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Winning Bonus and Incentive Programs!

George Hedley

Every year, business owners face the decision of what to do about year-end bonuses. Surveys show that as many as 50 percent of all construction and manufacturing companies offer some form of bonus plan, and another 33 percent have some sort of pay for performance incentive program. Owners always want to know which program works best and how they should be implemented to get the biggest bang for their buck.

Which Bonus Programs Work?

There are four basic kinds of employee recognition, bonus and incentive compensation programs you can offer. They include thank you awards, gifts, incentive compensation and profit sharing. The one you choose depends on your overall goals. Most owners are overly generous and want to give their employees extra money whether the company does well or not. But without an incentive compensation program that everyone understands, does handing out bonus checks motivate employees to work harder, build teamwork and result in extra profit? 

You can give everyone an annual bonus based on whatever you want to give out. You can set targets and goals for each project or key employee, and if they hit them, you can attach an extra cash reward. Or, you can attach bonuses to a percentage of the net profit your company makes. This requires you to show all profit-sharing participants your financials. Giving out money based on an arbitrary formula that employees don’t fully comprehend is nothing more than a gift.

Consider these situations when deciding which bonus program to implement: What happens if your company has a great year? A bad year? What if your employees worked hard to achieve results, but one of your customers went broke, causing your company to lose money? What if some foremen always finish their jobs under budget, while others continually go over budget? What about a field superintendent who can get a project going fast, but takes forever to get the punch list completed?


Thank You Awards

The number one motivator of employees is recognition and praise. People want to know they are doing a good job and therefore need to be appreciated on a regular basis. I recommend setting up an ongoing company program where everyone gets recognized on a regular basis for doing a good job. Many companies use a “Do It Right” awards program where managers and supervisors are encouraged to give out weekly awards when their employees are caught doing something right, going the extra mile or beyond the call of duty.

Surveys show that as many as 50 percent of all construction and manufacturing companies offer some form of bonus plan, and another 33 percent have some sort of pay for performance incentive program. 

Gifts

The easiest bonus program to implement is a gift program where the award is arbitrary based on simple formulas or no formulas at all. Many companies successfully use this system until they grow to the size where they can properly administer an incentive program that creates rewards based on performance and results.

At year end, owners decide how much money they want to distribute as bonuses and split it up based on each employee’s contribution to the overall company results. This system is simple and easy to manage, and you can reward some or all of your employees. As these bonuses are arbitrary gifts, they are not expected and employees should not anticipate the amount. However, if this system is used over many years, employees get used to the extra money and count it as a part of their entitled compensation.

You can also tie this gift system to performance by creating personal, project or company targets. For example, if the company achieves certain revenue or profit targets, the employee bonuses can jump from one to two or three weeks pay accordingly. Other bonus triggers for project performance can include additional week's pay if the project is completed on time or under budget. Or, if the project finishes late or over budget, the pay bonus can be deducted from the annual bonus amount for that employee. Other ways can include a week's pay to reward customer satisfaction, quality workmanship, safety achievements or overall company improvement.

If the economy or company performance doesn’t allow for extra bonus gift compensation, make sure to fully explain the situation to all of your employees in a company meeting. Open up the discussion to explore ways to improve results, increase productivity, increase profits, finish faster or enhance safety.

Incentive Compensation

Over one-third of companies use some form of earned incentive compensation. When employees know what is expected, participate in these goals, and get rewarded for hitting their targets, everyone wins.

At the project level, create incentive compensation programs based on the area of responsibility the manager or supervisor controls. For example, the project manager controls the contract, customer communications, contract awards and overall project profit. Project managers can receive a percentage of the overall project profit earned by their tight job management. Field superintendents control the schedule, workmanship quality, field manpower labor productivity and equipment usage. Therefore, their incentive compensation can be based on the factors they control.

Over one-third of companies use some form of earned incentive compensation. When employees know what is expected, participate in these goals, and get rewarded for hitting their targets, everyone wins.

Profit Sharing

Many companies are moving toward open book management where every employee sees and understands the company financial results and participates in the overall company profits. Some companies only include upper management in this, while most smaller or family-owned businesses allow only the owner, division managers and key management team members see the financials. The management team receives a profit-sharing bonus based on the overall company performance.

Simple profit-sharing programs start by setting an overall annual target for revenue and net profit. Management team members receive their incentive compensation based solely on how well the company performs. Each team member receives one equal share of the total net profit-sharing pool available for distribution. This way, each person is equally responsible to achieve the desired results and everyone works together as a team.

As your company grows, it will need to reinvest most of the profits back into the company. Be careful when setting up profit-sharing programs that they leave enough profit in your company to allow for steady growth.

In conclusion, installing and maintaining a winning bonus and incentive compensation program can be the key to improving your bottom line. Or it can be a drain on your cash flow and employee moral. Make sure you consider all of the pros and cons before embarking on a program.


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 productivity, and get their businesses to work for them. Visit www.hardhatpresentations.com for more information.