Depending on which direction the economic recovery moves in, here’s what E&C firms can do now to prepare for the future, including compensation planning.
This has been a year like no other, and it’s not over just yet. 2020 began as expected, with a 3.4% average uptick in construction industry salaries. Within weeks, COVID had reared its head, and one-third of contractors cut their workforces, one-third reduced their wages, and 50% began reducing or eliminating year-end bonuses.
These moves have usually been made in the name of cash preservation at a time when companies are consistently striving to do more with less. Across the built environment, COVID’s impacts range from companies experiencing continued growth and strong financial performance to those that have been grappling with project suspensions and dried up backlogs. Still others are dealing with supplier and subcontractor problems.
Assessing the Early Impact
The mid- and long-term effects of COVID are still unknown, but one thing is for certain: the need to engage and motivate employees is going to be the key to survival. According to FMI’s most recent Salary Increase Survey, the average industry salary increase budget is projected to be approximately 3.0% of payroll in 2021. This suggests that contractors are relatively optimistic, meaning there’s not much expectation for a cease-fire in the war for talent.
Business forecasts can shift on the dime, but this year has really been a harsh reminder of market cyclicality. We all knew an industry downturn was on the horizon, but many contractors came into 2020 with strong backlogs, positive outlooks, healthy margins, and a need for more skilled talent. Then the COVID pandemic took hold. But to say everything changed for the worse would be a misnomer.
For many contractors, business operations are classified as “essential” across the U.S., which means work continued despite more stringent safety protocols. Nonetheless, the unprecedented and uncertain time caused many firms to take prompt and decisive action.
Preparing for the Future
The lasting impact of the pandemic on industry and individual business performance remains to be seen. That means thoughtful contingency planning is essential. Here are three possible scenarios and our recommendations on how to deal with each of them, should they occur.
Scenario #1) Extended declines
FMI’s current assumed trajectory (i.e., Q3 2020 Outlook) suggests that the 2020 recession will continue to dissipate, but results in negative GDP growth for the year in range of approximately 5 percent. Demand for construction services (and spending) realizes a period of extended declines into 2021 and 2022.
In this extended decline scenario, it goes without saying that every company will react and perform differently. Therefore, the sooner executives have some clarity on their own forecasts for the upcoming year(s), the sooner corresponding action plans and communication should be implemented.
That applies to future compensation practices as well; if wage freezes or reductions and suspension of bonuses are eminent, employees should be informed to reduce uncertainties and inappropriate expectations. Clear communication should occur in all circumstances; that is, if a contractor finds that the outlook is better than expected, employees should also be kept in the loop about these changes.
Scenario #2) Soft landing
Scenario #1 plays out in the near term, but strength in the labor markets alongside strong future GDP growth and well positioned stimulus efforts allow for a swift return in demand for construction services.
If better times appear on the horizon, immediate talent management activities should focus on stability and preparation. Specifically, this is a prime time to examine staffing needs for the new year and beyond. In many instances, this means employee headcount may remain unchanged among contractors, as projects to continue.
However, the decade-long bull market and high demand for E&C projects have undoubtedly resulted in overstaffing for some companies. Even if restructuring is not undertaken now, careful thought should be given to whether right-sizing—with an emphasis on the right people in the right jobs—would be beneficial.
Scenario #3) Disruption to disintegration
This scenario assumes the U.S. economy is just entering into a long-term bout with negative GDP growth (i.e., into 2022) and the result would be similar to that of the Great Recession (i.e., from December 2007 to June 2009).
It’s unlikely that federal aid will support the long-term retention of the workforce for most contractors and key infrastructure spending may not come soon enough. Therefore, an ultra-lean staffing approach—whereby only the employees deemed most needed for business survival are maintained—may be necessary.
It is well documented that compensation is not the only method for encouraging employee motivation and retention and, in fact, is often not the primary driver of engagement. Accordingly, these challenging times provide an opportunity to explore non-monetary rewards for employees. The evolving remote workforce introduces new difficulties, but the value of recognition programs, culture-building activities, and employee “overall wellness” initiatives should not be ignored.
Don’t Bury Your Head in the Sand
Scenario #1 followed by #2 or #3 seems a likely prospect at this point. Thus, the best planning begins with a strong understanding of current operations so that effective decisions can be made quickly as projections become clearer.
As we approach the end of what has been the most unusual year on record for many of us, it’s important to take a step back and look to the future. This means setting key goals to provide guidance and strategy in the midst of continuous flexing to meet new shorter term challenges and opportunities. Contractors are all too familiar with “battening down the hatches” in difficult times, but the need for setting direction and planning for potential future states is all the more important.
Learn how our Compensation Survey Results Can Help Your Firm
FMI is dedicated to serving clients in the Built Environment. FMI’s annual compensation surveys report the largest representation of employees in the industry – nearly 45,000 in 2020. Our proprietary data, coupled with seasoned consultant experiences, forms the foundation for advising contractors on compensation plans that are customized to their objectives.