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Variable-pay Program Increases Taco Bell’s Profits

Taco Bell Corp.’s upbeat advertisements have been so successful at getting people to “make a run for the border,” that the Irvine, California-based company has opened more than 350 new restaurants in the last two years. Although this is great news for hungry consumers, it was a challenge for the company’s HR department to find managers for these restaurants.

“We didn’t think we could find all the talent we needed to run those stores,” explains Michael J. Rowe, Taco Bell’s director of compensation and benefits. “So we decided to ask existing restaurant managers to start supervising two units instead of one.”

Instead of increasing the managers’ salaries to correlate to their added responsibilities, Taco Bell did something very interesting. The company kept the managers’ base salaries the same, but allowed them to earn twice as much in bonus pay through a variable-pay program.

“To continue to sell 59-cent tacos, we can’t have pay programs that are inefficient,” Rowe explains. “We can’t afford to give $50,000 in base pay with no performance guarantees. We can, however, afford to pay $30,000 and give managers a $20,000 bonus if they drive profits to the bottom line. The way we do this is through a variable-pay program that funds incremental pay out of incremental profits.”

Today the 1,600 restaurant managers are evaluated and given bonuses based on three objectives:

  1. Targeted profit, which relates to bottom-line results.
  2. Customer service, which is evaluated by an independent marketing-research firm
  3. Actual store sales.

On average, managers receive a bonus worth about 30% of their base pay. But payments that double the base amount aren’t uncommon. However, Rowe is quick to emphasize that not all managers earn a bonus all the time. “It isn’t an entitlement,” he says. “Between 60% and 70% of managers earn a bonus that’s paid every six months. But that means 30% of managers don’t get anything in their variable pay for six months’ work. Believe me, a person who misses a $5,000 bonus payment twice a year will pay attention to the things that drive profitability: sales and customer service.”

Although Taco Bell’s program isn’t punitive in nature, it is high-risk. Under the company’s previous merit-pay system, about 85% of restaurant managers received $1,000 bonuses four times each year. “They really had to be bad not to get that money,” Rowe explains, “whereas under this system, they really have to be good.”

When asked how the variable-pay program fits into Taco Bell’s overall corporate strategy, Rowe says that the relationship between both may be irrelevant. “A bonus program at that level should be reflective of what you what to get out of people in that job,” he says. “I think it’s a mistake for every bonus program in the company to have the same objectives. You have to ask yourself what kind of results are you attempting to obtain from restaurant managers. Hopefully the answer isn’t too different from what you want to get out of your president, but clearly I’m not going to expect my president to do customer service at the unit level.”

Taco Bell’s program has been implemented for 18 months, and it seems to be working. Food costs as a percentage of sales continue to decrease, customer service scores for 1992 were the best the company has ever had, and profit records continue to be broken.

Personnel Journal, June 1993, Vol. 72, No.6, p. 64I.