Five Ways to Get Your Compensation Systems in Order
Is it easy in your market to recruit and retain top estimators, project managers and superintendents? Have you been surprised by the recent turnover of a high-potential employee? If you’re dealing with these and other talent issues, it’s time to get your compensation and performance management systems in line with the new normal of higher competition for talent, worries about retention and experienced managers aging-out of the workforce.
Here are five ways to get your compensation systems in order:
1) Establish a compensation philosophy and share it with your company.
A compensation philosophy is the mix of base salary and bonus that a company offers versus what is available for a given title in the labor market. Many companies in the construction industry have never formally articulated a compensation philosophy, but even if they have not stated one, there is a “phantom” compensation philosophy that exists based on their historic practices. The trouble comes when actual practices do not match up with the company’s self-image, or when the company leadership believes they are following one philosophy, while the rank and file believes something much different. If you do not benchmark this and really know (rather than guess) what your compensation package looks like relative to your competitors’ packages, then your compensation philosophy will always be a guess and subject to drift.
2) Benchmark your base compensation levels to objective, external market data.
FMI’s research of compensation practices in the industry indicates that the vast majority of companies do not use objective labor market data. There are layers of risk to a construction business that result from paying base salaries that are too high or too low. The consequences of paying too high should be obvious in a competitive industry like construction. Letting fixed labor costs get even a little bit above market norms can have a devastating effect on the ability to win work. Think back on a few projects you lost when you were second-low on the bid list. If there were less than a few percentage points in labor cost between your company and the winner—and if you had not benchmarked your pay in recent memory—then your potential over-market pay may have cost you that job.
3) Benchmark short-term incentives (annual bonuses) to the same objective, external market data.
A company should benchmark annual incentive pay externally for many of the same reasons it should benchmark base salary levels to external data. Notice we did not use the term “bonuses.” While many people use the term bonus and incentive interchangeably, FMI strongly believes that incentives connect the payment in the employee’s mind to desirable behaviors and outcomes. Bonuses, on the other hand, are more of a thank-you in a good year.
4) Offer a formal, short-term incentive (annual bonus) system with clear structure and measurable goals.
- Create a plan that clearly connects measurable goals for employees with:
- Their individual performance
- The performance of the small team they belong to, which can be as small as a functional team like an estimating department or as large as a business unit
- The performance of the company as a whole
- Benchmark the bonus opportunities (as a percentage of base salary) to objective external market data.
- Self-fund the plan by setting a goal for pre-incentive net profit that is equal to the sum of all of the individual bonus opportunities plus an appropriate ROE for ownership.
5) For senior management positions, consider a long-term incentive plan.
Long-term incentive plans (LTIP) are incentives that are targeted at senior managers of a business and typically vest over the course of three to five years. These are designed with the retention of top talent in mind and often prompt participants to use the description “golden handcuffs.” Unlike short-term plans that focus on driving annual business and individual performance, long-term plans usually offer incentives for attainment of goals that are lengthier in nature.
Once a company gets its base salaries and short-term and long-term incentives in line with best practices and market norms, it will be in much better shape to address the tightening labor market for construction professionals. The winners during the next upswing in the business cycle will be those companies that can attract, retain and develop the best people. Getting your compensation systems in shape is the first step along that road.