Business Building: Performance Pay Plans Improve Results!

Words: George Hedley
Words: George Hedley
  Construction business owners are always striving for the perfect bonus and incentive compensation program to reward managers and employees for a job well done. Without a clear or specific bonus plan in place, every year many owners struggle to decide how much extra to pay employees for their hard work and efforts. Frustrated, owners eventually and arbitrarily determine a yearend bonus amount to give each employee based on emotion, loyalty, effort, or some other factor they deem fair.  For a short time, the owner feels good about the bonus amounts paid out. Then he starts to second guess his decision as many employees don’t show appreciation for his generosity, few thank him for the bonus, and he hears some employees don’t think the amount was high enough based on what they thought they deserve or the probable profits the company made.  Extra bonus pay makes the giver feel better than the receiver. The giver feels responsible to reward and thank people for a job well done. While the receiver thinks the amount is often too low based on how much money they think the giver is making from their efforts and contribution. To solve this annual dilemma, the only solution is to design a well-defined performance pay plan with clear targets, goals, and compensation amounts know to all participants at the start of your fiscal year.  Bonus pay is either a gift or earned! Gift: To decide which kind of bonus plan you want to offer in your company, the owners must first decide if they just want to offer annual year-end bonus gifts based on arbitrary factors like position, longevity, loyalty, attitude, or pay scale. Gifts often become entitlements and don’t really improve performance or results over the year. And if your company loses money, reducing an annual gift bonus becomes difficult to present to employees who don’t know or see the actual bottom-line financials. Typical annual gift bonus compensation plans can include from one to three week pay based on arbitrary factors such as project performance, contribution to the overall success of the company, employee tenure, following company systems, or attitude. Earned:  Compensation plans which are earned based on actual results will keep managers, supervisors, and employees informed and focused on achieving company, project and personal performance targets and goals. They clearly set, track, and define additional compensation potential amounts employees can earn, and therefore can motivate people to improve bottom-line results.  For example, if construction project’s labor cost finishes on or under-budget, the project manager, supervisor, and foreman can each earn incentive compensation pay equal to 1% of the total crew hours, plus 2% of the total crew hours saved. To keep them informed, they need a project scorecard showing the labor budget and get a weekly project update showing the hours spent versus the budget. But consider the hours saved may also be a result of a padded estimate. Performance Pay Plan (PPP) Program
  1. No bonus or incentive compensation is earned until paid. Make sure you have every participant in your company incentive compensation PPP program sign a document stating they agree that no PPP bonus pay is earned until paid. This will eliminate potential conflicts when employees leave your company before PPP compensation is paid out. 
  2. Determine when PPP incentive compensation will be paid. The best PPP plans pay quick and often. Companies who only pay out extra compensation at yearend don’t benefit from constant reminders of better results equals more money. Quarterly PPP plans work out well when they are paid 90 days after each previous quarter. This allows time to calculate actual final results and adjustments for any changes, settlements, delayed costs, back-charges, final amounts collected from customers, call-backs performed, and reserves for potential claims. If you determine quarterly incentive compensation pay won’t work in your company, pay out half the amount after each quarter and the remaining at yearend adjusted for changes in the final amounts due. Present the results at quarterly meetings to show participants how well they did and who performed above their targets and goals.
  3. Decide who participates in the Performance Pay Plan. Next determine who will share in the PPP compensation pool. You can include only the management team, or people at certain levels like estimators, project managers, superintendents, and foreman. Or you can include everyone who works a minimum number of annual hours per year in your company. The best plans compensate those who directly affect and manage the outcome and results of the company or project targets and goals.
  4. Determine how much money is available in the PPP compensation pool.  You can decide to have an annual companywide all-employee PPP plan based on overall company net profits, or base your incentive compensation program based on each project’s performance. Your choice is to reward everyone or reward the leaders, managers, and supervisors. Companywide PPP programs are easier to manage while project PPP plans take a lot of work to organize and monitor. 
For annual companywide profit-sharing incentive compensation PPP plans, start each year deciding how much PPP compensation participation is available to distribute. For example, a companywide profit-sharing potential split might be 5%, 10%, or 25% of all company profits after a minimum annual net profit is met. Owners should make and keep a minimum amount of all net profits earned in the company before profit sharing. This allows for a fair return on investment and to allow for growth, working capital, reserve for potential claims, taxes, equipment replacement, and to maintain bonding capacity before any PPP participation with employees. Annual PPP plans should be paid out quarterly with a holdback for potential adjustments, and then adjusted after the fiscal year end is closed.
  1. Determine which results will be compensated. You can keep it simple and pay 100% of all PPP based on companywide profits. Or you can decide to break the total PPP pool into several areas of performance criteria, factors and weigh including:
  • Company Sales Collected
  • Company Gross Profit 
  • Company Net Profit
  • Project Profit
  • Field Crew Labor Production
  • Project Schedule
  • Project Quality
  • Safety
  • Company Core Values
  • Annual Improvement Areas
    • Profit Fade, Call Backs Or Punch-list
    • Equipment & Tools Maintenance & Repairs
    • Customer Performance Ratings
    • Contract Documentation & Project Paperwork
    • Change Order Management
    • Bid-Hit Ratio Improvement
    • New Customers, Loyalty Or Referrals
Company Performance Pay Plan - SAMPLE Designing a perfect PPP program is personal and different for every construction business based on how the owners want to compensate their employees for achieving the expected results. Email GH@HardhatPresentations.com to get a copy of a complete ‘Performance Pay Plan’ designed for contractors. The following is a sample outline of a PPP plan which compensates managers and supervisors for achieving results and provides annual gift bonuses to everyone else in the company:   Company Profit Sharing Incentive Compensation  
  • Incentive Compensation Pool Participants
    • Vice President, Managers & Estimators
    • Controller, Office Manager & Equipment Manager
    • Project Managers & General Superintendent
  • All participants get a pro-rata share weighted based on their base pay 
  • Company Net Profit Sharing Pool Earned 
    • First $250,000 net profit - pool earns 5% of net profit
    • After first $250,000 - pool earns 15% of net profit
    • After $500,000 net profit - pool earns 25% of net profit
  Project Incentive Compensation  
  • Incentive Compensation Pool Participants
    • Project Manager, Superintendent & Foreman
  • Incentive Compensation Earned by Participants 
    • Project Gross Profit (GP) After Completed 
      • 1% of total project GP if on-budget
      • 2% of project GP saved under-budget 
    • Field Crew Labor Production After Completed
      • 1% of total crew hours if on-budget
      • 2% of total crew hours saved under-budget 
  Project Safety Bucks Compensation  
  • Incentive Compensation Pool Participants
    • Superintendents, Foreman & all crew members
  • Incentive Compensation Earned by Participants - Quarterly 
    • No lost time accidents for entire company field crew quarterly
    • $1.00 per day earned for each crew member
    • Entire field crew loses safety bucks for any lost time accident
    • Paid quarterly
  Annual Bonus Program (Gifts)  
  • For all employees who don’t participate in above programs
  • Performance Review Criteria Compensation
    • Superior Results = 3 week extra pay
    • Excellent Results = 2 week extra pay
    • Good Results = 1 week extra pay
    • Expected Results = $100 gift card
  Companywide Improvement Incentive Compensation  
  • New hire referral - $500 bonus after 90 days employed.
  • No profit fade - PM earns $100 / project. 
  • Customer performance rating - Above 90% pays $500 to PM & Supt.
  • On-Schedule Project Completion - Supt earns $250. 
  • Subcontractor and supplier coverage over 4 to 1 – estimator earns $100 / bid.
  • Call-back work, equipment accidents & repairs will be deducted from all PPP.
Getting people to perform starts with a clear understanding of what’s expected. By outlining, measuring, tracking, and offering incentive compensation for the performance you want will help get the results you want to achieve. Start every year by defining the targets and goals for your company, people, and projects. Then design a ‘Performance Pay Plan’ to reward employees and managers based on the results achieved. ---------------------------------------------------------------------------------------------------------------------- ABOUT THE AUTHOR George Hedley CSP CPBC is a certified professional construction BIZCOACH and popular industry speaker. He helps contractors grow, make more profit, build management teams, improve field production, and get their businesses to work for them.  He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com.  E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, start a personalized BIZCOACH program, attend a 2 ½ day BIZ-BUILDER Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors.   George Hedley CSP CPBC HARDHAT Presentations BIZCOACH BIZSCHOOL Email: gh@hardhatpresentations.com     website: www.hardhatbizschool.com www.hardhatpresentations.com
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