Improving Performance at the Hotel Paris
The New Incentive Plan
The Hotel Paris’s competitive strategy is “To use superior guest service to differentiate the Hotel
Paris properties, and to thereby increase the length of stay and return rate of guests, and thus boost
revenues and profitability.” HR manager Lisa Cruz must now formulate functional policies and
activities that support this competitive strategy by eliciting the required employee behaviors and
competencies.
One of Lisa Cruz’s biggest pay-related concerns is that the Hotel Paris compensation plan does
not link pay to performance in any effective way. Because salaries were historically barely
competitive, supervisors tended to award merit raises across the board. So, employees who
performed well got only about the same raises as did those who performed poorly. Similarly, there
was no bonus or incentive plan of any kind aimed at linking employee performance to strategically
relevant employee capabilities and behaviors such as greeting guests in a friendly manner or
providing expeditious check-ins and check-outs. The bottom line for Lisa and the CFO was that
the company’s financial rewards system—potentially, the single-biggest tool they had for
channeling employee performance toward accomplishing the Hotel Paris’s goals—was totally
inadequate. She and her team thus turned to the job of deciding what sort of incentive-based reward
systems to install.
Based on their analysis, Lisa Cruz and the CFO concluded that, by any metric, their company’s
incentive plan had to be changed. The percentage of the workforce whose merit increase, or
incentive pay was tied to performance was effectively zero, because managers awarded merit pay
across the board. No more than 5% of the workforce (just the managers) was eligible for incentive
pay and the percentage difference in incentive pays between a low-performing and a high-
performing employee was less than 2%. Lisa knew from industry studies that in top firms, over
80% of the workforce had merit pay or incentive pay tied to performance. She also knew that in
high-performing firms, there was at least a 5% or 6% difference in incentive pay between a low
performing and a high-performing employee. The CFO authorized Lisa to design a new strategy-
oriented incentive plan for the Hotel Paris’s employees. Their overall aim was to incentivize the
pay plans of just about all the company’s employees.
Lisa and the company’s CFO laid out three measurable criteria that the new incentive plan had to
meet. First, at least 90% (and preferably all) of the Hotel Paris’s employees must be eligible for a
merit increase or incentive pay that is tied to performance. Second, there must be at least a 10%
difference in incentive pay between a low-performing and high-performing employee. Third, the
new incentive plan had to include specific bonuses and evaluative mechanisms that linked
employee behaviors in each job category with strategically relevant employee capabilities and
behaviors. For example, front-desk clerks were to be rewarded in part based on the friendliness
and speed of their check-ins and check-outs, and the housecleaning crew was to be evaluated and
rewarded in part based on the percentage of room cleaning infractions.
With these criteria in mind, Lisa and her team turned to designing the new merit and incentive pay
plan. They created a larger merit pay pool and instructed supervisors that employees scoring in the
lower 10% of performance were to receive no merit pay, while the difference in merit pay between
the top category and medium category employees was to be 10%. They contracted with an online
employee recognition firm and instituted a new “Hotel Paris instantaneous thank-you award
program.” Under this program, any guest or any supervisor could recommend any hotel employee
for an instantaneous recognition award; if approved by the department manager, the employee
could choose the recognition award by going to the company’s Website. The incentive structure
for all the company’s managers, including hotel managers, assistant managers, and departmental
managers, now ties at least 10% of each manager’s annual pay to the degree to which his or her
hotel achieves its strategic aims. The plan measures this in terms of ratings on the guest satisfaction
index, average length of guest stay, and frequency of guest returns. Ratings on all these metrics
soon began to rise.
Questions
1. Discuss what you think of the measurable criteria that Lisa and the CFO set for their new
incentive plan.
2. Given what you know about the Hotel Paris’s strategic goals, list three or four specific
behaviors you would incentivize for each of the following groups of employees: front-desk
clerks, hotel managers, valets, housekeepers.
