Expected effectiveness of plan, Operation Management

Expected effectiveness of plan:

Ramon Martinez is the general manager of Classic Inn, a local mid-priced hotelwith 100 rooms. His job objectives include providing resourceful and friendly service to the hotel's guests, maintaining an 80 percent occupancy rate, improving the average rate received per room to $88 from the current $85 and achieving a savings of 5 percent on all hotel costs. The hotel's owners, a partnership of seven people who own several hotels in the region, want to structure Ramón's future compensation to objectively reward him for achieving these goals. In the past, he has been paid an annual salary of $72,000, with no incentives. The incentive plan the partners have developed has each of the goals weighted as follows:

Measure                                                                                                              percent of Total Responsibility

Occupancy rate (also reflects guest service quality)                                                         40%

Operating within 95 percent of expense budget                                                                25

Average room rate                                                                                                        35


If Ramon achieves all the goals, the partners determined that his performance should merit a bonus of $23,000. The partners also agreed that his salary would be reduced to $60,000 because of the addition of the bonus.

The goal measures used to compensate Ramon are as follows:

Occupancy goal

29,200 room-nights = 80percentoccupancy rate*100 rooms*365 days.


40 percent weight* $23,000 target reward = $9,200

$9,200/29,200 = $0.315 per room-night

Expense goal


5 percent savings

25 percent weight*$23,000 target reward = $5,750

$5,750/5 = $1,150 for each percentage point saved

Room rate goal



$3 rate increase

35 percent weight *$23,000 target reward = $8,050

$8050/300 = $26.83 per each cent increase



Ramon's new compensation plan will thus pay him a $60,000 salary plus 31.5 cents per room-night sold plus $1,150 for each percentage point saved in the expense budget plus $26.83 per each cent increase in average room rate.


1. Based on this plan, what will Ramon's total compensation be if his performance results are

a. 30,000 room-nights, 5 percent saved $3.00 rate increase?

b. 25,000 room-nights, 3 percent saved $1.15 rate increase?

c. 28,000 room-nights, 0 saved $1.00 rate increase?

2. Comment on the expected effectiveness of this plan.

Posted Date: 2/12/2013 7:12:29 AM | Location : United States

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