1. 9/3/2011
CASE
ANALYSIS WAYSIDE INNS, INC.
REPORT
Submitted by: Submitted to:
Group M Dr. Monica Singhania
Management Control Systems | N-49, N-89, S-51, S-72, S-75
N- S- S- S-

2. Introduction:
The Wayside Inns, Corp., located in Kansas City Missouri was formed in 1980 as the
successor corporation of the united Motel enterprises, a company that operated sever-
al franchisee motels from two national motel chains. Because of the complicated and
restrictive contract covenants, United was unable to expand the business. The succes-
sor corporation, the Wayside Inns Inc. was formed to own, operate and license a chain
of motels under the name Wayside Inns as well as to continue to operate the present
franchises held by United. The Wayside Inns was a public corporation listed on the
American stock Exchange. It had 1,542,850 shares outstanding. The common stock
price had appreciated considerably and analysts felt that investor interest was due to
number of factors but primarily linked to innovative marketing strategy. The Wayside
Inns average occupancy rate was 10-20 % higher than competitive motels.
Strategy:
Strategy:
The Company’s fundamental strategy was to cater to those business travelers who
were generally not interested in elaborate settings. In fact 80% revenue of Airport Way-
side Inns was due to the salesmen and business travelers alone. There were no com-
mon areas such as lobbies, convention rooms, bars or restaurants. The chain empha-
sized clean rooms, dependable service, and rates that are generally 15 to 20 percent
lower than national motel chains. A free standing restaurant was always located on the
motels property- in some cases it was operated by the Wayside Inns. In general con-
cessionary leases were granted to regional restaurants chains.
Most of their motels were located near interstate highways or major arteries convenient
to commercial districts, airports and industrial or shopping facilities. The strategy was
to have a total of 600 rooms in five or more different locations within a city rather than
having one large hotel with 600 rooms. The Wayside Inns were usually constructed in
one of the three sizes-76 rooms, 116 rooms or 156 rooms. The firm had grown substan-
tially since its inception and the prospects for future growth were favourable. The com-
pany had three tiered expansion strategy:
1. Construction of new motels seeking ever widening geographical distribution,
2. Expansion of existing properties if operating at full or near full capacity.
3. Selling of the old properties that became financial burden or did not provide
required rate of return.
Strength:
The competitive strength of the Wayside Inns were:
1. Targeted market segment unaffected by seasonal or environmental factors.
2. Aggressive management.
3. Reduction of construction cost and completion times due to standardization.
4. Efficient quality control.
2

3. Management Compensation Models
The chapter talks about two philosophies of Incentive Compensation
• Fixed Pay
• Performance Based Pay
Fixed Pay
Recruit Good People
Pay them well
Expect good performance
Performance Based Pay
Recruit Good People
Expect good performance
Pay them well if performance is actually good
Since the Corporate Management at Wayside Inns wished that the Unit Managers must
follow the Corporate Strategy, a multifaceted compensation plan tied to profitability of
the company was followed at Wayside Inns. This compensation plan was of mixed types
– neither too fixed, nor too variable.
Compensation Plan The compensation plan composed of four elements:
Plan:
• A base salary on the basis of number of years of service, dollar value of sales and
adherence to corporate goals,
• An Incentive Bonus on the basis of sales volume increases,
• An additional incentive on the basis of return on investment,
• Fringe benefits not linked to sales,
3

4. Case Facts:
Facts:
The company is planning to have a 40 room expansion at Memphis Airport Wayside Inns
Motel, where it already has 116 rooms. The motel was located at the intersection of
Brooks road and Airways road. By 1991, it was operating at near full capacity for five
nights a week, except Saturdays and Sundays. It had average turn away of 31.7 per-
cent during Monday to Friday, whereas on Saturday and Sunday average turn away was
only 9.05. Within two mile radius of the Memphis Inn there were 10 other competitive
motels, which were franchises of the major national chains besides no. of independent
motels. In addition there were number of independent motels. According to recent sur-
veys by the Memphis Chamber of Commerce, the average occupancy hovered around
72 percent and the expansion plans by the major chains were expected to account for
an additional 800 rooms across the whole city in the following 18 months. Inns manager
Layne Rembert also expressed concern about the proposed expansion especially in
view of 80 room expansion at another motel; the central Toledo property lowered its re-
turn on investment.
The case shapes from the conversation when the Regional General Manager of the
Wayside Inns Kevin Gray visited the Memphis Airport Wayside Inn for an inspection and
started discussing this idea with Layne Rembert- the Inn’s Manager. Rembert was skep-
tical of the new investment as the compensation was linked to ROI and as he had al-
ready seen in case of Toledo, the ROI with the new investment comes down, impacting
his compensation adversely. On the other hand Gray expected the market to grow con-
siderably.
In the end we came to know about a 20 point performance evaluation report used by
Gray to consider merit increases in the salary. This report was so important to him for
decision making that he wanted the company to make it an enterprise wide basis to de-
termine the merit increases in one’s salary. This report laid emphasis on factors other
than ROI as well. The report takes care of uncontrollable factors for the manager and
hence laid more emphasis on customer satisfaction which was expected to permeate
into an efficient operations for an organization.
Case Numbers/Financials:
Even though we can see exhibits in the enclosed draft of the case, some of the impor-
tant numbers of the case are as follows:
Revenues:
1991(Actuals) 1992(Proposed)
$1049729 $1485589
Operating Expenses
1991(Actuals) 1992(Proposed)
$652225 $861624
4

5. Operating Income
1991(Actuals) 1992(Proposed)
$397504 $624235
Return on Investment
1991(Actuals) 1992(Proposed)
27.06 % 24.25 %
Compensation Variable linked to Investments
Return on Investment Bonus is part of the overall compensation of the Inns Manager
where the bonus was calculated as:
ROI X PF = ROI Bonus; ROI=Return on Investments, PF=Performance Factor defined as:
Investments ($) PF ($)
0-600000 15000
600000-1200000 25000
1200000-1800000 36000
1800000-2500000 45000
2500000 and above 50000
Direct construction related cost:
Construction cost + additional parking =$1,050,000
Engineering & legal fees =$18,000
Environmental Impact studies + Local building permission =$12,000
Total =$1,080,000
Non direct operating cost (annual) =$46,000
(For personnel, utilities and maintenance)
expenses
enses:
Direct room expenses:
Direct room expenses = 23% of room revenue.
Management and reservation fees =5% of room revenue + $30 per room per year
Data Analysis:
• Addition of 40 rooms will lead to increase in revenue by 41.5%,
• Out of this 41.5%, 16.37% is attributed to rise in average room rate,
• Operating income will go up by 57.04%,
• Return on investment (24.25%) will come down slightly from 27.06 %,
5

6. Case Questions:
Question No 1:
Is the proposed investment likely to be a good one for Wayside Inns, Inc.?
Our Views:
Even though the ROI in the first year of operations after the proposed investments will
get a beating, we are of the opinion that the proposed investment is likely to be a good
one for Wayside Inns because of the following factors:
• The present turnaways (Opportunity Loss) can be converted into revenue,
• The future ROI backed by an increased depreciation may be higher than the next
year’s one, Infact for a long term project we should have a long term perspec-
tive.
• The expansion gels with the Business Level strategy of the company to expand if
the existing one is running at full capacity,
• The competitors are expected to expand and if Wayside does not expand, the
turnaways and new customers may further get shifted to other competitors.
Question No 2:
Is Layne Rembert’s concern justified?
Our Views:
The concerns of unit manager Layne are not justified at all as the ROI linked bonus
takes care of the dip in ROI with increased investments. Even though the concept says
that the compensation management should be such that the unit manager should have a
control over all factors which is not there in this case- he’s having a control over reve-
nue, but then not over investments as that is expected to be done through a corporate
call. We are however of the opinion that given this fact as also given the fact that the
Business Level strategy is to expand, we have to draw the line somewhere and if the
business level strategy of expanding takes care of the effects of bonus which was taken
in this case, there is no harm in implementing such investments. We can see from the
exhibit on Performance Factor that as the size of investment increases, though ROI may
go down due to potential downside on capacity utilization, there is an upside in the per-
formance factor and hence no incremental loss on compensation. If we believe the cal-
culations by gray, we find that the compensation is infact increasing from $29712 to
$33775 within which the ROI Bonus too is on the rise from $ 9743 to $10914 after the
investment.
6

7. Question No 3:
Is the current compensation package for in managers as appropriate one? If not, what
would be?
Our Views:
The current compensation management system is more or less appropriate to the ex-
tant that factors other than ROI, Age in the organization, following Corporate Policies
etc.. does not give emphasis to Customer Satisfaction. Therefore if Gray’s 20 Point Per-
formance Evaluation Report can be institutionalized and given a weightage in the an-
nual compensation of unit manager, we feel that the compensation management will be
more customer oriented and less revenue oriented. After all it’s a customer service and
not a money making industry alone. This apart if we look at certain positives in the
shape of fringe benefits and graded performance factor, the company has already well
thought off for the employees motivation that comes through increased rewards suita-
ble to satisfy one’s needs.
Question No 4:
Should the performance measurement system for a regional general manager be fo-
cussed upon the same factors that are used by Kevin Gray and Wayside Inns to eva-
luate and compensate an inn manager? (An RGM has responsibility for a geographical
are containing anywhere from 10 to 15 motels).
Our Views:
The ultimate aim of any compensation system is to enthuse the workers, motivate the
workers so that the Corporate Level and Business level strategies can be implemented
and corporate goals can be achieved. Employee does get motivated if there is a proce-
dural justice as also a distributive justice. If an employee realize that there are two sets
of performance evaluation systems- one for the unit managers and another for Regional
General Manager, come whatever may, since the factors affecting one’s compensation
are not totally in one’s hands- Investments in this case, a sense of suspicion and dissa-
tisfaction may prevail. On the other hand if an employee realize that he will be weighed
under the same system as that of a regional general manager, assessed under the same
variables as that for his superior, a sense of belief and trust will prevail ultimately pool-
ing the energies in the organization for achievement of the corporate objectives. In the
extant case apart from the 4 point total compensation systems, a 20 point performance
evaluation report with related variables (Cleanliness, customer satisfaction for Rembert
and Occupancy, location, training etc for Gray) should also be institutionalized.
7