In the labor-intensive world of construction, finding and retaining the highest-quality personnel is a significant challenge. Incentive compensation plans that align the interests of management and employees are an effective way for construction firms of all sizes to attract talent, maximize productivity, and achieve enterprisewide goals.

An incentive compensation plan ties employee compensation to both individual achievements and overall company performance. While typical bonus compensation rewards employees based primarily on company profitability (at the discretion of senior management), incentive compensation plans reward employees based on individual merit. Properly structured, incentive compensation plans ultimately translate into increased profitability.

To be effective, an incentive compensation plan must be understandable to employees and must result in meaningful awards (typically 5 percent or more of salary) based on achieve-ment of identifiable, measurable goals. Bonuses awarded on a subjective basis are less likely to motivate workers.

Establishing Goals
You can’t determine how to reach your goals until you know where you are now. Start with a thorough analysis of existing compensation practices. How are employees paid compared to the competition? Remember that there can be significant regional differences in compensation, and the same position may merit different compensation depending on organizational structure and size.

Establish goals for individual employees that emphasize the company’s mission, motivate individuals, and lead to increased profitability. To ensure that the plan is perceived as fair by all concerned, management and employees should collaborate in setting goals. This not only generates buy-in from employees, but it also contributes to building a team atmosphere across the enterprise.

Designing a Plan
Following are steps to follow to ensure a successful incentive compensation plan:

• Determine your investment in the plan. The amount you allocate to incentive compensation should be tied to the company’s performance to avoid hurting the firm in down years.
  
  
• Determine who should participate in the plan. Supervisors? Superintendents? Foremen? Estimators?  Administrative staff?  What about hourly field personnel?  Some construction firms believe that including hourly employees motivates them to expand their roles in the firm.
  
  
• Determine what will be rewarded. Incentive compensation can be based on a wide range of factors, such as productivity, safety, customer satisfaction, estimating accuracy, and cost savings. With input from each participating group, examine your business to identify factors with the greatest impact on profitability. A company that does a lot of smaller, short-term projects may determine that labor productivity is a critical factor in determining profitability. A company that performs larger projects might find that meeting budgets is of primary importance. (Avoid counterproductive measures of success. Don’t reward timely completion of a job, for example, if quality was sacrificed to achieve that goal.)
  
  
• It’s often advisable to divide the investment in the plan into two parts: one based on individual performance and, because individual performance may be difficult to measure, a second based on overall company performance. The first part of the bonus pool should be allocated among employee groups (e.g., 12 percent to foremen, 10 percent to estimators, etc.). Within each group, determine individual bonuses using a point system based on factors selected in the previous step. Next, if the company has met its performance goals, the second portion should be divided equally among participating employees.
  
  
• Although an effective incentive compensation plan should be based on objective factors, leave some room for discretion. Often, the most talented workers draw the toughest assignments, so objective financial measures alone may not accurately reflect their value to the firm.

Implementation of the plan is just as important as its design. Employees must be aware of the plan and understand it. And an accurate system for tracking performance is needed so that workers will perceive the plan as fair. There should be an ongoing process of monitoring and evaluating the plan; this allows for the creation of additional or different incentives that reflect the dynamic nature of the business.