At Jack Hartnett's company, managers have an equity stake in the operations they run. "You've got to give them a piece of the action. That gives them their drive and their desire to hang in and do it well," he says. Hartnett is president of D.L. Rogers, in Bedford, Texas, a company whose primary business is ownership of 59 franchises of Sonic, a drive-in restaurant chain. At those Sonic eateries -- which accounted for more than $50 million in 1998 revenues -- in exchange for a percentage of profits, a manager must purchase an equity stake. For a 25% stake in the restaurant he or she runs, the manager receives 25% of the store's monthly net profits, along with a $1,200 monthly salary.
Managers who have been with D.L. Rogers for more than 18 months also qualify for a bonus of 15% of the net profits of the store they manage -- as long as the managers meet several guidelines, such as staying within certain food, labor, and paper costs. And three-year veterans are eligible to buy an additional 1% stake in a new Sonic outlet for about $1,750, as long as they meet certain goals.
To avoid valuation disputes when they leave, Hartnett's managers agree to buy into -- and get out of -- their investment in each existing store at a price based on the store owner's equity -- a figure taken straight from the business's balance sheet. (For a new store, the manager's investment is 25% of that store's initial capitalization.) "They buy in and buy out at equity," Hartnett says. "It's real simple."
Hartnett believes that sharing the profits pays off. In 1998, D.L. Rogers' per-store revenues were nearly 18% higher than the chain's average, while profits were 25% above the norm. In an industry known for high turnover, Hartnett's managers stay about nine years, compared with an industry average of less than two. "Some franchisees in Sonic say to me, 'Jack, I can't believe you sell 25% of your stores to your managers," Hartnett says. "I think to myself, 'You'd do a helluva lot better if you did, too."
Hartnett is not the first to develop that type of compensation strategy. The founders of Outback Steakhouse faced two big challenges when they started that restaurant company in 1987. They needed start-up cash, and they wanted to create equity opportunities for the restaurant chain's general managers. They nailed both with one solution, similar to Hartnett's. They asked the managers to invest in the company in return for a share of the cash flow that their restaurants generated. That compensation system helped the Tampa-based company grow so that revenues reached more than $1.35 billion in 1998.
A version of this compensation strategy is almost 100 years old. In 1902, a young man opened a dry goods and clothing store in Kemmerer, Wyo., in partnership with two of his former employers. Later, that same fellow jump-started the growth of his retail chain by offering one-third of the stock in each new store to its manager. The result? James Cash Penney's company, incorporated in Utah in 1913, became one of America's retail giants: the J.C. Penney Co.