ACC -P20-38 Incentive Pay in the Hotel Industry and 18-22 Phelps Glass Inc.

20-38  Incentive Pay in the Hotel Industry

QUESTION:
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 hotel’s guests, maintaining an 80 percent occupancy rate, improving the average rate received per room to $88 from the current $85, and achieving a savings of 5 percent on all hotel costs. The hotel’s owner, a partnership of seven people who own several hotels in the region, want to structure Ramon’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 developed has each of the goals weighted as follows:  

Measure     
Occupancy rate (also reflects guest service quality)  
Operating within 95 percent of expense budget      
Average room rate       
                              Check total
       
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:      29,200 room-nights = 80 percent occupancy rate  x100 rooms x 365 days    
Compensation:      40 percent weight x $23,000 target reward =  $9,200  
                                     $9,200/29,200 =  $0.31 5 per room-night  

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 goal:      $3 rate increase  
Compensation:      35 percent weight x $23,000 target reward =  $8,050  
                                     $8,050/300 =  $26.83 per each cent increase 

Ramon’s new compensation plan will thus pay him a $60,000 salary plus 31 .5 cents per room-night sold plus $1,1 50 for each percentage point saved in the expense budget plus $26.83 per each cent increase in average room rate.

Required
1 . Based on this plan, what will Ramon’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, 3 percent saved, $1 .1 5 rate increase? 
        c. 28,000 room-nights, 0 saved, $1 .00 rate increase?    
  2. Comment on the expected effectiveness of this plan.

18-22 Phelps Glass Inc. has reported the following financial data: net revenues of $1 0 million, variable costs of $5 million, controllable fixed costs of $2 million, noncontrollable fixed costs of $1 million, and untraceable costs of $500,000. The accounting manager has supplied you with this data and asked you to come up with the controllable margin, total contribution, CPC, and operating income.