An analysis of the two restaurants’ financials and additional information shows that Quick Burgers should implement a profit-sharing plan for its employees while Big Steak can continue with the current compensation model. Currently, Quick Burgers has a high number of part-time employees which works to reduce the payroll. However, Quik Burger had a turnover ratio of 10.81% for full-time employees compared to Big Steak’s 7.74% figure. The high turnover is associated with increased recruitment and onboarding costs for Quik Burger, thus affecting their customer service and profitability (Tantawy, Abbas, & Ibrahim, 2016). Currently, Quik Burger makes an average of 1700 part-time hires per year which represents 94.4% of their part-time workforce. The high turnover and recruitment contrast to Big Steak’s 550 hires which account for 50% of the total part-time workforce. Quik Burgers also scores lower than Big Steak on the employee satisfaction survey (2018), 52% vs 74% indicating that employee dissatisfaction is an influential factor in their turnover intent.
Need for a Profit-Sharing Plan
The quick-service industry suffers from a high turnover problem, primarily due to the compensation models employed. In most cases, front-end staff are paid a minimum wage with the expectation that they can earn tips from the clients with large orders potentially having bigger tips. On the other hand, back-end staff have slightly higher base salaries but do not receive tips on their work. For the front-end staff, this leads to competition for busy shifts where they can maximize their income while the pay for back-end staff does not reflect the degree of effort applied leading to overall dissatisfaction. Furthermore, most quick-service restaurants do not provide health and welfare benefits for their part-time employees leading to greater risk on the employee’s part. The exploitative model was popularized by the McDonalds franchise with an emphasis on cutting end-user costs by improving efficiency and reducing margins. Part of it involves relying on part-time staff who have lower than average wages and do not qualify for employer-provided benefits.
Both Quik Burgers and Big Steak suffer from a turnover problem, although the former’s is higher than the latter’s. Big Steak’s employees are likely to report higher satisfaction in their job as they likely receive bigger tips from customers ordering large meals. In contrast, staff at Quik Burgers have less income due to the smaller orders that require more work, leading to higher burnout and disatisfaction rates (Han, Bonn, & Cho, 2016). As noted by Tantawy et al. (2016), overworked and underpayed employees usually display their disatisfaction through worse customer service. Considering that front-end personnel represent the face of an organization, and organizational sustainability depends on continued customer satisfaction, mitigating the continued expenses is paramount to improving Quik Burgers’ performance.
As conventional compensation models have proven ineffective in stemming the restaurant’s turnover, Quik Burger’s management is considering a profit sharing model for the employees. Deployment of the new compensation scheme would reduce the reliance on tips and increase employee motivation through improved predictability in their incomes. Under a profit-sharing system, the organizaton implements various incentives that provide financial or non-financial compensation to employees based on the company’s profitability, in addition to the employee’s regular salaries and bonuses. The restaurant would allocate a portion of its weekly profits to a common pool that would then be distributed among employees using a pre-determined criteria. However, there is the potential for abuse as senior employee with higher base salaries can exploit the system to the detriment of their lower-paid colleagues. Therefore, the restaurant can implement the profit-sharing scheme for only the in-store front-end and back-end staff to reduce the risk. Reducing the scheme’s scope would also motivate employees as they would increase their agency in determining their weekly and monthly income. In some aspects, profit-sharing would also reduce the restaurant’s exposure to economic shocks as they would only have to share profits if they had been profitable in a particular period.
Viability of Profit-Sharing Plan for Quik Burgers vs Big Steaks
Since most employees in the restaurant industry receive weekly payments, a firm implementing a profit sharing plan must have the necessary cash flow to maintain the new scheme. The financial analysis in part 1 indicated that Quik Burger had better performance than Big Steak despite the strong revenues from the latter. Nevertheless, Big Steak’s current ratio, reflecting the ability to generate enough cash to meet short term obligations, is 1.5 compared to Big Steak’s 2.3, driven by the robust revenues, and lower employee turnover figures. Although both restaurants can meet short term debt obligations, with ratios above 1, Big Steak features the higher quick ratio. Nevertheless, Quick Burger has a better receivable turnover ratio compared to Big Steak. The higher receivable turnover ratio, indicates improved efficiency at converting receivables into cash. A decline in the turnover ratio could mean either a decline in sales or an indication that the customers are taking a longer time to pay for their purchases (Rist, 2015). The decrease would also affect short-term cash-flows and the restaurant’s ability to meet its short-term obligations to its employees (in the form of profit shares and bonuses).
Quik Burger has better performance in its average day’s sales uncollected with 13.8, compared to Big Steaks’ 27.6. The reduced duration between making a sales and receiving the proceeds improves the restaurant’s short-term liquidity thereby making it more suited to implementing a profit sharing plan. Additionally, Quik Burger has an inventory turnover ratio of 18.5 versus Big Steak’ 12.2. This reduces the amount of capital tied up in inventory, improving cash flows. For service industries such as restaurants, using the inventory at a specific time may reduce the ratio’s accuracy. Therefore, analysts utilize average inventory in comparison tests, especially if the business is seasonal in nature (Rist, 2015). These figures indicate that Quik Burgers has better financial positioning than Big Steak to implement a profit sharing plan. Furthermore, Quik Burger has better solvency than Big Steaks. The debt to equity ratio illustrated that Quick Burger uses less debt/ creditor financing than equity/shareholder financing than Big Steak. Investors prefer lower debt-to-equity ratios are better as a firm can service its debts and remain profitable even during market downturns. Finally, Quik Burger had better interest coverage ratio than Big Steaks (3.58 vs 3.53) indicating improved liquidity to pay its short-term interest from earnings.
Proposed Profit Sharing Plan
Quik Burger should implement a profit-sharing plan whose disbursement depends on the number of hours that a specific employee works. Employees would have a livable base pay higher than the loocation’s minimum wage and then receive bonuses and profit shares. The approach would reduce infighting and disatisfaction among employees about the number of hours worked. Consequently, working a slow shift would not mean a reduction in weekly income. However, the restaurant’s management would have to ensure that all staff received a certain number of hours per week to ensure predictable take-home pay. One way to achieve this would be to reallocate servers to cleaning jobs on slow days rather than reducing their hours. Having some slack in the available labor force also allows the restaurant to handle emergencies such as sick employees or unexpected rushes, while meeting customer expectations.
The second part of the proposed profit-sharing plan is eliminating the gratuity requirement for customers. Currently, some servers abuse the expectations of tips to make outrageous demands despite bad service thereby affecting customer experiences and contributing to low customer ratings. Furthermore, studies have shown that it perpetuates discrimination as black servers consistenly receive lower tips than their white counterparts despite providing similar levels of service. The tipping culture also reduces the employee willingness to stay at a restaurant as they percieve a disconnect between their personal and organizational goals. Therefore, making the restaurant gratuity-free would improve the restaurant’s performance in customer satisfaction surveys through improved customer service. If customer still wished to leave tips, then they would contribute toward staff parties or other staff-led ventures.
Nevertheless, a profit-sharing plan will require extensive analysis of historical sales and wage expenditure data for Quik Burgers. Shifting to a no-tip environment will also require an increase in the menu prices that will allow the restaurant to offer its employees livable base wages and attractive profit-sharing outcomes. Management will have to evaluate the available historical profits available for distribution, determine how different sharing percentages would impact long-term firm performance, and the relationship with customer satisfaction. Based on the restaurant’s history, the proposed profit share is 2% of net profits.
Eligibility:
The profit-sharing plan’s scope is limited to the front-end and back-end employees in the restaurant as these departments face the highest turnover rates. It includes all full time employees, part time employees working more than 30 hours per week, and the seasonal employees who work more than two months every year. These employee groups have the lowest wages in the restaurant which require them to work multiple jobs to meet ends meet. Furthermore, they have no health benefits or other employer-funded welfare programs compared to the middle and upper management personnel who have high salaries and extensive benefits. To reduce the potential for abuse of the system especially among part time and seasonal employees, workers will be required to have worked at the company for at least three months with no major disciplinary incidents.
Conclusion
Quik Burgers is the most suited to a profit-sharing plan based on its historical data. It features the highest turnover which means that an employee-retention program would have greater impact than at Big Steaks. Furthermore, the restaurant has better liquidity and solvency which gives them adequate cashflow to meet short-term wage obligations as defined under the profit-sharing scheme. Finally, an elimination on the tipping requirement will increase customer satisfaction and repurchase intent thereby providing positive outcomes for all stakeholders; shareholders, employees, and customers.
References
Han, S. J., Bonn, M. A., & Cho, M. (2016). The relationship between customer incivility, restaurant frontline service employee burnout and turnover intention. International Journal of Hospitality Management, 52, 97-106.
Rist, M., Pizzica, A., & LLC, P. (2015). Financial Ratios for Executives How to Assess Company Strength, Fix Problems, and Make Better Decisions (1st ed. 2015.). https://doi.org/10.1007/978-1-4842-0731-4
Tantawy, A., Abbas, T. M., & Ibrahim, M. Y. (2016). Measuring the Relationship between Job Stress and Service Quality in Quick-Service Restaurants. Egyptian Journal of Tourism Studies Vol, 15(2).
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