Performance Pay Plans Improve Results!

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 known 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 that 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.

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 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 year end 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 year end 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 PPP. 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 company-wide, all-employee PPPs 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. Company-wide PPP programs are easier to manage while project PPPs take a lot of work to organize and monitor.

   For annual company-wide profit-sharing incentive compensation plans start each year deciding how much PPP compensation participation is available to distribute. For example, a company-wide profit-sharing potential split might be 5 percent, 10 percent or 25 percent 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 PPPs should be paid out quarterly with a holdback for potential adjustments, and then adjusted after the fiscal year end is closed.

5. Determine which results will be compensated. You can keep it simple and pay 100 percent of all PPP based on company-wide 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 and tools maintenance and repairs
  • Customer performance ratings
  • Contract documentation and 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. 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:

A. Company Profit Sharing Incentive Compensation

• Incentive compensation pool participants
  • Vice president, managers and estimators
  • Controller, office manager and equipment manager
  • Project managers and 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 percent of net profit
  • After first $250,000 – pool earns 15 percent of net profit
  • After $500,000 net profit – pool earns 25 percent of net profit

B. Project Incentive Compensation

• Incentive compensation pool participants
  • Project manager, superintendent and 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

C. Project Safety Bucks Compensation

• Incentive compensation pool participants
  • Superintendents, foreman and 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

D. 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

E. Company-wide Improvement Incentive Compensation

• New hire referral – $500 bonus after 90 days employed.
• No profit fade – Project manager earns $100/project.
• Customer performance rating – Above 90% pays $500 to project manager and superintendent
• On-schedule project completion – Superintendent earns $250.
• Subcontractor and supplier coverage over 4 to 1 – Estimator earns $100/bid.
• Call-back work, equipment accidents and repairs will be deducted from all PPP.

Getting people to perform starts with a clear understanding of what’s expected. 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.