Case Study: McDonald’s Corporation

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Financial incentives can motivate managers by satisfying their needs but only to a retain extent. According to Mascots hierarchy of needs , once a lower level of needs has been satisfied, It will no longer serve as a motivating factor for the managers. As such, satisfying their higher level of needs Is required. Therefore, In the context of McDonald’s, once the managers are satisfied with their basic needs (pay), the monetary incentives will no longer motivate them. There is a need to provide managers with non-financial incentives such as promotion, Increased autonomy and recognition so as to fulfill their esteem needs.

Thus, It Is necessary for McDonald’s to identify the needs of the first-line managers and incorporate suitable financial and non-balancing incentives into the compensation package. 2. 2 Remuneration System Generally, there are two types of pay systems; the fixed-pay system and the performance-based pay system . The former guarantees managers a fixed salary regardless of their performance. This may be a disadvantage as It encourages managers to develop a complacent attitude and hence shirk from their responsibilities.

An advantage of having a fixed pay is that managers are guaranteed Under the performance-based pay system, which emphasizes incentive bonus, angers’ pay varies with their performance. This may be beneficial to the company as it motivates managers to put forth maximum effort in their work. However, it may face objections from managers as it does not provide them with the assurance of a stable income. Therefore, when designing the compensation plan, McDonald’s need to weigh the advantages and disadvantages of both systems before deciding which system to use. 2. Bonus Basis Another factor McDonald’s has to consider is whether to base bonuses at the company level or solely at the business unit level. Awarding bonuses at the corporate bevel induces collaboration and teamwork among different units and hence promotes the interests of McDonald’s collectively. However, there are factors in the corporate level such as shifts in management philosophy and competitive pressures that are beyond the control of managers at the business unit level. Managers may not be happy that their bonuses are being based on factors they cannot control.

On the other hand, where managers’ bonuses are based at the business level, bonuses are tied to the store performance. It will strengthen the link between rewards and performance thus motivating managers to strive harder towards attaining their unit goals. The disadvantage is the lack of teamwork among the store. 2. 4 Performance Measures In designing the compensation plan, appropriate performance measures should be used in the compensation plan to evaluate manager’s performance. When selecting the performance measures to be used, McDonald’s needs to ensure that these measures align managerial behaviors to the company’s goals.

For instance, McDonald’s should use measures that are congruent with organizational goals such as the application of quality, service, cleanliness and value (SC). Furthermore, here is a need to use more than one measure with different weightings to give a fair evaluation of manager’s performance. A benefit of using multiple performance measures is that it reduces managers’ bonuses dependency on uncontrollable factors such as changes in market demand. McDonald’s has to consider the degree of subjectivity of the various performance measures.

The higher the subjectivity in the performance measure, the harder it is to measure managers’ performance accurately. Managers may feel that their performance are not fairly evaluated and thus will not be motivated to work for the incentives. Another factor that McDonald’s needs to consider when drawing up managerial compensation plan is to ensure that targets set are achievable. Targets that are set too high may be considered as unattainable by managers, making them unmotivated to work towards the targets. If the targets are set too low, it will cause managers to adopt an indolent attitude as the targets are easily achievable.

Thus the targets should be set within an attainable range. McDonald’s can consider using internal and external benchmarks such as master budget, company’s past performance and industrial standards to determine a seasonable target for each performance measure. 2. 6 Design Care should be taken to ensure that managers understand the compensation plan design. Time will be wasted trying to explain complicated plans to the managers. In addition, they will not be motivated to work hard if they do not fully understand the plan.

The maximum bonus that he can receive is 20% of his base salary plus an additional 10% of his salary as a result of the increase in volume. Encompasses many components and variables. Some components of the bonus evaluation scheme, such as the annual merit increase, are based on supervisors’ subjective evaluation, which does not adequately recognize and reward managerial reference. In addition, the Management Visitation Report contains no proper definition and guidelines to follow, resulting in undue subjectivity.

On top of these, the company placed great emphasis on sales volume which is beyond managerial control. 3. 2 Plan A A first-line manager will feel that Plan A is not as complicated as the 1972 plan. In addition, focus on long-term growth and incentive rewards for volume, profit and SC aligns managers to company objective and directs them towards achieving it. Plan A focuses on both quantitative and qualitative measurements which assess the managers more holistically. However, a weakness is its high subjectivity, leading to a lack of balance.

This is because four of the six factors rated require the subjective evaluation by regional operation staff and all factors carry equal weights. 3. 3 Plan B This plan may appeal to first-line manager because it offers an unlimited payout potential as the remuneration received by the managers from the second year onwards is based entirely on percentage of sales gain and profit. In addition, the subjective evaluation of SC by the regional operation staff is excluded in this plan and this may appeal to the managers since it has been a source of contention.

The first-line managers in areas with high sales growth will prefer this plan as there is a high chance that they will receive higher compensation. The downside to this plan is that managers’ remuneration is highly volatile due to the uncertainty in sales gain and profit. Moreover, this compensation plan may discourage managers in areas of low sales growth as they are not rewarded as much even if they put in the same amount of effort compared to those in high sales growth. 3. Plan C If this plan is implemented, managers will push for high sales volume regardless of he expenses generated as the company places no emphasis on cost control. This may lead to dysfunctional behavior where self-interested managers will be likely to incur higher cost to obtain the volume that will maximize their total bonus. Doing so will result in higher bonus for managers at the expense of profitability for the company. Entirely within their control. Thus, uncertainty in sales volume may deter managers from choosing the plan.

A base salary is of paramount importance to managers as it provides stability and fulfills their lower level of needs. Compared to the 1972 Plan, it is also easier to understand. In addition, Plan A also considers both quantitative factors, such as sales volume, and qualitative factors, such as training ability, which the other plans fail to adequately address. To a manager, these factors are needed so that their supervisors can give them a fair evaluation of their overall performance since it encompasses both the quantitative and qualitative aspects of their Scope 5.

SENIOR OFFICER’S VIEW After evaluating the different plans, Senior Officers will also find Plan A the best proposal. Firstly, it contains elements of objectivity making it a fairer evaluation of the angers’ performance. Secondly, emphasis placed on cost control will prevent managers from pushing for higher sales volume at the expense of profitability. Thirdly, this plan considers factors that the first-line manager can affect, and aligns him to important corporate goals, long term objectives and provide incentive for profit and volume.

Fourthly, the plan acknowledges the impact of SC, which is crucial for McDonald’s long term success. Lastly, it considers manager’s training ability and provides an adequate distribution of measurement to all the areas important to the managers. This corresponds to both short-term individual utility maximizing and long-term corporate growth. 5. 1 Modifications to Plan A However the Plan should be modified to become a more effective compensation plan. Managers should participate in the design and establishment of profit and volume goals of their respective units.

A predetermined floor and ceiling of bonus paid for the achievement of business objectives should be incorporated into the objectivity of Plan A, a change in the weight to the 6 factors is proposed. For example, the allocation of weights for SC can be lowered as it is highly subjective ND higher weights can be allocated to objective factors like profits. Finally, to make the plan more comprehensible, senior officers should communicate with the managers and explain the plan and seek their support before it is being implemented.

In addition, we recommend that a component of the bonus is based on the recognition for the most cost conscious manager. 6. Conclusion In conclusion, the purpose for implementing a compensation plan for the employees is to act as a control mechanism to reduce divergent objectives and information asymmetry and achieve goal congruence. An effective incentive plan results in sired performance from the employees and more importantly, motivate employees toward organizational goals.

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