to gauge how you are paying for performance. $1,800 should be the payment for achieving plans. The matrix is paying $3,183 for exceeding plans. Adjust scales to determine what total spending would be and if the program would be affordable 4b_MakePlanMatrix 4c_MakePlanMatrix

  27. Pay 100% target at 100% of RCP Plan and Sales Plan   If you must reduce cost, adjust from 300% down to 250% (adjust other matrix cells accordingly)  Pay a percentage of target for nearly achieving plan. To reduce cost, consider holding payment flat for increasing sales but not achieving profit plan  Encourage both growth in sales and growth in profit  To avoid negative behaviors, consider maintaining a flat percentage for not increasing sales but increasing profit.  Encourage sales growth  Consider making the increase between these increments larger to reflect the fact that it is more difficult to achieve these levels of performance. Reduce the matrix payouts below this level. RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued) • If the bonus is not affordable using the current matrix percentages, consider changing the matrix percentages • Again, the following are guidelines to assist you in decision making; judgment is required to focus appropriate behavior within your BMU See Next Slide for Matrix Graphic Guidelines

  28.         RGM Bonus -Step 4 - Develop the Make Plan Matrix (continued)

  29. RGM Bonus -Step 5 - Develop the Flow-Thru Chart Design Parameters • Based on actual RCP results (volume-based) • Quarterly calculation (i.e. payout based on quarterly results) • Weight of component can vary between 20% – 30% Objective • Focus RGMs on maximizing profitability by focusing on costs that they control • Flow-Thru reflects bottom-line controls by adjusting for sales plan attainment • Bonus increases with increase in profitable sales Targets and Thresholds • % RCP pool figure will vary based on component weight and average RCP for the BMU • 100% factor on the Flow-Thru chart should correspond to at least 100% RCP to Flow-Thru index • All other percentages on the chart can vary based on BMU discretion • BMU establishes thresholds • Establish thresholds that ensure good long-term cost control decisions are made

  30. RGM Bonus -Step 5 - Develop the Flow-Thru Chart • BMUs may have a different Flow-Thru calculation than the one outlined in the following example • Consult with your Finance partner on how Flow-Thru works for the BMU

  31. RGM Bonus -Step 5 - Develop the Flow-Thru Chart • Worksheet Tab in the Bonus Modeling Tool • Calculate Flow-Thru Bonus Target as a % of the average 2004 RCP Plan • Flow-Thru Payout as % of RCP Plan is the percentage of actual RCP that RGMs would receive for achieving Flow-Thru targets. The number will be used as the basis for calculating the payout on the Flow-Thru chart. 5a_FlowThru From Step 1 From Step 3 Calculate the Flow-Thru Bonus Target as a % of Average 2004 RCP Plan (1,200  410,420) x 100 = .29%

  32. Include estimated 2004 RCP data from “Make Plan” Matrix modeling l 2 l l 1 3 l 4 Identify the appropriate multiplier from the Flow-Thru chart (next slide) using estimated 2004 Flow-Thru Assume that 2004 Flow-Thru will equal 2003 Flow-Thru for each restaurant Calculate payouts by multiplying .29% of RCP by the chart multiplier .0029 x 359,700 x 1.5 = 1,565 l 1 l 3 l l 2 4 RGM Bonus -Step 5 - Develop the Flow-Thru Chart • Set up the spreadsheet to model the matrix • Worksheet Tab in the Bonus Modeling Tool 5c_FlowThru

  33. 0.29% (.0029) of actual RCP x quarterly multiplier RCP versus  Flow-Thru % Quarterly Multiplier Payout Set 100% payout at 100% RCP vs. Flow-Thru %; Set at bonus target for the component ($1,200)  104 200% 2,400 103 - 103.9 150% 1,800  102 - 102.9 125% 1,500  101 - 101.9 110% 1,320 Allow for threshold payment for achieving within 2-3% of the goal. Work with Finance to determine the appropriate RCP vs. Flow-Thru %.  100 - 100.9 100% 1,200   98 - 99.9 50% 600 Based on the performance distribution, create a logical progression for payment (see next slide). As a starting point, you may want to align to Balanced Scorecard targets. 97.9 0% 0 Set the maximum based on your performance distribution and what the BMU can afford (see next slide)  RGM Bonus -Step 5 - Develop Flow-Thru Chart • Worksheet Tab in the Bonus Modeling Tool 5b_FlowThru

  34.  3 Use the modeling tool to determine the appropriate breakpoints based on what the BMU can afford Adjust scales to determine what total spending would be and if the program would be affordable   3  3 RGM Bonus -Step 5 - Develop the Flow-Thru Chart • Worksheet Tabs    Set the maximum at around the 90th percentile (e.g., only 5-10% of RGMs should achieve this level of payment) 5b_FlowThru 5c_FlowThru

  35. RGM Bonus -Step 6 - Develop 100% CHAMPSCheck Chart Design Parameters • Every CHAMPSCheck score of 100% is rewarded • Every customer provides RGM with opportunity to generate more sales and bonus • Fixed $ payout assumes similar level of complexity in delivering 100% CHAMPS, regardless of volume • Period calculation (i.e. payout based on period results) • Weight of component can vary between 20% – 30% Objective • 100% CHAMPS = Satisfied Customers Targets and Thresholds • Targets should be set to motivate improvement over prior year • Work closely with your CHAMPS team to ensure that you have a good prediction of 100% CHAMPSCheck in the base year and the year for which you are planning • BMU establishes threshold for payment • Payouts vary by BMU to fit strategy

  36. Enter the average number of CHAMPSChecks per year  1   1 1  2  2  3  3  4  4 RGM Bonus -Step 6 - Develop 100% CHAMPSCheck Chart • Worksheet Tab in the Bonus Modeling Tool 6_CHAMPSPlanning From Step 1 Enter the 2004 CHAMPSCheck target Calculate the average number of CHAMPSChecks needed to achieve the goal 16 * .628 = 10 Calculate the bonus payout per 100% CHAMPSCheck score 1,800  10 = 180

  37. RGM Bonus -Step 7 - Calculate Strategic Component Chart Design Parameters • Must be measured on Balanced Scorecard Summary or Balanced Scorecard Detail reports • Calculation timeframe can be period or quarterly (we recommend that you pay quarterly) • Fixed $ or volume-based • Should be a recognized strategic focus for BMU and YRI AOP • Weight of component can vary between 15% – 30% Objective • Align to BMU strategic objectives • Business Unit can change strategic measure each year although we recommend balancing “year of initiative” with consistency • Example - BMU could use People Measure (e.g. TM Turnover to drive people capability mindset) to balance Financial Measures

  38. 1  1   2 2  3  3   4 4 RGM Bonus -Step 7 - Calculate Strategic Component Chart • Worksheet Tab in the Bonus Modeling Tool • Example: Team Member Turnover data The Strategic Component should be determined by the BMU. We recommend a People or Customer measure to balance the Financial measures. 7a_StrategicPlanning Calculate the Average TM Turnover for the prior year Enter the Target for 2004 Calculate % of improvement (1.14-1.00)/1.14 * 100 = 12.3 Use % of improvement to calculate the estimated 2004 TM Turnover by restaurant 78 * (1-.123) = 68 3...

  39. Set the maximum at around the 10th percentile (e.g., only 5-10% of RGMs should achieve this level of payment). Payment can be up to 300% depending on what the BMU can afford. RGM Bonus -Step 7 - Develop Strategic Component Chart  • Worksheet Tabs Leverage Projected Multiple Payout Annualized Turnover  Calculate the estimated bonus for each RGM using 2004 Team Member Turnover. For example, 69 falls into the 55-74.9 category yielding a bonus of $2,400. 0 - 54.9 3,000 250%  55 - 74.9 2,400 200% Calculate the overall average payout.  75 - 99.9 1,500 125% 100 - 114.9 1,200 100%  115 - 129.9 900 75%  130 + 0 0%   Adjust scales to determine what total spending would be and if the program would be affordable. As a starting point, you may want to align to Balanced Scorecard targets. 7_StrategicPlanning 7_StrategicPayouts

  40. 4 Strategic Initiative Putting it all together... Sales & RCP Make Plan Matrix 2 Flow-Thru 1 3 100% Perfect CHAMPSCheck • $180 payout per 100% CHAMPSCheck

  41. Validation • To validate the bonus design, the following should be taken into consideration • On an average basis, consider how the plan is paying out for the level of performance that is achieved • Is the overall cost of the bonus affordable for the BMU

  42. Validation (continued) • When calculating the projected cost of the bonus, the following should be taken into consideration: • This bonus modeling technique is modeled on annual data. To validate the bonus, you may want to model the cost of the bonus for each quarter of data to ensure that you are not under or over funding the plan. • The model assumes that all stores will be open for a full year. Work with Finance to determine the appropriate assumptions to apply to the total cost figure. • The model assumes that no RGMs will forfeit the bonus by terminating employment. Work with Finance to determine the appropriate assumptions to apply to the total cost figure. • The model assumes that restaurants will perform at the same level to plan as they did in the prior year.

  43. Validation (continued) • To test the bonus, calculate bonus payouts for different performance levels and restaurant volumes • Does the payout level appropriately reflect performance? • Restaurant 200 • Almost achieved Sales Plan • Achieved RCP Plan • Almost achieves Flow-Thru target • 10 of 16 100% CHAMPSChecks • Achieves TM Turnover Target • Receives 73% of bonus target • Restaurant 13 • Achieved Sales Plan • Achieved RCP Plan • Exceeds Flow-Thru target • 8 of 16 100% CHAMPSChecks • Achieves TM Turnover Target • Receives 118% of bonus target • Restaurant 161 • Exceeds Sales Plan • Exceeds RCP Plan • Achieves Flow-Thru target • 6 of 16 100% CHAMPSChecks • Achieves TM Turnover Target • Receives 215% of bonus target

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