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FMI Quarterly/September 2014/September 1, 2014

Increasing the Effectiveness of Incentive Compensation: Success Stories in the Construction Industry

money_imageInvolvement begets commitment. Providing an incentive opportunity to your employees will help them focus on what is important and support their commitment to company success that the vast majority of respondents desire. Incremental improvements of the majority of employees will have significantly more impact on the company success than incremental improvements of only a few employees.

Having an effective incentive compensation plan in place can mean the difference between success and failure in today’s competitive business environment. With economic conditions improving and an expanded number of job choices opening up for construction workers, the importance of developing structured compensation plans based on measurable criteria and centered on employee performance and development will only increase in the coming years.

Screenshot 2017-01-23 10.54.23Though U.S. construction companies have long embraced the pay-for-performance culture, today’s industry compensation model remains predominantly discretionary (see FMI’s “Incentive Compensation Effectiveness Study — the 2013 U.S. Construction Industry Incentive Compensation Survey”). Based on FMI’s research, for the incentive to be effective, employees should know what their bonus opportunities are — and what it takes to achieve those targets — in advance. In fact, the old “trust me” catchphrase is no longer effective in motivating employees to outperform, nor is it a compelling argument when recruiting and engaging new employees.

By creating incentive compensation plans that support their strategic objectives, help them attain their long-term goals, provide desired returns and behaviors, and yield real results, firms can move out of “reactive” mode and take a proactive approach to incentive compensation. As competition for limited labor and talent intensifies in the years ahead, having a well-thought-out incentive compensation plan in place will likely become a key differentiator in company performance and overall company value.

In a 2013 FMI study of incentive compensation effectiveness, contractors who utilized structured incentive plans reported them to be three times more effective than those who continued to use discretionary plans.

The following paper highlights how two different firms are effectively tackling this very important issue of incentive compensation. The article also presents best practices on how to get started with this kind of strategic endeavor.

SUCCESS STORIES: Testing the Waters of Incentive Compensation

The following case studies highlight the efforts of several construction firms to create and administer effective incentive compensation programs. FMI interviewed company executives to explore their strategies, discuss what actions they’ve taken, and find out how the new and/or revised plans are working out for the organizations and their employees.

CSRS, Inc.: Setting and Sticking to Targets
Established in 1978, CSRS, Inc. is a leader in the delivery of infrastructure and facilities serving public and private organizations across the southeastern United States. The company took a somewhat arbitrary approach to distributing bonuses until management decided that its nonexistent bonus plan was no longer feasible. Co-owner Chris Pellegrin said, “We were very subjective with any sort of bonuses and disparate across the company as to how those bonuses were distributed.”

In 2012 when CSRS decided to improve its performance review process, the company’s bonus plan also came under scrutiny. “We were trying to get more deliberate with our performance reviews,” recalled Pellegrin. “That evolved into a compensation plan that allowed us to start conducting a broader distribution of bonuses in order to reward our employees for their efforts.”

In Search of a More Formal Process
In early 2013 the firm’s owners and managers hired FMI and started developing a plan. Ten months into the implementation of that plan, Pellegrin said he has noticed a number of positive results stemming from the firm’s newfound commitment to compensating employees for a job well done. “It has motivated some of them to follow through on their efforts,” Pellegrin points out. “So many times when a new initiative launches, the initial momentum is strong, and then it sort of fizzles out when everyone gets busy with other projects. Now that we have tied some of these efforts to our bonus plan, I’ve seen more projects followed through to completion.”

Additionally, Pellegrin said the plan has helped company managers formalize a process for meeting with their employees on a more frequent basis (rather than just once a year for an annual review). “Two or three times during the course of the year, we are prompting managers to meet with their direct reports to go over how they’re doing on their individual targets,” said Pellegrin. “That opens up the opportunity for more dialogue between manager and employee.”

Opening the Doors
As a tightly held entity, CSRS hasn’t historically been forthcoming with its financial data. “It’s always been a group of owners in a closed room talking about profitability,” said Pellegrin, who has seen that “close to the vest” way of thinking shift slightly since performance reviews were ramped up and a bonus structure introduced. “In the past, profitability wasn’t really a companywide topic of conversation and now it is,” said Pellegrin. “That’s positive because everyone gets in on the topic. Accounting has one more reason to get the quarterly numbers out on time because everybody on staff is anxious to see how we’re performing.”

The same level of visibility applies to CSRS’s bonus plan, which was rolled out in December of 2012 at a corporate meeting and later introduced to each division individually. “We did that to get some Q&A going,” said Pellegrin. “It was well-received and looked upon as ‘new and exciting’ for employees who would finally have the opportunity to be recognized for their performance above and beyond just salary.”

As part of that rollout, FMI came on-site and conducted a half-day session with all company managers or “business unit leaders,” as CSRS refers to them. “We went into detail about the plan to make sure everybody knew the rules and the processes,” said Pellegrin. “Through FMI, everyone received a pretty good tutorial on the measurable targets, how the program works, and examples of it in action.”

As with any type of cultural change, CSRS has also faced a few struggles in its quest to implement a new bonus program. Setting targets that align with the plan itself, for example, hasn’t been easy for the firm’s owners and managers. “Trying to go above and beyond the day-to-day activities to figure out what types of things are measurable has been our biggest challenge,” said Pellegrin.

To work through that challenge, Pellegrin said that all business unit leaders met with their staff members in 2013 to review goals, make sure past goals were still applicable and reconfirm the measurement approach. Also assessed were individual targets for the year across all six of the company’s key business lines. “When we sit down at the end of the year with the employee,” said Pellegrin, “we don’t want to argue over if someone met his or her goals … or not. We want it to be black/white, yes/no, with no question as to the result.”

Key Success Strategies

  • Get owners, managers and employees involved from the start in the process of setting up a bonus program based on individual performance.
  • Don’t be afraid to open the doors to the owner’s suite and allow someone other than the company leaders to take an interest in the firm’s profitability.
  • Have managers conduct three or four one-on-one meetings with employees throughout the year to see if the plan is on track and/or if anything needs to be adjusted.
  • Be very clear when setting goals for individual employees to avoid eleventh-hour arguments over whether targets were met or not for the prior year.

Bergelectric Corp.: Kissing Holiday Bonuses Goodbye
When Jennifer Davis came onboard as Bergelectric Corp.’s new vice president of HR in 2012, the company’s incentive plan was ripe for an overhaul. “The CEO wanted to change the plan and implement something new,” said Davis. Ready for a new approach, the company started exploring its options and considered the help of a third party.

“We met with FMI to see what kind of services it could provide and then ended up engaging its Compensation Group to help us overhaul our incentive program,” says Davis. The implementation originally kicked off in 2012 but wasn’t officially put into effect until February 1, 2013, (the start of the firm’s fiscal year). It replaced an existing incentive arrangement that was largely based on employee tenure. The plan lacked transparency, according to Davis, and basically centered on holiday-oriented bonuses. “Everyone had the mindset of, ‘Well, it’s around Christmas, so where’s my bonus?’” said Davis.

A Major Shift in Thinking
After years of relying on a tenure-based approach to incentives, Bergelectric did a 180-degree turnabout in 2013 and put together a plan that was based on a mix of company and individual performance. It incorporated key performance indicators (KPIs) for specific positions and specified measurable objectives that — when attained by employees — equated to a bonus. “If they did well, they’d get a bonus,” said Davis. “And if they hit it out of the park, they’d get an even bigger bonus.”

Davis said the tangible nature of the plan makes it particularly attractive for employees. “Not only do people know what it is now, but also they can touch it, feel it and see it,” said Davis. “They know what the numbers are, and they see for themselves how they are tracking throughout the year.” But what about those employees who came to love those holiday bonuses? Davis said some of them were upset with the new arrangement.

“The timing of the bonus payout reflects our fiscal year, which means employees won’t get their payouts until early April 2014,” Davis acknowledges. “As a result, the group mindset has had to shift to adapt to this change.”

Offsetting some of that concern on the part of employees is the fact that the compensation plan itself is transparent and clear-cut. “Our team knows what the numbers mean, what their targets are, and where they stand at any given time,” said Davis. “So while this approach is going to be negative for those who just ‘showed up’ for work, it will be extremely positive for anyone who is performing at or above expectations.”

Setting up the Program
Davis credits FMI with taking the reins on Bergelectric’s bonus plan project and helping her company successfully develop and introduce the new approach. “The team that put this together is made up of pros who really know what they’re doing in terms of compensation and bonuses,” said Davis, who quickly learned from FMI that laying out a complete, comprehensive plan at the outset — and then tweaking it slightly when needed — was a vital first step in the process. “They told us to be wary of starting off with one approach and then scrapping it for something else the following year,” said Davis. “The idea is to introduce and maintain consistency; that’s how you get buy-in.”

When developing the KPIs for its new bonus plan, for example, Bergelectric looked carefully at the value and productivity provided by the firm’s field management staff. “We are performing work all across the U.S. and on different jobsites, and we’ve put a lot of effort into making sure that our front-line supervisors understand the bonus program and how they impact the bottom line,” Davis said. “That’s the group we’re really looking to bump up, and so far, they’re embracing the program.”

Striving for Success
As Bergelectric’s fiscal year-end begins to come into view, Davis and the rest of the company’s HR department will be focused on the KPIs and other measures associated with its new bonus program. And while some employees may have mourned the loss of their Christmas bonus for year-end 2013, Davis is confident that the new plan will eventually be well-received and also extremely beneficial for the company as a whole.

To other companies looking to improve their own incentive programs and get employees thinking outside of the “all I need to do is show up at work” box, Davis said operating with an experienced third party like FMI’s Compensation Group helped keep the project on track and moving in the right direction. “What we were trying to do was a bit crazy, seeing that some of our policies had been in place for 30 or 40 years,” she explained. “Overall, it’s been a positive experience being supported by an FMI team that communicated well during meetings, shared a lot of information and offered up a high level of expertise that we were able to leverage to our advantage.”

Key Success Strategies

  • Develop key performance indicators (KPIs) and relate them to individual positions within the company.
  • Use those KPIs to measure performance and award bonuses accordingly.
  • Look at the plan as a work in progress rather than an end-all solution to human resources challenges that have existed within the organization for years.
  • A cultural shift takes time. Be mindful, yet firm, in how you implement the new policies and guidelines.

Best Practices for Getting Started

2014q3_incentive_comp_ex1As shown by the previous case studies, there is no clear or carved-out path to success on the route to developing an effective incentive compensation plan. Some firms create their programs from scratch; others dust off their existing approaches and upgrade them to modern-day standards; and still others attempt to round out their current strategies by adding new-and-tested techniques to the mix. Regardless of how your firm gets from Point A to Point B, there are a few solid strategies that should be followed in order to achieve success.

A successful incentive compensation program begins with designing a reward system that supports and compensates the achievement of strategically important initiatives. In other words, begin with the end in mind when designing an incentive compensation plan. Determine what behaviors and outcomes are most important for the company’s success, for example, and then decide which of those activities warrant paying incentives for.

When developing your incentive compensation plan, be sure to include a team of key leaders who will drive the design effort at all levels within the organization from the start. Key elements of this process include:

  • Determine eligibility for the plan
  • Benchmark labor market data to set target incentives
  • Select performance measures and assign their weightings
  • Establish threshold, target and excellence performance levels
  • Run cost models to calculate pro forma, expected and maximum payouts
  • Document the plan
  • Introduce the plan and communicate the incentive opportunity
  • Measure results
  • Provide periodic feedback
  • Assess plan effectiveness

Finally, pay special attention to the timeline for changing an existing compensation plan. As shown in the case studies in this article, abrupt replacement of or changes to a long-standing plan can create turmoil for employees that for years have been accustomed to a “certain way” of doing things. Be sure to factor in your current plan, the state of that plan and your corporate culture as you design how you will introduce and implement change.

FMI advocates the use of a design team consisting of five to eight business unit or line managers to help develop performance measures and associated weightings. Including key leaders in the design process, with soundly established design rules, will assist in the buy-in from the organization. Design team members represent their constituents and can report back that they were represented, and that the plan is acceptable.

Conclusion

Because it links rewards to performance, incentive compensation is a critical tool for aligning employee goals with overall business objectives. Communicating and tracking each employee’s progress against company objectives often translates into better employee engagement and a clear understanding of how daily activities affect the overall company health. The result is both individual and organizational success.

Progressive construction firms — such as the ones presented in this report — are taking charge and increasing company performance through well-defined incentives that motivate their employees to go beyond the call of duty.

Business great Jack Welch of General Electric believed that management’s ultimate goal should not be to motivate employees to perform but to create an environment where going beyond the call of duty is the norm. An incentive compensation system helps companies develop employees who excel at maximum (and beyond) levels. With the right combination of clear direction, quality feedback and tangible rewards, employees become engaged and satisfied with their jobs. This, in turn, helps to create a win-win situation, where employees are inspired by the fact that management truly values their efforts.

As competition for limited labor and talent intensifies in the years ahead, having a well-thought-out incentive compensation plan in place will likely become a key differentiator in company performance and overall company value. Winners will be able to recruit and retain top talent, post higher levels of performance throughout the company, and increase revenue and profits. Now is the time to act and reinvent your incentive plan and build a company fit for the future.


Sabine Huynen Hoover is a senior research consultant with FMI Corporation. She can be reached at 303.398.7238 or via email at shoover@fminet.com.

 

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