The Contribution Factor has been used by many industries to quantitatively measure the effectiveness of management teams. Several years ago, we started using this tool to evaluate the profitability of hotels and resorts. The Contribution Factor turned out to be very accurate.
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. They make most 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 years. 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). Or re-assign some major duties, or juggle the Departments the person is responsible for. The key? Make sure the new assignment is enough different so the three-year peak performance 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 an average management turnover of over 40% per year for hotels.
Premise 3: When management turnover exceeds 20-30% per year, profit improvements will be minimal, or at best short lived.
Identifying expected profit targets from each position for the next year should be part of the budgeting planning process. It can identify the likelihood the projected profits will be hit.
expected contribution
The Contribution Factor can be an excellent way for hotels and companies to evaluate overall performance. Or break performance down by Department, Division, or function. Then take proactive steps for areas that need addressing.
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 employees who are not producing.. American industry downsized (right-sized, or re-engineered) because it had to.
critical evaluation of the contribution factor
Before holding management employees accountable. Be sure each position is structured properly. Give each manager latitude to achieve the desired profitability. Profits are not attainable? Revise position responsibilities until they are. There are many instances when "management" structured positions that precluded success.
CANDIDATES: Anytime you are evaluating a new management position, 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 the example of a hotel with 24 management employees. Let's assume that management salaries, bonuses, and fringe benefits total $1,420,000. Next, let's assume the projected Gross Operating Profit for the year is $4,900,000.
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 for 2 years. 6 employees 3 years.4 have worked in their jobs at the hotel for longer than three years.
Team Contribution Factor
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 $1,420,000 payroll to arrive at the expected GOP contribution ($4,189,000) from this team based on their experience in their current jobs. The hotels projected GOP of $4,900,000 is $711,000 higher than is realistic to expect from this management team.
Based on the Contribution Factor this hotel has three options:
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Identify exactly how the extra $711,000 is going to be obtained by this team. Will hourly contributions make up the difference? Are there unusual sources of business that will make up the difference?
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Restructure the management team so the projected profit is achievable, or...
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Reduce the projected GOP.
uses for the contribution factor
Let's continue to use the above example.
By the Hotel Management Team
The hotel management team and GM need to identify how to achieve projected GOP. The Contribution Factor quickly spots contributions by Department. Are there enough group bookings to make GOP? Will contributions from hourly associates make up the difference? Is the hotel just setting the budget and projections? If so, the team may want to reduce the projected GOP. Or identify new sources of business. The team can also discuss ways to re-assign people to increase profit contribution. Or GM can re-align the management team to achieve the projections. A last recourse. Can the property/company be bled enough to make the numbers? What would the long-term effect be?
Point: Evaluate all alternatives.
If GM's hands tied? GM better start looking for a new job. Chances of surviving this one are slim.
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
Who came up with the projected GOP of $4,900,000? The Contribution Factor identifies if tough questions need to be asked. If Corporate Office, then GM and team need to ask some tough questions. If a hotel, Corporate’s job to ask tough questions. How are the numbers going to be achieved? Who can be transferred into or out of the hotel to make the projection?
When going through this analysis both the hotel and Company need to keep in mind Premise # 3. To hold planned and unplanned management turnover under 30. When management turnover exceeds 30% profits typically are reduced.
By an Owner, REIT, Pension Fund, Financial Institution, Etc.
Owners can use The Contribution Factor as a quick tool to get a realistic expectation from their asset. Are the profit projections they have received from the hotel or management company realistic?
By Potential Buyers of Hotels or Companies
Use The Contribution Factor to ask innocent questions. Get the length of time each member of management has been in their position. Then get the overall payroll and fringe benefit budget. Then projected profitability. These tools allow a potential buyer to quickly determine if the projected profitability is realistic.
By Chains to Evaluate Performance from Various Divisions
The Contribution Factor allows quick comparisons of Divisions. Or a comparison between regions or brands. If a Division or Region has a higher than normal management turnover ratio, anticipate lower profits or take immediate corrective steps. The Contribution Factor allows an apples-to-apples comparison without getting into personalities.
Candidates
Job seekers can use The Contribution Factor to evaluate whether or not the profits expected of them are realistic or not. Is this a good career opportunity or not?
Once a candidate is getting close to receiving a job offer, ask innocent questions. How long has each member of the management team been in their positions? Then a simple look at the budgeted salaries. A question on the percentage of payroll, fringe benefits are. Now candidate can run a quick computation to compare a "realistic" profit projection to the budget.
The above will be an approximation. It lets the candidate determine whether the new job can make them a superstar 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, ask questions about The Contribution Factor. Ask the candidate the dollar amount they impacted GOP in their current job. A great question that generates some interesting answers. The best question I know to identify candidate understanding of their financial role.
Potential employers will have seen the applicant's resume. They know how long the person has been in their current position. The interviewer may know the salary for the candidate. If not assume the current salary is bottom of your posted salary range. Use a factor of 20% for fringe benefits and the average bonus you have paid the last 3 years. Then compute your own evaluation of the candidate’s contribution. This leads to some interesting comparisons to the candidate’s answer.
If the applicant is making $70,000, earned a $15,000 bonus, and has benefits of about $14,000, for a total of $99,000 then you have your start point.
If the applicant has been in their current position for 2 years they should be contributing roughly $297,000 to GOP. (3 times $99,000).
Ask probing questions to find out how much the applicant personally is contributing. It may take several questions. Most managers contribute to the GOP in a variety of ways. Mentally tally them up. If the applicant can't give at least some quantitative answers, the odds are the applicant won't make any money for you. Move on to the next interview or phone call.
Conclusion
The Contribution Factor is not the ultimate answer in evaluating hotels, companies, or people. It does identify trends and whether people understand their role in achieving profits. Try it.
It has been accurate within plus or minus 5%.
KEEP CONTRIBUTING!