Incentive Conflicts

IncentiveRestaurant Owners and ManagersConflicts

1.Discuss the incentive

conflicts that are likely to arise between owners and managers of a restaurant

What causes

Incentive Conflict?

Individuals tend to make decisions that benefit their

personalWell - Being

Tend to have goals in line with their firm (restaurant)

OwnersManagers

- Whereas -May not share these same goal’s, as they are not entitled toThe excess return$

5The textbook outlines

Root causesFor Owner – Manager Incentive conflicts

Choice

Additional effort by a manager

Of ~Effort~

INCREASESthe value of the restaurant

But

DECREASESTheir utility of time (leisure)

No1.

PerquisiteTaking. It is in the best interest of the owner to pay sufficient salaries to the managers to retain competent workers.

OWNERS ALSO DO NOT WISH

TO OVERPAY THEIR WORKERS.

REVENUE - COSTS = PROFIT

No2.

PerquisiteTaking. (Continued) Not only do managers seek high salary's, but perquisites such as clubs, vacations, daycare and dental plans.. Etc

No2.

U = f(C,P)U = utility, C = compensation, P = perks!

ExposureExposure

Differential

Managers may forgo expensive projects that they anticipate to be profitable simply because they do not want to bear the risk of failure..

RiskExposure

No3.

Differential horizons ”Managers claims to the firm are limited by their tenure”

No4

Differential horizonsTherefore, managers have limited incentive to care about the future of the firm.

No4.

Managers can be reluctant to reduce the size of their firm. Even if it is the more profitable option.

Overinvestment

Manager bear a personal cost (disutility), when firing a colleague

No5.

2.Do you anticipate that

the conflicts will be easier or harder to control at the new salt lake location?

HARDER.

Although there are many ways to monitor restaurants using technology, the physical distance between HQ and Salt Lake City puts the new location at aDISADVANTAGE.

Staff members who develop close personal relationshipswith their coworkers are much more likely to stay with a Company.

Without a strong owner-manager relationship there may be “differential horizons”.

“When an employee knows they’re truly valued and that their boss has a genuine interest in them, they’re much more likely to perform well.” - Forbes magazine

3.Should you offer the new

head manager at the Salt Lake location the same compensation contract that you are using for the five managers in Portland?

Given the autonomous nature of the new head manager.

I would entice the manager with stock options or a larger bonus.

As part of fringe benefits, I would add an annual paid trip to Portland so the manager

can see our headquarters.

This would let manager develop a closer bond to the owner and overall brand.

In effect, incentivizing their work.

Thanks for reading!