Fresh Foodie operates two restaurant services, one in City X and one in City Y.

The semiannual
bonus plan for each restaurant’s president has three components:
a. Profitability performance. Add 1% of operating income.
b. Average customer’s waiting time. Add $45,000 if the average waiting time for a customer to
get the service after the order placed is less than 12 minutes. If average customer waiting
time is more than 12 minutes, add nothing.
c. Customer satisfaction performance. Deduct $50,000 if customer satisfaction (measured using
a survey asking customers about their satisfaction with the quality of food and their overall
satisfaction with the service of Fresh Foodie) falls below 65 on a scale from 0 (lowest) to 100
(highest). No additional bonus is awarded for satisfaction scores of 65 or more.
Semiannual data for 2016 for the City X and City Y restaurants are as follows:

January-June July-December
City X
Operating income $10,850,000 $11,100,000
Average waiting time 10 minutes 15 minutes
Customer satisfaction 74 67
City Y
Operating income $9,120,000 $8,500,000
Average waiting time 18 minutes 9 minutes
Customer satisfaction 60 70

Required:
1. Compute the bonuses paid in each half year of 2016 to the City X and the City Y restaurant
presidents.
2. Discuss the validity of the components of the bonus plan as measures of profitability, waiting
time performance, and patient satisfaction. Suggest one shortcoming of each measure and
how it might be overcome (by redesign of the plan or by another measure).
3. Why do you think Fresh Foodie includes measures of both operating income and waiting
time in its bonus plan for the presidents? Give one example of what might happen if waiting
time was dropped as a performance measure.

SOLUTION

(30–40 min.) Compensation linked with profitability, waiting time, and quality measures.

1. Jan.-June July-Dec.
City X
Add: Profitability
1% of operating income
(1% × $10,850,000; $11,100,000) $108,500 $111,000
Add: Average waiting time
$45,000 if < 12 minutes 45,000 0
Deduct: Customer satisfaction
$50,000 if < 65 0 0
Total: Bonus paid $153,500 $111,000

City Y
Add: Profitability
1% of operating income
(1% × $9,120,000; $8,500,000) $91,200 $85,000
Add: Average waiting time
$45,000 if < 12 minutes 0 45,000
Deduct: Customer satisfaction
$50,000 if < 65 (50,000 0
Total: Bonus paid $ 41,200 $130,000

2. Operating income as a measure of profitability

Operating income captures revenue and cost-related factors. However, there is no recognition of
investment differences between the two groups. If one group is substantially larger than the other
group, then the differences in size alone will give the president of the larger group the
opportunity to earn a bigger bonus. An alternative approach would be to use return on investment
(perhaps relative to the budgeted ROI).

12 minute benchmark as a measure of customer response time

This measure reflects the ability of Fresh Foodie to meet a benchmark for customer response
time. Several concerns arise with this specific measure:

a. It is a yes-or-no cut-off where benchmark is set at 12 minutes. More waiting time

above 12 minutes does not cause additional cost. For example, a 15-minute waiting
time earns zero bonus and a two-hour wait costs the same. No additional loss is
incurred for a longer waiting time. On the other hand, no bonus is paid for additional
waiting time reductions below 12 minutes. An alternative is to have the bonus that
increases with greater waiting time improvements.
b. It can be manipulated. Waiters might quickly serve one or two items to the customer
to meet the benchmark, but then leave them sitting in the table for other orders. This
will even incur loss of customers due to unavailability of table.
c. It reflects performance relative only to the initial waiting time. It does not consider
other time-related issues such as the waiting for a table to be ready or the time needed
to generate the bills.

Problems in (b) and (c) can be overcome by measuring total customer response time (such as
how long it takes from the time a customer reaches the restaurant to the time he/she leaves the
restaurant), in addition to the most direct measure i.e. average waiting time to enjoy the service.