Every year, business owners face the decision of what to do about year-end bonuses. Some have an incentive compensation formula they attempt to calculate. Others use simple bonus plans. Many just do not know how to keep their employees happy and reward those who contributed to the overall company success.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 a pay-for-performance incentive program. Company owners always ask which structure works the best and how to implement a program to get the biggest bang for their buck.
What Kind of Bonus Program Works?
There are four basic kinds of employee recognition, bonus and incentive compensation programs for employees. They include thank-you awards, gifts, incentive compensation and profit-sharing. The one you choose for your company is dependent on your overall goals. Many business owners are overly generous, think they have to give bonus checks at year-end 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 the extra bottom-line profit?
You can set targets and goals for each project or key employee, and if the goal is met, 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 do not fully comprehend is nothing more than a gift. For example, if you arbitrarily decide to give all of your project managers $5,000; foreman $2,500; field workers $1,000; and office workers $500 as their year-end bonuses, will you get them to work harder next year? No! Will they appreciate the bonus? Some might, while others will think it isn’t enough and complain to their peers. To make matters worse, they will expect the same or more next year, whether or not your company makes any money or achieved better results than the previous year.
Bonuses without a required performance level are nothing more than gifts, which deliver goodwill and/or frustration. Profit-sharing tied to performance makes everyone in your company focused on hitting the targets you want to achieve: growing your customer base, increasing productivity and profit, acquiring more referrals, improving customer service or safety and producing on-time delivery.
Consider these questions when deciding which bonus program to implement. What happens if your company has a great year? What about a bad year? What if all of your employees worked hard to achieve spectacular results, but one of your customers went broke, did not pay and caused your company to lose money for the year? What if some foremen always finish their jobs under budget, while others continually go over budget? How do you reward your best foremen and project managers who are assigned the most difficult projects and do an incredible job that only breaks even? What about a field superintendent who can get a project going quickly but takes forever to get the punch-list completed? Or what about a field operator who does a good overall job but has an accident and destroys a large piece of company equipment?
The No. 1 employee motivator is recognition and praise. People want to know they are doing a good job and want to be shown on a regular basis that they are appreciated. I recommend you set up an ongoing company program that recognizes everyone frequently for doing a good job. Many companies use a “do it right” awards program in which managers and supervisors are encouraged to give out weekly awards when their employees are caught doing something right or going beyond the call of duty.
This program works well when supervisors recognize a few of the team players at weekly meetings. During the meetings, the supervisor acknowledges and recognizes people who did something commendable, helped the team achieve their weekly goals or accomplished tasks ahead of schedule or under budget. After the person is recognized, the supervisor gives him/her a “do it right” award, and everyone cheers for the winners. These small recognition awards can include gift certificates to restaurants or hardware stores, cash, company hats or shirts, tools, lunch dates with the boss or even an hour off with pay. The key is to make these awards fun and a part of your exceptional work environment to motivate everyone.
Creating a comprehensive incentive compensation program takes a lot of work and is hard to implement. The easiest bonus program to implement is a gift program in which the award is arbitrary and based on simple formulas or no formulas at all. Many companies successfully use this system until they grow and can begin properly administering an incentive program.
Some gift bonus programs can be arbitrary. At the end of the year, the owners decide how much money they want to distribute to employees as year-end bonuses and split it up based on what they think about each employee’s contribution to the overall company results. Some companies pay out amounts such as one-, two- or three-weeks pay per employee. This system is simple and easy to manage. You can reward some or all of your employees under this program. As these bonuses are arbitrary gifts, they are not expected, and the amount should not be anticipated by employees. However, if this system is used over many years, employees become accustomed 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 or goals. 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 an additional week’s pay if the project is completed on-time or under-budget. Conversely, if the project finishes late or over-budget, the pay bonus can be deducted from the annual bonus amount for that employee. Other ways to boost performance can include a week’s pay to reward customer satisfaction, quality workmanship, safety achievements or overall company improvement.
If the economy or company performance does not warrant or allow for an extra bonus gift compensation, make sure you fully explain the situation to all of your employees in a company meeting. Open up the discussion to explore ways to improve results.
Over one-third of companies use some form of earned incentive compensation. When employees know what is expected, participate in achieving these goals and are rewarded for hitting their targets, everyone wins.
At the project level, I encourage you to create incentive compensation programs based on the area of responsibility the manager or supervisor controls. For example, the project manager of a general contractor controls the contract, customer communications, contract awards and the overall project profit. Project managers can receive a percentage of the overall project profit earned or the extra profit gained 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 factors they control. For example, if they finish a project ahead of schedule, they can receive a percentage of the costs they saved.
Many subcontractors reward foremen based on hitting their job labor/manpower budget. The foreman reviews the bid estimate for labor hours and agrees to bring the project in at a targeted number of man hours. If the foreman achieves this goal, he can receive from 1 to 5 percent of the total man hours as an incentive compensation bonus for bringing the project in on budget. If the foreman brings the project in under the man-hour goal, he can receive an incentive compensation bonus from 10 to 25 percent of the hours saved. These percentages vary by company, trade and project difficulty. In some programs, the foreman splits the incentive compensation with the crew members as well. The key to making these field incentive programs work is to meet with your foreman every week for an in-depth review of the man hours expended by work task versus the project goal or target as the job progresses.
Many companies are moving toward “open-book management” that allows every employee to see and understand the company financial results and participate in the overall company profits. Some companies include only upper management in this form of profit-sharing and financial disclosure. For smaller companies or family-owned businesses with fewer than 50 to 100 employees, 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.
A simple profit-sharing program that works starts by setting an overall annual target for revenue and net profit. In a construction company, for example, the management team can include the owner, president, vice presidents, business development manager, CFO or controller, chief estimator and senior project managers. You can add or reduce your executive management team depending on your company’s structure. These 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 for achieving the desired results for the company, and everyone works together as a team.
Some companies set their minimum net-profit goal at a 10- to 15-percent return on the company equity. Other companies set their annual net-profit goal at 20- to 30-percent return on the annual overhead budget. When the minimum annual net profit targets are hit, each management team member receives an equal share of the net-profit incentive pool earned. For example, if the company’s equity is $1 million, the minimum annual net profit goal might be a 15-percent return on equity, which equals $150,000. For hitting this net profit goal, the management team will receive a percentage (such as 25 percent) of the $150,000 net profit (or $37,500 total) to be split among the team members. If the company net profits are larger than the minimum goal, the management team can receive a larger percentage of the additional net profit earned.
As your company grows, you will need to reinvest most of the profits back into the company. This allows for expansion and increases bonding capacity and reinvestment into people, tools, equipment and technology. Be sure that the profit-sharing programs leave enough profit in your company to allow for steady growth.