John Kenney, CEO, Cotney Consulting Group
The best incentive plans tie compensation to all aspects of an employee’s job. Quality and safety standards may suffer if you are only rewarded for getting a job done on time. So, set up your program to reward excellence for time, budget, quality and safety.
Nearly two-thirds of all companies use an incentive compensation program, including the construction industry, which often leads all other sectors in offering bonuses to top officers.
The best incentive plans tie compensation to all aspects of an employee’s job. Quality and safety standards may suffer if you are only rewarded for getting a job done on time. So, set up your program to reward excellence for time, budget, quality and safety.
Executive incentive plans include employees with substantial company responsibilities, from the Chief Operating Officer to Project Managers. These incentives help ensure top officers attain corporate, short-term objectives and motivate managers by evaluating performance.
A manager’s bonus amount should depend on evaluating corporate, individual and sub-unit or department performance. The most common standard is based on earnings per share (EPS). The desired EPS should be stated at the start of an evaluation period
compared to the actual EPS achieved at the completion. This method is the same as using a return on equity.
Many companies use after-tax targets, so it is not a widespread concern even though employees may be concerned about financial accounting methods – employers short-changing them through manipulation. Most of these companies use less formal procedures
to prevent such manipulation.
Design your incentive program so that all employees can benefit and consider:
■ Reward for the right things. Tying incentives just to projects can backfire if employees adopt short-term strategies to increase their compensation at the expense of long-term company performance. If an employee uses a short-term strategy to achieve compensation, safety and a contractor’s reputation are at risk.
■ Link compensation to overall results. Employees might see a one-time annual bonus as a gift rather than an incentive. Yearend
bonuses may be expected and become ineffectual as a reward. A more defined incentive is critical for good results.
■ Establish attainable performance goals but goals that require hard work. These goals should be understandable and employees should know what they gain by meeting them. Complicated or difficult goals that are hard to understand can backfire when employees become disillusioned. Seek input from employees on how to set up an incentive program to gain their buy-in.
■ Know your company’s present results before setting goals for future results. You cannot reward employees for getting a job done faster if you do not know how long it takes now. If it is cost-cutting you seek, set benchmarks so you can measure your firm’s decrease in labor hours or overtime.
Timing is important. Tying bonuses to projects means giving them out within a reasonable time frame after completing a project instead of holding off to give annual bonuses. Try quarterly bonuses, instead. You may hold on to a portion of the compensation and reduce it if, for example, if warranty expenses arise. This keeps it real for the employee and the company.
Cash incentives are not the only option for you. Consider stock options or other equity-based rewards to align your employees’ interests with your company’s long-term goals. This type of compensation, giving employees an ownership stake, provides a financial incentive to keep them at the company longer, maximizing its value.
Vest stock options over a substantial period of time. That way, you don’t boost the value of the company stock just in the short term. Before implementing this incentive program, speak with your tax advisors and accountant first since there could be tax
consequences.
Incentive programs are generally more effective than across-the-board bonuses. And, in some instances, employees might be willing to take a smaller base salary for the opportunity to earn higher performance rewards.
The three most commonly used incentive plans are profit-sharing, discretionary bonus distributions and job-by-job incentive pay.
Profit-sharing is a popular incentive plan but not always practical for contractors because it does not tend to drive performance. One reason is that employers do not provide financial information until year end, so employees do not have data to know how their performance is benefitting the company. That information lets them know the kind of bonus they might expect. The major problem with profit-sharing is a lack of trust. There is a lot beyond the employee’s control, such as office overhead and other business costs. And again, some employees believe management will manipulate the numbers to the company’s benefit.
A job-by-job incentive plan does not always work in a company’s favor. It is based on sharing excess profits but also means the company is absorbing all losses. There is a risk that the company will be paying out bonuses when a project is losing money. This type of incentive does not reinforce teamwork throughout the company.
Using this type of incentive can confuse employees since they do not necessarily understand what goes into determining the size of the bonus they receive. Since the connection between their performance and the reward is not well defined, it does not incentivize maximum performance.
No incentive plan is perfect. It depends on the individual business, its jobs and its employees. Consider customizing a plan
that best suits your company’s situation.
■ Focus on the particular group of employees you wish to reward
■ Ensure your company is profitable before setting up an incentive program
■ Establish benchmarks on which you will base incentives
■ Share performance numbers with employees periodically
■ Make sure the incentive plan drives profitability and competition.
Tie your incentive plan to actual achievements for pre-determined company goals. Set up accurate, objective performance standards so employees know exactly how you determine the amount of their bonuses. Work with your accountant to determine the actual bonus amounts your program should establish. Do not hesitate to fine-tune or revamp your incentive program as needed.
John Kenney has over 45 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at jkenney@cotneyconsulting.com.
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