Get Results with a Performance Pay Plan
A guide to creating a bonus plan that improves project outcomes
by Julie Smith
Thursday, January 7, 2016
Construction business owners always strive to find the perfect incentive program to
reward managers and employees. Without a clear bonus plan, many owners struggle to
decide how much extra pay employees deserve for their hard work. Frustrated, owners
arbitrarily determine a year-end bonus amount to give each employee based on
emotion, loyalty, effort or some other factor. To solve this dilemma, define a
performance pay plan (PPP) with clear targets, goals and compensation amounts
known to all participants at the start of each fiscal year.
Gifted or Earned Bonuses
To decide which kind of bonus plan to offer, you must first decide if you 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 do not improve
performance or results throughout 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 bottom line. Typically, gift bonus compensation plans include one to three weeks'
pay, based on subjective factors such as project performance, contribution to overall
company success, employee tenure, adherence to bylaws or general attitude.
Compensation plans earned based on actual results will keep managers, supervisors
and employees informed and focused on achieving company, project and personal
performance goals.
PPP Program
1. No bonus or incentive is earned until paid. Make sure every participant in your
PPP program signs 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.
2. Determine when PPP incentive compensation will be paid. The best PPP plans
pay quickly and often. Companies who only pay extra compensation at the end of
the year don't benefit from constant reminders that better results yield more
money. Quarterly PPP plans work well when they are paid 90 days after each
previous quarter. This allows time to calculate actual, final results and
adjustments for any changes. If you determine that quarterly incentive
compensation pay will not work in your company, pay out half the amount after
each quarter and the remaining funds at year-end, adjusted for changes in the
final amounts due. Present the results at quarterly meetings to show participants
who performed above their targets and goals.
3. Decide who participates in the PPP. Determine who will share in the PPP
compensation pool. The best plans compensate those who directly affect and
manage the outcome and results of the company.
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 on
each project's performance. You must choose to reward everyone or reward only
the leaders, managers and supervisors. For annual, companywide profit sharing
incentive compensation PPP plans, start each year by deciding how much PPP
compensation participation is available to distribute. Owners should make and
keep a minimum amount of all net profits earned in the company before profit
sharing. Annual PPP plans should be paid out quarterly with a holdback for
potential adjustments, and then adjusted after the fiscal year-end.
5. Determine which results will be compensated. Consult the PPP framework
example on the next page. You can keep it simple and pay 100 percent of all
PPP based on companywide profits, or you can decide to break the total PPP
pool into several areas of performance criteria.
Improving performance starts with a clear understanding of what is expected of
employees. Start every year by defining your targets and goals. Outlining, tracking and
offering incentive compensation for the performance you want will help you get results.
Framework of a Successful PPP
Designing the perfect PPP program is different for every business. The following is a
plan which compensates managers and supervisors for results and provides annual
bonuses to all other employees.
A. Company profit-sharing incentive compensation
Incentive compensation pool participants
o Vice president, managers and estimators
o Controller, office manager and equipment manager
o Project managers and general superintendent
All participants get a pro-rata share weighted based on their base pay
Company net profit sharing pool earned
o First $250,000 net profit, pool earns 5 percent of net profit
o After first $250,000, pool earns 15 percent of net profit
o After $500,000 net profit, pool earns 25 percent of net profit
B. Project incentive compensation
Incentive compensation pool participants
o Project manager, superintendent and foreman
Incentive compensation earned by participants
o Project gross profit (GP) after completion
o 1 percent of total project GP if on budge
o 2 percent of project GP saved under budget
o Field-crew labor production after completion
o 1 percent of total crew hours if on budget
o 2 percent of total crew hours saved under budget
C. Project safety bucks compensation
Incentive compensation pool participants
o Superintendents, foreman and all crew members
Incentive compensation earned by participants quarterly
o No lost time accidents for entire company field crew quarterly
o $1 per day earned for each crew member
o Entire field crew loses safety bucks for any lost-time accident
o Paid quarterly
D. Annual bonus program (gifts)
For all employees who don't participate in above programs
Performance review criteria compensation
o Superior results = 3 weeks extra pay
o Excellent results = 2 weeks extra pay
o Good results = 1 week extra pay
o Expected results = $100 gift card
E. Company-wide improvement incentive compensation
o New hirae referral—$500 bonus after 90 days employed
o No profit fade—PM earns $100 per project
o Customer performance rating—Above 90 percent pays $500 to PM and
superintendent
o On-schedule project completion—Superintendent earns $250
o Subcontractor and supplier coverage over 4 to 1—Estimator earns $100
per bid
o Call-back work, equipment accidents and repairs will be deducted from all
PPP
As a professional construction BIZCOACH and industry speaker, George Hedley helps
contractors increase profits, grow and get their companies to work. He is the best-
selling author of "Get Your Construction Business To Grow & Profit!," which is available
online at hardhatpresentations.com. Email
[email protected] to sign up for
his free e-newsletter, join a peer mastermind BIZGROUP, implement the BIZ-BUILDER
BLUEPRINT, or get a discount for online courses at hardhatbizschool.com.
