Download - 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!