In a tight market for talented estimators and business developers, employers must provide an environment where the best work acquirers are incentivized and valued.
In the past several years, the construction industry has received a re-education in the importance of work acquisition to any successful construction company. Whether your firm is a national construction manager, a regional highway builder or a local mechanical contractor, the ability to sell work is more important than ever.
At the same time, the availability of highly skilled work-acquisition specialists remains tight. Everyone is looking to add a talented senior estimator or a highly effective business developer to the team. If you have one of these people on your staff, you are trying to ensure he or she is happy and not going anywhere.
FMI long has seen a well-designed performance management and incentive compensation program as a valuable tool to attract, retain and motivate the best talent. However, the construction industry as a whole has often struggled in implementing systems to track and manage individual performance. The further away from the field a person is positioned, the more difficult it becomes to quantify his or her (personal?) impact on project success.
In addition, the challenges with incentivizing employees in the sales function are many. It can be difficult to measure their efforts since the behaviors of great business development people, who are spending time out in the market and away from the office, can be indistinguishable at times from someone who is just avoiding the workplace. And when estimating metrics are tied too closely to the idea that the estimator’s focus should be “getting bids out the door,” they can lead to resulting behaviors that make it tough to land profitable projects.
BASIC ELEMENTS OF A PAY-FOR-PERFORMANCE METHODOLOGY
The first step in developing a strong incentive compensation plan is to develop an understanding of what motivates your employees. Not everyone has the same motivational factors. An employee’s preference for money, security, prestige, advancement opportunities and a host of other motivating factors can vary in importance, based on the individual’s personal life and career trajectory. It would be a mistake to believe that money works as a universal motivator, or that what incentivizes one estimator will work on all of them. Once you have an understanding of the individual’s key motivators, it becomes much easier to drive the intended results by offering the proper mix of rewards.
Change in a business is often intimidating for employees and at no time more threatening than when it affects the employee’s paycheck. Implementing a pay-for-performance plan requires a thorough vetting of the new system through scenario planning, gaming likely outcomes and demonstrating to the employee that prior-period payouts would have been enhanced under the contemplated plan. Most importantly, though, management must take the time needed to communicate the plan clearly to all employees affected. Employees who do not understand in detail how their behavior and performance drives their incentive opportunities will tend to perceive any performance management or incentive compensation system as though it were designed with the intent of limiting their compensation opportunities. Implementing the plan will require business managers to put on a “piper” hat of their own and show employees the benefits of the program. If those benefits cannot be communicated easily, or if they seem nebulous, the employees will not trust the program.
While all companies would like to believe that they have a clearly articulated strategy behind which the entire company is united, the sad fact is most construction firms are made up of individuals with different levels of understanding of company strategy, conflicting understanding of what deployment of that strategy means in day-to-day action, and often vastly differing personal goals. FMI would argue that the overarching goal of a business development team should be to bring in profitable opportunities that align with the firm’s operational capacity, while also supporting the strategic direction of the firm. In other words, not all business that could be developed is necessarily good business.
It is easy to use a three-legged stool analogy in evaluating opportunities to pursue. Any opportunity that is not: 1) profitable work, 2) work that aligns with the operational capabilities, and 3) work that aligns with the strategic direction of the firm, should not be pursued. More importantly, employees should not be rewarded or incentivized for bringing in one- and two-legged opportunities, lest the company’s strategy falls prey to individual employees’ desires to maximize personal compensation.
UNINTENDED CONSEQUENCES ABOUND
Although this concept seems simple, a poorly structured incentive plan can easily lead to unintended consequences. For the purpose of this article, we have chosen to highlight three of the most common examples of poor plan design. You will notice quickly that these examples correlate closely to our three-legged stool.
Bad Incentive 1: Being paid simply for bringing opportunities to the table or for “winning work” on bid day.
This tends to be the starting position of most firms as they are developing a compensation plan for their work-acquisition employees. While management intuitively senses that it probably is opening itself up for problems by incentivizing work won, the full depth of the issue usually only comes to light after a significant “win” that puts the operations team in a tough situation.
Unintended Consequence: Business development and estimating are rewarded in the short term, but operations struggles to bring the job in at a profit. Over the long term, the firm sacrifices profit for workload. Most firms identify the problem eventually and the “get-work” compensation system is changed, which often results in turnover of those roles. It is common to lose strong operational employees through this process. If their compensation is tied to profitability, they suffer from the resulting bids as well. In frustration, the firm decides that it is impossible to incentivize business development or estimating personnel and moves to discretionary bonuses for these roles.
Bad Incentive 2: The employee is paid for bringing in opportunities that the company will chase rather than opportunities that the firm already pursues.
This is the example of the firm that brings in a business developer with experience in a particular market sector, with the imperative to “go out and bring in opportunities.” However, the firm lacks the operational resources or resumé to pursue and prosecute the work effectively.
Unintended Consequence: Business development brings all opportunities, good or bad, to the estimating table, eventually overwhelming the estimating team. An overwhelmed estimating team is a sub-optimal estimating team. The estimators end up bidding a large number of projects that the firm has no capability to perform and no legitimate reason to pursue.
The result is an organization that gets burned out on particular work types. The company comes to the realization that, “We can’t win in that market,” whether that market is higher education, health care or the public-bid market. The hired gun with the great market sector experience moves on to the next organization and the company returns to its comfort zone of doing the same old things the same old ways.
Bad Incentive 3: Business development or estimating employees are paid based on the profitability of a job at completion.
At first blush, this seems to be the right methodology. After all, we want our work-acquisition employees to be focused on bringing in profitable project opportunities. To the extent that they can control the types of projects brought to the table, this sort of incentive should encourage them to bring in the right types of projects.
Unintended Consequence: Business development must wait for its incentive and must rely on operations to deliver the project profitably. Some employees may grow impatient and leave while others may not like putting their incentives in the hands of the operations team.
If there are so many types of pay-for-performance programs that do not work, there must be some similarities between the types of incentives that are typically effective. FMI has seen some commonalities in what works and has identified several performance metrics that can be used to incentivize work-acquisition employees.
WHAT WORKS IN PERFORMANCE MANAGEMENT
Business development employees, and work acquisition employees in general, thrive on short-term incentives and immediate results and rewards. Depending on the nature of the business and the typical duration of jobs, employees may not get the gratification they need to stay motivated and pursue opportunities if they must wait until the end of a project life cycle or a fiscal year. Additionally, if incentives are tied too closely to landing particular projects or customers, undesirable behaviors may be the result. For example, the employee may adjust his or her priorities to maximize incentives rather than to maximize corporate profits (e.g., by over-focusing on those targeted customers and projects to the exclusion of other opportunities).
A well-designed incentive program for business development and estimating keeps the business strategy in mind. It also balances input- and output-driven measurements. An input measurement tracks the effort put in, while an output measurement tracks results. While there are many measurements that can be used, the ones implemented to best effect are listed below. A good performance management program will use several of these criteria to make up a scorecard against which to measure the business developer or estimator.1
Business Developer Performance Criteria
- Time spent in marketing activities per target market segment. This input measurement tracks the business developer’s time spent in various marketing activities.
- Total marketing dollars (salary and other) invested per targeted market segment. This input measurement tracks return on the cash invested in developing business in a particular segment.
- Gross profit dollars earned on key accounts. This output measurement is an imperfect tool, since it requires the involvement of operations. However, when used as one of several measurement criteria, this is an effective performance metric.
- New opportunities identified per quarter in a targeted market segment. An input measurement used in a scorecard for business developers focused on new accounts.
- New opportunities captured per quarter in a targeted market segment. Another input measurement used to score business developers charged with exploiting certain market segments.
- Time invested in proactive relationship development versus project chasing. A way to measure whether the business developer is spending his or her time on the highest value activities. This is the most subjective factor listed in performance criteria. While totally objective criteria leave less grounds for argument, some subjectivity is inevitable in performance evaluation. Having clear understanding as to what relationship development means and which specific results constitute successful relationship development will go a long way toward reducing future arguments or dissatisfaction by a business developer or supervisor.
Estimator Performance Criteria
- Dollars left on the table on bid day. This measures the estimator’s market awareness and bid accuracy, and ensures that the estimator does not take work too cheaply.
- Gross profit won per dollar of estimating expense. This metric will measure the return on the estimating investment made by the company.
- Success, or capture, rate in a targeted market segment, project size and type. This measures the estimator’s performance in landing projects based on the project’s characteristics and is an important test of market selection strategy. It also can be used to predict future performance in work acquisition based on past performance. For example, if an estimator has a 30% capture rate on projects between $5 million and $20 million in size, the firm can use this information in budgeting based on the likely projects of that size in the marketplace.
- Budget versus actual variance and profitability in a targeted market segment. This is another output measurement to test the estimator’s ability to develop solid, complete scopes of work.
THE FINAL STEP —TYING PERFORMANCE TO PAY
Once a company has developed a set of scoring criteria for its estimators and business developers that meets it strategic needs, the final step is tying this scorecard to the incentive compensation payout. There are many ways to make this connection, but they all reflect one of two core methodologies — the target bonus and the uncapped commission.
A target bonus identifies a targeted dollar amount or percentage of salary that is established as a goal for the employee. This targeted amount should be compared to industry averages to ensure the incentive is aligned with what is available for the role in the broader market, lest it be too small to have any effect. In general, FMI has observed targeted bonus ranges between 15% and 25% of salary for estimators, with that range moving upward with the skill and expertise of the employee. For business developers, the range tends to start at 20% to 30% and increases depending on market sector knowledge and experience.
The uncapped commission most commonly is used with business development employees and tends to work best in organizations with strong management and project selection systems. The firm that has a clearly defined strategy and strong selection criteria will be better equipped to ensure that business development employees do not bring in marginal opportunities in an attempt to inflate their compensation artificially.
If a firm intends to commission its work-acquisition employees, a wise strategy is to reduce the commission for each successive project with the same client to ensure continued focus on developing new clients. This also recognizes the reality that while business development may land you the first opportunity with a client, it is the operations staff who secures future work through its performance. Many contractors use a sliding scale, where on the first project with a new client the business developer gets 100% of the target commission. Then, on each successive project, the commission is reduced by 20%, so that after the fifth project, the business development employee is completely out of the equation.
PAYING THE PIPER IS A STRATEGIC IMPERATIVE
As the market for talented estimators and business developers continues to be tight, employers must provide an environment where the best work acquirers are incentivized and valued. It is important to avoid making the kinds of mistakes in implementation seen in other organizations and to stick with metrics that measure the right inputs and outputs. The more your firm’s performance management scorecards are set up to measure the right criteria and you incentivize the right behavior in your business developers and estimators, the greater the likelihood you will keep your best people and attract superior talent from the outside.
Mike Clancy is a principal with FMI Corporation. He can be reached at 919.785.9299 or via email at firstname.lastname@example.org. David Madison is a consultant with FMI. He can be reached at 919.785.9213 or via email at email@example.com.
1 The role of the estimators is often, but not always, that of a business developer. In other words, not all estimators are business developers, even though they may support the business development effort.