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Incenting employee performance in the construction industry

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Construction is one of the industries most significantly impacted by the economic downturn of the past 3-4 years. With market conditions improving, more construction companies are seeing turnover in key positions such as field superintendents, project managers and engineers.  We have worked with many construction firms that provide conservative base salaries, putting much of the employees’ total cash compensation opportunity ‘at risk’ through a discretionary bonus plan. These plans paid out little or nothing during the recession years but in most cases, employees were reluctant to leave the security of what they had. Now that the industry is turning around, will this approach to compensation allow companies to keep their key talent?  And with limited compensation budgets, are discretionary bonuses the best way to drive business performance?

Bonus plans vs. incentive plans

Bonus plans are “after the fact” and reward employees for their overall performance and contributions without setting individual objectives or committing to specific payment levels based on results. Bonus plans do a great job of rewarding performance and have a broad motivational value if they are consistently given after good performance, but they are not as effective for incenting specific actions or behaviors, or supporting a pay for performance culture.

More and more construction companies are moving to Incentive plans as a way to motivate and reward specific results, and retain key talent. Incentive plans are before the fact because they incent employees to take specific actions to meet individual or company goals. Incentive plan objectives are communicated prior to the plan period along with an explanation of how results will translate into individual award payments. If the incentive plan is communicated and documented well, a plan participant will know what he or she needs to do in order to receive an award and approximately what that award will be for different levels of performance. The employee’s pay is directly linked to performance.

Just because a plan communicates a specific objective prior to the plan period doesn’t necessarily make it an incentive plan. In order for employees to understand how actions or behaviors will impact their incentive award, they need to have a line of sight to the objective. In other words, employees need to understand what they specifically can do to impact the results of the objective. If the only objective in your plan is company revenue of $X, many employees may not believe they can impact the objective and will simply wait to see if they are rewarded after the fact. However, if you are able to include individual or department objectives that support the overall revenue goal, it will incent specific actions and behaviors. In addition, if you communicate objectives but don’t specify how the award will be calculated based on results, participants won’t have a clear understanding of how their actions and behaviors will impact their pay.

Some construction companies are maintaining a discretionary component to their formula-driven incentive plan as a way to reward employees for elements of their jobs that are not easily measured (e.g., rewarding your best project manager to take on an extremely difficult job that may lose money without that individual’s unique skills and abilities).

Considerations for effective incentive plans

If incentives are the right approach to drive performance and results in your company, here are a few tips on designing an effective plan. The most effective incentive plans have four things in common:

  1. The plan is specific. Employees know, in advance and in writing, what they need to do in order to receive an award and what that award will be for different levels of performance.
  2. The plan design is simple and easy to understand.  Employees need to easily understand how their day-to-day actions and behavior can potentially impact their incentive award. Management incentive plans should have no more than four measures, with 2-3 being ideal, and non-manager plans should normally be tied to one or two metrics or objectives.
  3. The incentive opportunity is meaningful for the employee. Incentive targets need to be a substantial portion of the employee’s total compensation in order for the employee to change behavior to attain it. In our experience, incentive targets should be at least 10 percent in order to be considered meaningful to participants.
  4. Good communication at all stages is critical. The plan is communicated in advance and in writing to all participants and senior management provides clear and regular communication on the progress of the incentive plan goals or targets along with encouragement and direction on how to improve results.

Incentive plans require effort and focus but a well-designed plan is critical to creating and supporting a pay for performance approach to rewards in your company.

Maureen Driscoll is a Senior Vice President and Jim Vandervelde is an Engagement Leader with Verisight’s compensation consulting group. Both are located in Verisight’s Minneapolis office.