Wrap it up developing a new compensation plan

HBS Professor W. Earl Sasser, Jr., and writer Rachel Shelton prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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R A C H E L S H E L T O N

WrapItUp: Developing a New Compensation Plan

Introduction

Martha Reyes needed some fresh air. The 46-year old human resources executive locked her computer display, left her third-floor office, and took the stairs down to the lobby. She crossed the street to a park where she observed workers from the area’s offices as they enjoyed their lunches on a sunny afternoon near San Francisco. She smiled as she saw several people carrying bags bearing the logo of WrapItUp, her employer.

When Reyes was recruited to lead HR at the restaurant chain in early 2010, she found that WrapItUp employee turnover was relatively high, customer satisfaction was suffering, and revenue growth was flat. It was her immediate mission to get to the bottom of the HR issue—turnover—but she thought that all of the chain’s challenges probably were related and that solving the turnover issue might take steps toward solving the others. With the help of an external consulting firm, Reyes developed the ShareIt program, a profit-sharing plan intended to make store manager compensation more competitive and to motivate managers to maximize individual store profits.

In late July 2011, the ShareIt program had just finished a six-month pilot in two carefully selected outlets. Reyes had received the final report from the consulting firm and needed to decide what to recommend to WrapItUp’s two founders, who still served as co-CEOs. WrapItUp could roll out the program to all stores, run a larger trial, put the program on hiatus while they modified it, or abandon it altogether.

Background

Shawn Jackson and Simon Sethi, self-proclaimed picky eaters, founded WrapItUp in Northern California in 2002 while still in graduate school. Frustrated with the fat-laden choices offered by on- campus dining, they started making and selling customized wraps out of the kitchen of their on- campus apartment, using fresh, healthy ingredients. Before long, the line stretched out the apartment door and around the block. They used their idea to win a university-sponsored business plan competition and, with the capital it provided, built it into a full-time business after graduation.

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The initial restaurant opened near campus the following year, and the business expanded quickly, well ahead of an increasing overall consumer preference for quick meal alternatives perceived as healthy. A 2011 restaurant industry study indicated that 70% of restaurant consumers were trying to eat healthier and that two-thirds of restaurant operators noticed guests ordering healthier choices and inquiring about the nutritional value of menu items.

By mid-2011, WrapItUp operated 30 restaurants in Northern and Southern California, and the Seattle (WA), Portland (OR), and Phoenix (AZ) metro areas. Many, but not all, of its restaurants operated near universities. The founders imagined that they would eventually expand to other geographic areas, but doing so was not on their immediate strategic agenda. All stores were still company-owned, and the company did not currently have plans to franchise. “There’s a right size for us, and it’s not to have one on every corner of every street in every city,” said Sethi. “We want to keep our company at a manageable level to ensure consistency.” The firm was privately held with the co-founders as majority shareholders.

The standardized WrapItUp menu included a variety of made-to-order wrap sandwiches and salads and a multitude of options to accommodate special diets, such as vegan, gluten-free, and lactose-free, in addition to “raw food” options and fresh fruit for dessert. Although the executives had discussed expanding the menu, they wanted to avoid the operational challenges involved in baking activities. The chain further differentiated itself through a visible commitment to local sourcing. Since its founding, WrapItUp had purchased ingredients from local farms whenever possible. “During our startup period,” Jackson remembered, “we grew some of the produce in the backyard of our apartment building, and customers loved it. We can’t do that at this stage, but it taught us the value of emphasizing ingredients that are fresh and local.” This approach again placed WrapItUp ahead of a trend: In 2011 the restaurant industry named local sourcing as one of its top five trends and gluten-free and allergy-conscious foods a top-10 trend.

The freshness of WrapItUp’s ingredients and its accommodation of special diets meant that its prices were somewhat higher than its competitors. The average sandwich sold for around $10, so it operated primarily in high-income areas where consumers were willing and able to pay a premium for quality and choice. To maintain freshness and to reflect the chain’s strong community orientation, at the end of each day store managers donated outdated ingredients to local food banks and homeless shelters.

Almost 10 years after founding the chain, Jackson and Sethi’s passion for delivering fresh, quality food had not wavered. They had always shared the CEO role and had remained hands-on leaders, maintaining ultimate approval on all menu changes as well as hiring for store managers, who came to WrapItUp from a wide variety of backgrounds and were generally experienced in the food or restaurant industry. Some had attended culinary or hospitality school; some studied other subjects and broke into the industry through part-time jobs. Several of the managers had minimal formal education and had worked their way up through the fast-food industry. Jackson and Sethi made sure that everyone on the team shared their passion and vision.

Challenges

Jackson and Sethi’s hands-on leadership style worked well when the business was small and they could be on-site at all the stores, sharing their enthusiasm and knowledge firsthand with store managers. With expansion, the co-CEOs struggled to disengage from daily operations and decision making. They still had tight relationships with some long-term employees. “I’ve known Shawn since grad school and feel comfortable going straight to him whenever I have a question or need

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anything,” said the manager of a San Francisco restaurant. “He always takes care of me right away— no waiting around for an answer.”

To maintain a consistent brand image, the founders had prohibited individual restaurants from engaging in their own marketing activities. In particular, all social media activities were centralized. In 2009 one of the Seattle outlets launched its own Facebook page and Twitter feed; the founders found out about it when the store manager friended them. Jackson and Sethi had both local efforts taken down immediately for “failure to conform to brand standards.”

WrapItUp also had experienced growing pains in the area of human resources. Turnover was high; recruiting was disorganized. “We do our best to make WrapItUp an amazing place to work— especially for people who share our passion—so we can’t understand why we keep losing good managers,” said Sethi. “We can’t keep going like this. Last year we burned through our entire annual recruiting budget in the first quarter just by trying to keep up with the hiring.”

Recognizing the need for expert help, in early 2010 Jackson and Sethi recruited HR executive Martha Reyes to the firm from an upscale restaurant chain. An industry veteran, Reyes started her restaurant career in high school by working the drive-thru lane at a fast-food outlet. After college, she steadily worked her way up through a variety of managerial and HR positions at multiple firms in the industry. The dilemma she faced at WrapItUp was both familiar and unique.

WrapItUp faced some common challenges in the hospitality industry. It was difficult for the company to attract and retain top talent, especially at the store manager level. The fast-paced atmosphere in the restaurant meant that any position could not stay vacant for long, so hiring had been more a rushed scramble than a thoughtful exercise to find the right person. Managers were sometimes promoted from within and sometimes hired externally—whichever route could fill the position the quickest. Since 2006, WrapItUp’s turnover rates for both salaried (managerial) and hourly employees had consistently exceeded industry averages (see Exhibit 1) and were a constant source of frustration at all levels of the company. “Low compensation” was the top reason that managers offered for their resignations in exit interviews conducted by the HR generalist.