In March 2013, Ralph Martin called Karen Williams

for an appointment. Ralph was the manager of Restau-

rant #036, a Fine Harvest restaurant located in Grand-

view, Missouri. Karen was the president and CEO of

the Fine Harvest Restaurant Group (hereafter “Fine

Harvest”), a chain of 246 companyowned restaurants.

Ralph was livid. He had just received his performance

evaluation from Joe Simmons, his immediate supe-

rior, the Kansas City area manager. The evaluation

was not good, and Ralph learned that he would not be

 earning a bonus for the year 2012. Ralph had already

expressed his anger to Joe, but on further refl ection,

Ralph decided that he would not just passively accept

the evaluation. He felt able to express his anger and

frustration directly to Karen because he had known

her for a long time. He was one of the fi rst employees

Karen and her husband, Robert, hired when they

founded the Fine Harvest Restaurant Group in 1994.

Despite the gap in the management hierarchy, Karen

agreed to meet with Ralph. The meeting was sched-

uled for April 2, 2013.

At the April meeting, Ralph bluntly laid out his com-

plaint. He explained that performance evaluation was

not fair.

My employees and I worked our butts off all year.

We did the best we could. In fact, I think we did

the best that could be done. You know I’m a good

manager. I’ve proven it over many years. And

now for me to get this slap in the face … well, it’s

just not fair. And this is a particularly bad year to

not get a bonus. My wife’s been out of work

because she has been ill, and I’ve got two kids in

college.

Ralph also explained that he had been talking

with some other restaurant managers, and they too

did not trust the company’s performance evaluation

system. Many of them did not want to complain,

because they perceived they had earned part of their

bonuses out of luck.

The company

Fine Harvest Restaurant Group, headquartered in

St. Louis, was one of the largest family-owned busi-

nesses in the United States. Over the last 18 years, Fine

Harvest had grown from a single location to a national

company with 246 outlets in 27 states, predominantly

in the Midwestern and Western regions of the United

States. It had about 4,250 employees and approxi-

mately $289 million in annual sales.

Since its founding, the privately held Fine Harvest

dramatically outperformed its competitors. Same-store

sales, a common industry measure of growth, had

increased almost every year since 2001, with a 7.3%

jump in 2007. The only year in the last decade when

same-store sales did not increase was during the reces-

sion of 2008, when same-store sales remained steady.

Fine Harvest also continued to add to its growth by

opening new restaurants. In 2012, Fine Harvest

recorded annual revenues approaching $290 million,

capping five consecutive years of growth at a com-

pound annual rate of 14.2%.

Fine Harvest’s core menu offerings focused on

sandwiches and salads. At Fine Harvest, the customer

could choose from a wide selection of attractively dis-

played sandwich and salad choices a-lacarte or order

one of four meal types (chef salad, soup and sand-

wich, salad unlimited, and vegetable burger), also

known as “combination platters.” For larger parties,

customers could order party platters that served

10–12 people.

The founders also believed that Fine Harvest’s suc-

cess was due in part to the fl exibility the restaurants

provided by adapting to a variety of operating environ-

ments. Since its founding in 1994, Fine Harvest had

broadened its operations from the St. Louis area to

27 states, and management had aggressive plans for

continued expansion.

Fine Harvest was one of the fi rst quick-service chains

to open restaurant locations inside of a supermarket

and was also testing drive-through locations in several markets. Fine Harvest strategically positioned
its res-

taurants in four sites:

1. Shopping center cafeterias;

2. Key intersections and downtown areas;

3. University campuses, airports, casinos, resorts, and

stadiums;

4. Major supermarkets and retailers.

Fine Harvest made a significant investment in each

location. Its in-house architectural and construction

team oversaw each step of development to ensure a high

quality of design and construction. In addition, it made

sure that its restaurants accommodated the specific cri-

teria of each location while still maintaining the opera-

tional and visual elements characteristic of Fine Harvest.

Both owners, Robert and Karen Williams, remained

actively involved with their company on a daily basis as

chairman and president/CEO, respectively. They

believed that much of their success was due to their

active involvement in the daily operations of each res-

taurant. There were no plans to offer franchises in the

near future.

Organization structure

As shown in Exhibit 1, the executive committee of the

Fine Harvest organization consisted of seven people:

founder and chairman of the board (Robert Williams);

president and CEO (Karen Williams); chief financial

officer; vice president of human resources, vice presi-

dent of marketing, senior vice president of operations;

and senior vice president of restaurant development.

Three vice presidents reported directly to the chief

financial officer in the functional areas of business

planning, accounting and finance, and information

systems. The senior vice president of operations super-

vised the work of the vice president of purchasing, the

executive chef, and the director of food and beverages.

Thirty four geographical area managers, each

supervising between 4 and 11 restaurants, also

reported on a regular basis to the vice president of

operations, and reported summary results to the mem-

bers of the executive committee on a quarterly basis.

The area managers were responsible for administering

the management and staff training programs, setting

performance targets for the restaurants, and oversee-

ing the performance of the restaurants. The area man-

agers were primarily held accountable for the

achievement of the financial goals.

The staff of a typical Fine Harvest restaurant con-

sisted of a general manager, one or two assistant man-

agers, and approximately 12 to 15 hourly employees.

The general manager of each restaurant was responsi-

ble for the day-to-day operations of that restaurant,

including sales, costs, hiring, training, ordering, inven-

tory, and marketing. The general manager ensured

that the restaurant provided excellent customer ser-

vice, maintained high-quality food, and met financial

and operational goals. The assistant managers were

responsible for purchasing, maintaining product qual-

ity, and controlling food and kitchen labor costs.

Budgeting and performance

measurement systems

Fine Harvest’s goal-setting process was primarily top-

down. In October of each year, Fine Harvest’s top exec-

utive committee set preliminary profit margin targets

for each of the area managers. These targets were

based on historical projections, plans for new restau-

rants in each area and the committee members’ knowl-

edge of market trends and the competitive environment.

They were also designed to ensure that the company

achieved its desired minimum of 12% annual growth

in profits.

The area managers then set tentative financial tar-

gets for each restaurant. At the restaurant level, restau-

rant margin was the fundamental indicator of

performance. Restaurant margin was calculated as the

difference between a given restaurant’s revenues and

its expenses. Interest expense, taxes, and rent or leas-

ing expense were excluded from the margin calcula-

tion. This was done because the restaurant managers

had little or no input into decisions about financings

and restaurant locations.

In setting restaurant margin targets, the area man-

agers generally extrapolated from the restaurants’ his-

torical performances. However, they also took into

consideration new information that they were aware

of, such as local population growth rates, highway con-

struction plans, and competition. These preliminary

restaurant targets were consolidated, reconciled with

the executive committee’s target for the area, and pre-

sented to the executive committee.

At the end of the year, bonuses were paid to area

managers and restaurant managers based on their per-

cent achievement of targets for the restaurant margins.

No bonuses were paid where performances were below

targets. If performances exceeded targets by 50% or more, the managers could be paid bonuses of
up to

twice the target bonus levels. Salary increases and pro-

motions also depended primarily on the achievement

of the financial targets.

Fine Harvest managers believed that the most

important factor affecting growth prospects for a res-

taurant was the population growth rate in the sur-

rounding area. Restaurants located in communities

that were growing rapidly grew faster than those in

declining communities. For analysis purposes, Fine

Harvest grouped their restaurants by area in which

they operated and estimated the growth rate for each

area. They then compared each restaurant to its peers

as well as the performance of the entire system.

The performance evaluation

of Restaurant 036

Ralph had worked on the Grandview downtown restau-

rant for five years. Before he took over, the profit mar-

gins of this restaurant had never exceeded 3.5% since

its opening in October of 2000 and were often in the

red. During his tenure, Ralph brought the profit mar-

gins up from 3.4% in 2007 to 8.8% in 2012. He had

achieved most of this improvement in the first two

years, during which profit margins increased at an

average 30.5% annual growth rate. But according to

Ralph, the restaurant could not sustain this rate indefi-

nitely, since all the main improvements had been

already implemented. The profit margins had increased

only 8.4% in the last year (from 8.12% in 2011 to 8.8%

in 2012).

Ralph complained to Karen that the targets set by

Joe Simmons assumed that the restaurant could

increase its profit margins indefinitely and at an unre-

alistic rate. “Instead of rewarding us for turning around

this restaurant, Joe has frustrated our efforts by impos-

ing ever increasing targets. I feel like a donkey follow-

ing a carrot on a stick.” Ralph also complained that

Simmons did not understand how downtown restau-

rants operated. “Downtown restaurants are less profit-

able than restaurants operating in malls or

supermarkets.”

Karen’s indecision

Karen was not sure what to make of Ralph’s complaint.

On one hand she worried that Ralph would lose motiva-

tion or would even leave the company if she did not

revise his performance evaluation. Ralph was one of

the most loyal, capable, and hard-working employees

that Karen had encountered, and she could not afford

to lose a manager like him. On the other hand, Fine

Harvest had a no-exceptions policy when it came to

performance evaluations. Karen understood well that

bending the rules for one employee would threaten the

credibility of the company’s performance evaluation

system, which had produced exceptional results since it

was implemented in 2005.

Karen also worried that the frustration expressed by

Ralph was a symptom of a wider-spread problem. She

had already heard that some managers were unhappy

with their bonuses because they asserted their targets

were too challenging and she was concerned that some

of the managers who were not complaining might have

too easy targets. As the restaurant group grew larger

and operated in increasingly diversified markets, Karen

was suspicious that she was losing touch. She won-

dered whether the performance evaluation system,

which had served the company well for almost two dec-

ades, needed to be modified. How could she know

when the targets set were too easy or too challenging?

What changes, if any, could she implement to improve

the current system?