HW-1189 Phelps Glasss and Incentive Pay in the Hotel Industry

Phelps Glass Inc. has reported the following financial data: net revenues of $10 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
these data and asked you to come up with the controllable margin, total contribution, CPC,
and operating income.


20-37
Incentive Pay in the Hotel Industry Kristin Helmud is the general manager of Highland Inn, a
local mid-priced hotel with 100 rooms. Her job objectives include providing resourceful and
friendly service to the hotel’s guests, maintaining an 80% occupancy rate, improving the aver-
age rate received per room to $88 from the current $85, achieving a savings of 5% on all hotel
costs, and reducing energy use by 10% by carefully managing the use of heating and air conditioning in unused rooms and by carefully managing the onsite laundry facility, among other
means. The hotel’s owner, a partnership of seven people who own several hotels in the region,
want to structure Kristin’s future compensation to objectively reward her for achieving these
goals. In the past, she 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:
If Kristin achieves all of these goals, the partners determine that her performance should
merit a bonus of $30,000. The partners also agree that her salary will need to be reduced to
$60,000 because of the addition of the bonus.
The goal measures used to compensate Kristin are as follows:
Kristin’s new compensation plan will thus pay her a $60,000 salary plus 20.55 cents per
room-night sold plus $1,800 for each percentage point saved in the expense budget plus $30 for [LO 20-3]
Measure Percent of Total
Responsibility
Occupancy rate (also reflects guest service quality) 20%
Operating within 95% of expense budget 30
Average room rate 30
Energy use 20
100%



If Kristin achieves all of these goals, the partners determine that her performance should
merit a bonus of $30,000. The partners also agree that her salary will need to be reduced to
$60,000 because of the addition of the bonus.
The goal measures used to compensate Kristin are as follows:
Occupancy goal: 29,200 room-nights 5 80% occupancy rate 3 100 rooms 3 365 days
Compensation: 20% weight 3 $30,000 target reward 5 $6,000
$6,000 4 29,200 5 $0.2055 per room-night
Expense goal: 5% savings
Compensation: 30% weight 3 $30,000 target reward 5 $9,000
$9,000 4 5 5 $1,800 for each percentage point saved
Room rate goal: $3 rate increase
Compensation: 30% weight 3 $30,000 target reward 5 $9,000
$9,000 4 300 5 $30.00 for each cent increase
Energy use goal: 10% savings
Compensation: 20% weight 3 $30,000 target reward 5 $6,000
$6,000 4 10 5 $600 for each percentage point saved
Kristin’s new compensation plan will thus pay her a $60,000 salary plus 20.55 cents per
room-night sold plus $1,800 for each percentage point saved in the expense budget plus $30 for each cent increase in average room rate plus $600 for each percentage point saved in energy use.
The minimum potential compensation would be $60,000 and the maximum potential compensation for Kristin would be $60,000 1 $30,000 5 $90,000.
Required
1. Based on this plan, what will Kristin’s total compensation be if her performance results are
a. 30,000 room-nights, 5% saved, $3.00 rate increase, and 8% reduction in energy use?
b. 25,000 room-nights, 3% saved, $1.15 rate increase, and 5% reduction in energy use?
c. 28,000 room-nights, 0% saved, $1.00 rate increase, and 2% reduction in energy use?
2. Comment on the expected effectiveness of this plan. In what way, if at all, would you change the
compensation weights?

Answer will be sent by email as attachment.