The Contribution Factor
Why Does the Contribution Factor Work
It is based on three well known premises:
- Premise 1: People make 95 percent of their total contribution to a position during their first three years in the position.
The thought process behind this premise is that people are the most enthusiastic about a position during their early years on the job. Therefore they make the majority of their contributions their first three years. After three years they may be steady performers, but their contribution to your profits has most likely peaked. To maintain competitive profits, companies need to consider re-assigning their management people between the third and fourth year. Or the companies can re-engineer positions. Re-assignments or re-engineering can be as simple as switching jobs among employees within the hotel or just re-assigning employees within the same job to a different hotel (as long as the new hotel isn't a carbon copy of the hotel the person left). The key? Make sure the new assignment is enough different to rejuvenate the person so the three year cycle starts over.
- Premise 2: Plan your attrition.
It's well documented that companies that have been the most successful over time have had planned attrition.
The ideal formula states that hotels (or management companies or chains) should plan to bring 20% of their management team from outside their company. Remember, the key word here is "planned attrition."
The hotel industry, like many others, typically has plenty of management turnover. Unfortunately most hotels experience most of their turnover in just a few positions. The last study we saw on the hotel industry indicated average management turnover of over 40% per year for hotels. Many times Corporate Management initiates the turnover, but all too often it is reactive turnover. Our industry loves to set very ambitious targets for our hotels.
- Premise 3: When management turnover exceeds 20-30% per year, profit improvements will be minimal, or at best short lived.
Turnover impacts profits. Quickly filling jobs with qualified candidates reduces the impact on profitability. The Contribution Factor identifies how long you can afford to have any job vacancy open.
Expected Contribution
Besides addressing all three premises The Contribution Factor can be an excellent way for hotels to evaluate their performance and take a proactive stance if profits are not where they should be.
Simply stated, every management employee (and every hourly employee as well) needs to contribute to profitability. Worldwide markets are simply too competitive. No business can afford to carry dead wood. American industry downsized (right-sized, or re-engineered) because it had to.
Years in same job |
Expected contribution to profit |
Hotel, Resort, Conference Center Management Positions |
|
1st year |
Improve operating profit by 5 times their total compensation. |
2nd year |
Improve profit by 3 times compensation. |
3rd year |
Improve profit by 1.5 times compensation. |
4th year & thereafter |
Improve profit by 1 times compensation. |
Sales & Marketing Positions (including Corporate Sales/Marketing Positions) |
|
Every year on job |
Minimum contribution to profit of at least 10 times their annual compensation. |
Corporate Management Positions |
|
1st year |
Improve profit a minimum of 10 times their annual compensation. |
2nd year |
Improve profit 7 times annual compensation. |
3rd year |
Improve profit 5 times annual compensation. |
4th year |
Improve profit 3 times annual compensation. |
5th year & thereafter |
Improve profit 1.5 times annual compensation. |
Critical Evaluation of the Contribution Factor
Before you can hold management employees accountable for their contribution factor be sure each management position is structured to give the manager enough latitude to achieve the desired profitability. If the profits are not attainable, revise the position responsibilities until they are attainable.We have seen many instances when "management" structured positions for other managers that precluded success. Anytime you are evaluating a new management position as an applicant, be sure to review enough numbers and projections to be sure you can make the desired Contribution to profit.
How Does the Contribution Factor Work?
Let's take an example of a hotel with 24 management employees. Let's assume that management salaries, bonuses, and fringe benefits total $960,000. Next let's assume projected Gross Operating Profit for the year is $3,170,700.
Eight of the management employees have been in their current positions with the hotel one year or less, six employees have been in their positions 2 years, 6 employees 3 years, and 4 employees have worked in their jobs at the hotel for over three years.
Team Contribution Factor |
|
8 employees x 5 (their expected contribution factor) |
40 |
Total contribution from 24 employees: |
71 |
Average Contribution: (71 divided by 24 employees) |
2.95 |
$960,000 x 2.95 |
$2,832,000 |
Projected GOP |
$3,170,700 |
Shortfall between projected GOP and expected employee contribution to GOP |
($338,700) |
Adding up the total contributions expected from the 24 employees gives us a raw contribution of 71. Divide that by the 24 employees to get an average contribution for the team of 2.95. Now multiply the 2.95 times the $960,000 payroll to arrive at the expected GOP contribution ($2,832,000) from this team based on their experience in their current jobs. The hotels projected GOP of $3,170,700 is $338,700 higher than is realistic to expect from this management team.
Based on the Contribution Factor this hotel has three options:
- Identify exactly how the extra $338,700 is going to be obtained by this team.
- Restructure the management team so the projected profit is achievable, or...
- Reduce the projected GOP.
Uses for the Contribution Factor
- By the Hotel Management Team
The hotel management team and GM would need to sit down and identify how they planned to achieve the projected GOP of $3,170,700. If there were some unusual group bookings already on the books the projection may be able to stand. If that is not the case and the hotel is just setting the budget and annual projections they may want to reduce the projected GOP to a number that is closer to their expected Contribution. Or the team can discuss ways to re-assign people on the team to increase their expected contribution to match the projected GOP. Ultimately the GM can make decisions on how to re-align the management team to achieve the projections. As a last recourse the GM, team, or company can evaluate whether they can bleed the property enough to make the numbers and what the longer term effect will be. If the GM's hands are tied, the GM would know to look for a new job because the chances of surviving this one are slim to none.
GM's can use The Contribution Factor to check on their Departments when budgets are being put together and monthly to check on performance.
- By the Management Company or Chain
If the hotel came up with the projected GOP of $3,170,700 then Corporate Management needs to ask the hotel some tough questions on how the numbers are going to be achieved. Or talk to the GM about who can be transferred into or out of the hotel to make the projected numbers work. Going through this analysis both the hotel and Company or Chain would need to keep in mind Premise number 3 to hold their planned and unplanned management turnover under 30%. When management turnover exceeds 30% profits typically are reduced.
- By an Owner, REIT, Pension Fund, or Financial Institution
Owners, et al can use The Contribution Factor as a quick tool to get a realistic expectation from their asset. If the numbers don't match they also know to ask tough questions. REIT's, etc. can use this to get an overall measure of the expected contribution from their portfolio so they know what to put in reports to shareholders, press releases, on their own internet sites, etc. Forcing a hotel or management company to exceed 30% management turnover will only improve profits if the property is bled in one or more ways. Remember the adage: "Don't throw away what you want most for what you want now!"
- By Potential Buyers of Hotels or Companies
Asking innocent questions to get the length of time each member of management has been in their position and then getting the overall payroll and fringe benefit budget allows a potential buyer to quickly determine if the projected profitability is really realistic or just pie in the sky.
- By Chains to Evaluate Performance from Various Divisions
The Contribution Factor also allows quick comparisons of Divisions of a conglomerate, or comparison between regions in a chain. If a Division or Region has a higher than normal management turnover ratio anticipate lower profits or take immediate corrective steps. The Contribution Factor can allow an apples to apples comparison without getting into personalities.
- Job Applicants
As stated earlier job seekers can use The Contribution Factor to evaluate whether or not the profits expected of them are realistic or not. Once a job applicant is getting close to receiving a job offer they can ask innocent questions about how long each member of their new management team have been in their positions. Then a simple look at the budgeted salaries for the Department, and an innocent question on what percentage of payroll, fringe benefits are, gives the job applicant all they need to run a quick computation so they can compare a "realistic" profit projection to the budget. That lets the job applicant determine whether the new job can make them a super star or a chump. If the numbers don't work the applicant can either ask some questions or simply turn the position down.
- When Interviewing
Potential employers can learn a great deal about applicants by asking them questions on how much they personally impacted GOP in their current job in the last 12 months. By the time potential employers get to a phone or an in-person interview they will have seen the applicant's resume and know how long the person has been in their current position. The interviewer will also know the salary for the applicant and how much of a bonus the applicant earned. Then simply use a factor of 20% for fringe benefits. (Which in the hotel industry is probably being very generous.)
If the applicant is making $40,000, earned a $5,000 bonus, and has benefits of about $9,000, for a total of $54,000 then you have your start point. If the applicant has been in their current position for 2 years they should be contributing roughly $162,000 to GOP. Ask probing questions to find out how much the applicant personally is contributing. It may take several questions. Most managers contribute to GOP in a variety of ways. Mentally tally them up. If the applicant can't give at least some quantitative answers, odds are the applicant won't make any money for you either. Move on to the next interview or phone call.
Conclusion
The Contribution Factor is not the ultimate answer in evaluating hotels, companies, or people but it does an excellent job of identify trends and whether people understand their role in achieving profits. Try it. It has been accurate within plus or minus 5% for over 200 hotels. One hotel with an 84% occupancy and high ADR exceeded it by 12%, that's the largest variance we have seen. We have used it for budget, rooms only properties, all-suite properties, hotels with limited F&B, full service hotels and resorts, conference centers and luxury hotels.
KEEP CONTRIBUTING!