Compensation Plan Outline for McDonald’s
Compensation Plan Outline
McDonald’s Corporation is one of the U.S. most iconic companies. It was founded in 1940 as a barbecue restaurant. Over the years, McDonald’s has grown to become the largest fast-food chain in the world. As of 2015, McDonald’s had an upwards of 36,500 outlets located all over the globe, employing more than 420,000 employees and demonstrating that it has a competent compensation system that attracts and retains the best workers around the world. Its global outlook has enabled it to appropriate the best practices in designing an excellent compensation plan and optimal pay structure. This paper studies McDonald’s compensation plan to analyze whether it is appropriate. It will also determine its best ratio of an internally consistent and market consistent compensation system and compare its retirement plans and health insurance programs to those of its competitors. Analysis indicates that McDonald’s has one of the best compensation plans in the fast-food industry as it appropriates a market-based compensation plan that equally balances internal consistency and market competitiveness needs.
McDonald’s appropriates a market-based compensation plan to determine its employees’ remuneration. McDonald’s compensation plan employs a hybrid model that incorporates seniority pay, merit pay, incentive pay, and skill-based pay (Ashenfelter, 2012). The compensation plan includes a basic salary for salaried workers and a host of incentives, including retirement plans and health insurance programs. The most senior employees earn higher base pay than the junior ones. The same applies to the base of skill-set possessed and used by employees for the attainment of the company’s objectives. Crucially, McDonald’s compensation plan also incorporates a broad range of incentive pay, which means that there is no cap to what an employee can earn (McDonald’s, n.d.). A hardworking employee can earn above the market pay as much as efforts necessitate.
The hybrid compensation plan is appropriate given the competitive nature of the fast-food industry. The existing plan enables McDonald’s to control its compensation costs. Wages, salaries, and incentive costs constitute a substantial percentage of McDonald’s expense budget (Schlosser, 2012). The current plan allows it to manage who gets raises and by how much. The compensation plan employs an aspect of incentive pay, which allows McDonald’s to link pay to performance. Those who make the highest contributions to the company in a bid to attain its objectives are better remunerated for their additional efforts.
Additionally, the existent plan is appropriate because it balances financial objectives of the company with individual needs of its employees. Since it is market-based, it allows the company to match the best offers in the market to ensure that employees are adequately remunerated. In turn, employees will be motivated in their work and this enhances productivity and consequent profitability for the organization (Roberge, 2015). Research studies, for instance, McNeil (2015), have established that employee remuneration impacts their job satisfaction and productivity levels. McDonald’s leverages this knowledge to boost its employees’ satisfaction and morale to optimize their productivity. Furthermore, McDonald’s compensation plan creates a sense of ownership among its employees. There is no better way to reward employees other than making them feel entitled and responsible for the fate of the business (Ji & Weil, 2015). McDonald’s pay structure offers its employees, including both full-time and part-time ones, a route to ownership through the purchase of McDonald’s shares at discounted prices (Ashenfelter, 2012). What is more, this sense of entitlement reduces employee turnover rate, which is a core problem in the fast-food industry. With a largely consistent workforce, McDonald’s optimizes productivity of its employees.
Internal and Market Consistency
Organizations often seek to achieve internal consistency and market competitiveness to attract and retain the best workforce. Different organizations appropriate different ratios to balance internal and external interests. For McDonald’s, the most beneficial ratio of internally consistent and market competitiveness is 1:1. The two interests have to be equally balanced to reduce employee turnover and fairly remunerate the workforce.
Internal consistency measures the extent to which employees perceive that they are fairly remunerated for their efforts. Employees have to believe that their salaries reflect their relative importance to the organization and their role in achieving organizational objectives (McNeil, 2015). Those who assume greater responsibilities should receive higher salaries than their counterparts with fewer responsibilities. McDonald’s must ensure that there is equity and that employees are paid amounts that justify the levels of energy and skills they appropriate in the course of undertaking their day-to-day activities.
Most importantly, however, McDonald’s should balance the desire to equitably remunerate its employees with the need to offer a market-competitive compensation. McDonald’s should ensure that its levels of compensation do not fall below the industry’s median; otherwise, employees will leave the company for some other company offering higher salaries. Conducting a salaries survey or a brief review of the data available at the Bureau of Labor Statistics will affirm the market competitive compensation levels (Ji & Weil, 2015). It includes determining base salary levels and various benefits and emoluments offered to employees performing similar tasks in the industry. Offering a slightly better remuneration as compared to the market median will make McDonald’s a preferred employer. If McDonald’s employs a compensation system that balances internal consistency and market competitiveness under the ratio of 1:1, it will not only meet its strategic goals, but will also enhance its employee retention rate.
Recognition of Employee Contributions
One of the core strategies that McDonald’s has appropriated to stay ahead of the competition is recognizing its employees’ contribution through both monetary and non-monetary compensations. Its current pay structure offers a myriad of schemes that recognize contribution in the form of skills and knowledge, effort and diligence, and even employee loyalty. McDonald’s has a very competitive incentive plan that is administered by a special committee known as the Compensation Committee formed in 1993. The incentive pay recognizes the highest and most improved performers during a financial year as these are the individuals who have contributed the most towards the attainment of the organizational objectives (Ashenfelter, 2012). Through McDonald’s Target Incentive Plan (TIP), employees are afforded an opportunity to optimize their total compensation through enhancing their productivity.
Apart from the TIP, McDonald’s also recognizes employees who have been performing well consistently for long. The long-term incentive is a token granted to those who have shown dedication to sustained optimal performance that has created value at McDonald’s. Additionally, the organization also has an active and popular recognition program, which is at times accompanied by a monetary token. There is an employee of the month award that is awarded to employees with the highest contribution both at local and regional levels (McDonald’s, n.d.). There is also the President’s Award given in every country where the company operates and it is mostly given to executives that have shown the greatest improvement. Lastly, there is also the Circle of Excellence Award (McDonald’s, n.d.). There may also be other smaller recognition programs at local levels instituted at the discretion of the local manager.
Apart from performance-related recognition, McDonald’s also recognizes savings contributions and loyalty that employees have demonstrated. It has an Anniversary Splash kitty that rewards employees who have stayed with the company for a stretch of five continuous years. Eligible employees enjoy paid vacation and paid holidays when they reach their fifth, tenth, fifteenth, twentieth year, and so on (Ashenfelter, 2012). The paid vacation package is dependent upon the length of time served at McDonald’s. The company recognizes savings its employees initiate. McDonald’s has a 401k savings plan under which contributions by employees are matched by the employer (Schlosser, 2012). Just like most other companies, McDonald’s also contributes to its employees’ pension plan.
Improving Effectiveness of Discretionary Benefits
Discretionary benefits are incentives offered by an organization to its employees regardless of the fact that the enterprise is not legally mandated to offer them. They are usually offered to enhance employees’ satisfaction and boost their morale. However, in a bid to mitigate the spiraling business expenses, some firms offer discretionary benefits that are not in fact beneficial to intended prospective beneficiaries (McNeil, 2015). There are varied strategies McDonald’s can employ to enhance effectiveness of its discretionary benefits. Firstly, McDonald’s should issue a satisfaction survey to determine effectiveness of the benefits it offers. Each level of employees from managers to the frontline ones should participate in the survey to paint a clearer picture of discretionary benefits they find to be useful and the ones they consider to be ineffective. The benefits that prove to be unfavorable should then be disregarded for the ones that are popular among employees. For instance, McDonald’s offers paid vacation and sabbatical programs for employees who have worked for ten continuous years. If employees derive more satisfaction from paid vacation than from taking sabbatical leaves, the management should scrap the sabbatical leaves. Instead, the management may introduce alternatives that resonate with the employees’ preferences.
Secondly, McDonald’s should also conduct internal assessments of its human resources policies and practices to identify discretionary benefits that are redundant and do not bestow the same levels of benefits they used to. Since McDonald’s is a multinational company, it can leverage its global presence to identify the best compensation practices from all over the globe (Ji & Weil, 2015). The ones that prove to be effective can then be implemented in its other branches and franchises all over the world. However, McDonald’s should also consider cultural factors that may affect the extent of the desirability of the discretionary benefits in different parts of the world (Ji & Weil, 2015). If McDonald’s implements these two strategies, it will be uniquely placed to recalibrate its discretionary benefits to ensure that they have intended effectiveness, namely boosting the employees’ morale and enhancing their levels of job satisfaction.
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Comparison with Major Competitors
McDonald’s employer-sponsored retirement plans and health insurance programs compare favorably to those of its core competitors. McDonald’s offers varied types of retirement plans. Its primary employer-sponsored retirement scheme is the 401k plan available to non-union employees. McDonald’s studies contributions made by employees at different rates for the different amount contributed (Ashenfelter, 2012). It also has a universal pension plan to guarantee income to all employees after their retirement. Most of its competitors, including KFC, offer similar employer-sponsored retirement schemes. However, others like Starbucks offer an additional company-based retirement plan, which is unique to employees of Starbucks (Schlosser, 2012). Others such as Burger King offer 401k plan only and do not even complement it with a pension plan.
McDonald’s health insurance programs are among the best in the hospitality industry. Only a few firms offer better health insurance coverage. It offers a comprehensive vision supplement plan, which affords eyeglasses, contact lenses, and discounts on eye surgeries to its employees (McDonald’s, n.d.). McDonald’s also offers dental insurance that covers a broad range of dental services and employees can visit the dentist they want. Crucially, McDonald’s, like any other reputable employer, covers long-term and short-term disability claims (McDonald’s, n.d.). Furthermore, McDonald’s employees also enjoy employer-sponsored life insurance, accidental death and dismemberment insurance, and travel accident insurance. Among primary competitors, only Starbucks offers a wider scope of health insurance coverage. In addition to the coverage provided by McDonald’s, Starbucks also covers mental health care needs of its employees (Ashenfelter, 2012). The other two, KFC and Burger King, have significant shortfalls, making their health insurance standards fall below those of their competitors. For instance, KFC does not offer vision insurance, life insurance, and accidental death and dismemberment insurance, which are considered to be irreducible minimum health covers in the industry. Burger King also fails to provide life insurance, as well as short- and long-term disability cover among others (Schlosser, 2012). Therefore, while McDonald’s health insurance programs are a bit less extensive than some programs offered by a few other companies, it still has one of the most comprehensive health protection strategies in the industry.
It is evident that McDonald’s has one of the best compensation plans in the world. It not only offers competitive base pay, but also unrivaled employer-sponsored retirement plans and health insurance coverage among other incentives. McDonald’s employs a market-based compensation plan that aptly balances internal consistency and market competitiveness needs of compensation systems. The existent plan allows McDonald’s to control its salaries and remuneration costs and tie them to the company’s performance. McDonald’s leverages employee motivation tactics to enhance and sustain quality performance. It has rolled out varied incentives and discretionary benefits that recognize and appreciate employees’ contributions. However, it is imperative for the management to conduct frequent reviews to ensure that benefits remain effective in motivating employees; otherwise, their productivity will slump. Conducting satisfaction surveys and assessments of the HR policies and practices can help optimize effectiveness of discretionary benefits aimed at boosting productivity and reducing employee turnover rates.