The “Big Mac” Provision Redux: What About Franchisee Compensation?

In response to last week's post, When Franchisees Innovate: Discussing The "Big Mac" Provision, I received the following question:

Curious about the benefits to franchisee that discovers the new "Big Mac" as you say. Are there any financial rewards/incentives for them? If I was a franchisor, I would want to encourage innovation since the franchisee has the relationship with the customer.

During the negotiating process, sometimes a prospective franchisee asks for the right to some kind of compensation for innovations that are created by them. On very rare occasions, franchisors (usually emerging franchisors) will agree to this.

My opinion, however, is that compensation for franchisees under the "Big Mac" provision is ultimately a bad idea. Franchise systems benefit, as a whole, when they are able to capitalize on the shared resources and innovative thinking of all franchisees. If an improvement is made to the franchise company's system, it should be useable and used by everyone if the franchisor determines that it materially enhances the overall value of the system and its operations. 

Franchisors who permit or encourage innovation generally take the position that building compensation into the "Big Mac" provision will ultimately discourage the sharing of new ideas between and among franchisees.  This is because the franchisee in that situation who comes up with a good idea may hesitate to share it with others unless a compensation plan is in place. If franchisees get possessive about their ideas and refuse to share them unless they get paid for the ideas, no one benefits. 

Also, not all franchisee innovations are breakthroughs on the level of the Big Mac. Many smaller (but valuable) "tweaks" are made to systems when franchisees share ideas. If compensation becomes part of the equation, the franchisor might not feel that every idea that comes along is so significant that it merits payment to the franchisee who created it — in which case the idea goes unused, and helps no one.

Finally, there are many changes that provide a benefit to the system but don't necessarily result in an increase in earnings that directly correlates to the innovation. In those cases, any compensation to the creating franchisee can be hard to quantify and therefore make compensation impractical.

In sum, my opinion is that building compensation into "Big Mac" provisions is a bad idea because the compensation provision can actually discourage positive system change. That isn't good for anyone — the franchisor, the franchisees as a whole, or customers. 

P.S.: In the case of Jim Delligatti, the franchisee who created the Big Mac, McDonald's did not pay him any money for his idea. But he has been honored in various ways by both the company and his home town of Pittsburgh (a statue of him was erected there), and he will go down in history as the creator of one of the world's most famous sandwiches!

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