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FMI Quarterly/September 2013/September 1, 2013

You Kept Your Employees During the Great Recession: Now You Owe Them?

peoplegroup_image“Employees are our most important asset.” Companies often recite this cliché, often without supporting action. That is, until their most important asset becomes their competitor’s most important asset.

During the worst economic recession since World War II, many construction firms scraped together any available resources possible to provide pay and benefits to valued employees. Although some were forced to reduce pay, decrease benefits and cut back on learning and development, most firm owners took substantial hits to their equity as a trade-off to keep talented employees from suffering loss of jobs and benefits as well as the security and esteem of holding a steady position. Owners making these difficult decisions justified the cost with the need to have qualified staff when the markets picked back up.

Fast-forward to the current economic recovery, and many construction firm owners and senior leaders are now frustrated to find that returns on their significant investments to keep employees during the recession are dwindling. The market once again favors the supply side of construction labor in many parts of the country, and cornerstone employees whom employers kept during the recession are now jumping ship. The investments made during the recession turn into hard feelings when those key employees walk out the door to sign on with a competitor.

Post-recession, labor supply-demand dynamics and the associated psychology of employees differ drastically from the previous two to six years. Despite the scarce times and meager pay increases during that time, employees in the construction industry were grateful to simply have jobs, as nearly 5 million construction-related workers were laid off from 2007–2011, and the industry suffered a net loss of 2 million jobs. Employees who were aware of the overall economic situation appreciated the sacrifices that owners made to keep the lights on and payroll checks cut.

Reading about financial distress in the news, seeing foreclosure signs go up and talking to one’s neighbor about his or her job loss, the average construction employee knew the economy was bad. What most employees could not quantify, however, was how much worse the situation was getting. Sure, the construction employees hearing the news knew that their pay was stagnant, but they did not see the other side and realize that executive and senior manager pay decreased 20% on average between 2008and 2012.1 They often did not realize the amount of equity evaporating from their company’s balance sheet.

In the couple of years following the recession, FMI consultants have traveled around the country working with contractors on compensation and rewards plans and have heard one very consistent message: Qualified field and project managers are the most challenging positions to recruit and retain. One of the main reasons for this is because when the markets pick up and more opportunities emerge, it is nearly impossible for high-potential employees in these positions to recall anything but their personal experiences. This is especially true, considering their average base pay increased less than inflation did during and after the recession. Specifically, project manager, superintendent and foremen pay increased annually at 1.4%, 1.3% and 1.0% from 2008 to 2012.2Although average raises improved in 2012 to 2.9% for professional employees and are expected to be 3.0% in 2013, this will probably not be enough of a motivator by itself for those who passively or actively are searching for other opportunities.3 This could explain why FMI’s 2012 Annual Salary Increase survey showed one-third of the industry’s workforce is pursuing other employment, while one-half is looking or considering other employment passively. We think of the latter group as the “shadow inventory” of the labor market; once the market slowly turns in its favor, it will be marketing itself and shifting employers rapidly. That means that either actively or passively, more than 80 percent of the workforce will be contemplating a shift in employers.

Memories of a terrible recession and gratitude for the employer for employment while the company was trying to make ends meet have now faded, and employees are unforgiving for stagnant merit increases over the past four to five years. Instead of asking themselves, “Will I have a job tomorrow?” as they did four years ago, they are now asking, “After working hard and helping keep the company afloat over the past four years, how could my boss give me such dismal raises?” It is not taking much time for your employees quickly to go from passively thinking about a job change to actively looking or being placed on a project for a competitor.

Shocked by losses of key employees, as a company owner or senior manager, you look at the situation differently and ask, “After I was loyal to some of our employees and gave them stable employment during the recession, how could they betray me like this? They know we are about to win a large project where we had meaningful roles for them.”

The discrepancy of employer and employee expectations post-recession has taken a toll on maintaining workforces and is creating large shifts in the construction job market. The positive news is that many key employee losses are avoidable with reasonable investment in retention and motivation strategies.

Construction Business Owner reported in its July 2012 issue that nearly one in five construction workers either retired or plan to retire from 2012 to 2014. Additionally, FMI’s 2011 Talent Development Survey revealed that 76% of owners more than 50 years old plan to retire in the next 10 years. Compounded by less young talent coming into the construction workforce, these staggering statistics will intensify your challenges hiring and retaining key talent. Your most important asset’s bargaining power in the coming years warrants sound and innovative strategies for recruiting, motivation and retention.

What do construction employers need to be thinking about when the demand and tight supply of the labor market is a disadvantage to them? Here are four proven strategies that can help you retain key talent during challenging times.

Conduct annual base-salary benchmarking. One of the most common excuses for leaving an employer, as given in exit interviews, is pay. Surprisingly, this employee claim is typically not complete or accurate. But what the departing employee does not want to tell you is that it was due to a real or perceived lack of mobility or career path, or often because of his or her manager. As an employer, you need objective ground to stand on when talking about compensation and when discussions about money arise. Going by what you have paid employees in the past, using unverified online resources or asking current or former employees what competition is paying will provide you an incomplete and often inaccurate picture of market pay. High pay does not guarantee low turnover, but determine if this is a contributing factor to employee flight. Additionally, while we do not advocate that money is the ultimate motivator, it is a large consideration when attracting talent and you will need to know your precise position in the market during the recruiting process.

Design and implement short-term incentive plans tied to company and individual performance. Construction employers pay, on average, 10% of their net income for bonuses to professional employees.4 Many employers find that they do not incentivize the right performance, nor do they achieve an adequate return on this precious investment. Without fully understanding how to affect individual bonuses, employees do not change behavior to the extent that justifies this investment. FMI does not advocate increasing the dollar amount of bonuses; rather we would prefer to see bonuses distributed to those who drive your improved company performance. A structured incentive plan provides routine performance updates that drive performance. The incentive compensation plan should provide clearly defined measures with distinct bonus targets; arbitrary and discretionary plans are expensive and ineffective. Structured plans are also an effective recruiting tool. When one employer shows the candidate a structured incentive compensation plan versus another that says, “Trust us, we pay good bonuses” — the employee will choose the first option when all other factors are equal.

Develop an individual development plan for each employee. Individual development plans that are unique show employees how to progress and develop professionally and are necessary to create individual accountability. They also place accountability on the organization to support the employee in areas that leadership deems important enough to put on the employee’s individual development plan. When employees request training or professional development, make them a part of the process to justify the dollar investment necessary and provide a solid business case. An annual development budget will provide the organization an investment strategy to develop the workforce, just as an equipment maintenance budget tracks wear and tear on equipment. A workforce development budget will quantify your strategic investment to keep “your most important assets” up-to-date and effective. An organization can buy or grow its talent, but it is usually more advantageous to grow leadership strength from within.

Conduct annual or semiannual performance evaluations. Without providing an accountability structure for managers to give proactive employee feedback and provide educational opportunities, you leave a major component of employee development to the discretion of your middle management. Managers should have one-on-one meetings with their employees regularly, but at a minimum, a system of “forced interaction” is better than no system at all. Due to the inability to provide merit increases and bonuses during the downturn, we have seen several construction firms hold back or delay performance reviews altogether, a double punch to employees. While we realize that pay and bonus freezes are difficult and often necessary decisions, you and your leadership team have an obligation to discuss the business rationalization with your star talent in order to avoid concerns about company stability. Make them feel like they are part of the long-term solution as opposed to dead weight that deserves no feedback.

According to the National Bureau of Economic Research, the Great Recession ended in mid-2009, but the deficit of investment in employee motivation and development lingers through current times. It was a painful time for the construction industry, which entered the negative economic downturn later and is digging out slower than other industries. Unfortunately, for employers, competitive labor markets have become active again for many positions, without the commensurate return in revenue and profits to justify substantial increases in pay and benefits.

Construction employers are now competing against other industries more than ever. A net of 2 million construction employees left the industry when unemployment approached 20%, and most simply are not coming back. Employees forgot their gratitude for companies that kept them during periods of austerity, and their former loyalty toward employers is trumped by the need for long-term viability and work satisfaction. Millennials witnessed a labor market catastrophe in construction and now are reluctant to join the industry. If you are an owner or senior leader of your construction firm, your ability to build a legacy that lasts beyond your lifetime and through unforeseen economic cycles and industry disruption hinges on the talent that you attract, retain and develop. As safety, quality and customer satisfaction determine your company’s place in the market, the four talent strategies outlined above may ultimately determine your company’s long-term fate. Your window of opportunity to “wait and see” before committing to employee retention and development strategies may be slowly closing, as the storms of turbulence and uncertainty turn into showers of opportunity for your most important assets.


1 FMI Executive Compensation Surveys, 2008–2012.
2 Ibid.
3 FMI’s Annual Salary Increase Survey 2012.
4 2013 FMI Incentive Compensation Survey.

 

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