Incentive

Conflict

Restaurant Owners and Managers

1
.

Discuss the incentive

conflicts that are likely
to arise between owners
and managers of a
restaurant

What
causes

Incentive
Conflict?

Individuals tend to make

decisions that benefit their

personal
Well - Being

Owner
s - Whereas -

Tend to have goals in

line with their firm
(restaurant)

Managers

May not share these

same goals, as they
are not entitled to
The excess return$

The textbook
outlines

oot causes
For Owner
Manager
Incentive conflicts

No1.

e
c
i
o ~

t
r
h
o
f
Cf ~E
O

Additional effort by a manager

INCREASES
the value of the restaurant
But
DECREASES
Their utility of time

No2.

Perquisite
Taking.
It is in the best interest of the
owner to pay sufficient salaries to
the managers to retain competent
workers.
OWNERS ALSO DO NOT
WISH
TO OVERPAY THEIR
WORKERS.

No2.

Perquisite
Taking. (Continued)
Not only do managers seek high
salary's, but perquisites such as
clubs, vacations, daycare and
dental plans.. Etc

U = f(C,P)
U = utility, C = compensation, P = perks!

No3.

Differential

Risk

Exposur
Exposur
e
e
Managers may forgo
expensive projects that
they anticipate to be
profitable simply because
they do not want to bear
the risk of failure..

No4

Differential horizons
Managers claims to the firm are limited by their tenure

Differential horizons

No4.

Therefore, managers have limited

incentive to care about the future
of the firm.

No5.

Overinvest
ment

Managers can be reluctant to reduce

the size of their firm. Even if it is the
more profitable option.

Manager bear a
personal
cost (disutility),
when firing a
colleague

2
.

Do you anticipate that

the conflicts will be
easier or harder to
control at the new salt
lake location?

HARDER
.

Although there are many

ways to monitor
restaurants using
technology, the physical
distance between HQ and
Salt Lake City puts the new
location at a

DISADVAN

Staff members who develop

personal
relationships
close

with their coworkers are much

more likely to stay with a

Company.

Without a strong owner-manager

relationship there may be
differential horizons.

When an employee knows theyre

truly valued and that their boss
has a genuine interest in them,
theyre much more likely to
perform well.
- Forbes magazine

3
.

Should you offer the new

head manager at the Salt
Lake location the same
compensation contract
that you are using for the
five managers in Portland?

Given the autonomous

of the new head manager.

nature

I would entice the manager with

stock options or a larger

bonus.

As part of fringe benefits, I would

add an annual paid trip to
manager
Portland so the
can see our
headquarter
s.

This would let manager

develop a closer bond to
the owner and overall
brand.

In effect, incentivizing their

work.

Thanks for reading!