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Construction contractors, like other business owners, sometimes take a less than objective approach to incentive pay. Some owners simply compare their year-end profits to those of the year before, draw up bonus figures for some or all their employees and hand them out before the holidays.

If this procedure rewards performance, it’s only in a general, undifferentiated and subjective way.

A better approach for contractors is to structure incentive programs thoughtfully — not only to reward people, but also to drive specific improvements in the business. Higher productivity, reduced absenteeism, fewer accidents and higher employee retention rates have all been achieved, in part, through carefully targeted incentives.

An effective incentive program takes planning and organization. It also requires ownership — a company leader tasked with championing the project. The following are some other principles of effective incentive plans.

Performance Is the Issue

Incentives can take many forms, and they can aim to achieve a variety of results. But in all cases, the most effective incentives are those based on specific performance goals.

Individual goals can vary widely, of course, and a project manager’s will be different from those of a roofing-crew chief. By setting goals carefully at every level, a company can align its employees’ efforts more closely with its strategic direction and overcome specific obstacles that are holding it back.

Self-Funding Budget

The incentives budget should be performance-based — that is, it should be funded from the benefits the incentives are designed to produce. Business improvements, such as a reduction in time lost to illness, for instance, can generally be projected and measured in financial terms.

The alternative is to build incentives into each project’s direct costs. But few contractors have that luxury, since they’re competing with bids that don’t reflect that approach. It’s far better to tie the incentives to specific performance improvements. Incentive programs fail for different reasons, but one common cause is a failure to recognize and reward performance up and down the line.

Some contractors repeatedly reward project managers and executives but not front-line supervisors or hourly workers. Owners may not hear the grumbling, but it’s there, and it can be an obstacle to the very improvements the company needs most.

In a comprehensive incentive program, on the other hand, a company offers every employee — from executives to laborers and administrative assistants — the opportunity to earn something of value by improving their performance on the job.

Of course, different metrics and rewards apply at different levels, but companies that implement such comprehensive programs report leaps in morale and energy.

Different Strokes

When it comes to rewards, craft and hourly workers typically prefer cash. Stock options or other long-term rewards may be of more interest to salaried employees looking toward a long career with the company, but immediate monetary awards rarely bring complaints from them either.

Non-cash awards also can have advantages. Through deals with merchandise or service companies, contractors may be able to deliver incentives of greater value to some employees. Still, since not everyone responds positively to a bass boat, some diversity in awards is a good idea.

Catalog programs provide such diversity, including new Internet-based programs that offer immense selections from a multitude of vendors. Some contractors award incentive tickets for various achievements during the course of a project, which employees can redeem for catalog merchandise at the project’s end.

Incentives for Management

An incentive program for management should proceed from the same assumptions as one for hourly workers. Its purpose is to drive results, so it should be based on performance.

Because managers are responsible for groups of workers or other managers, collective results provide the baseline for the rewards. The company should set milestones based on its own needs — less rework, faster framing, a better safety record — and reward managers and supervisors for exceeding these goals. By raising these bars carefully, contractors may see significant improvements over time.

Companies that give management bonuses for project work generally hold them until project end. They know that, given the nature of the construction business, they may need that money during the project.

No Substitute for a Paycheck

Contractors should also resist the temptation to let incentives and bonuses make up too great a proportion of total compensation.

This generally happens for two reasons. One, when the company sees the impact of well-designed incentives, it decides that more must be better. Or two, the company simply finds that incentives, which are variable and based on revenue, are easier to manage than the fixed costs of paychecks and salaries. Either way, the company begins to neglect pay increases in favor of bonuses.

In good times, no one complains — for employees, it’s all good money. But the problem shows up in a downturn, when incentives and bonuses necessarily dry up and employees are left with a base pay that may be substantially below market rates.

Is your company using incentive awards effectively? If you’d like some ideas, please contact our firm.

Show-Up Incentive for Hourly Workers

FrameWork, Inc. had plenty of work but not enough workers. For whatever reason — flu virus, fishing season — too many employees were taking too many days off.

How much does a day of absenteeism cost a company? Construction science organizations consider all the various disruptions an employee’s absence can trigger — project delays, idle time, shifts in personnel, even a lost crew-day. On average, researchers say, the cost of an employee’s absence is equal to the employee’s hourly rate times 12.

That means that when a $20-per-hour crew lead misses a day, the contractor is out around $240. FrameWork’s owners figured up their absenteeism costs for a year and decided to set aside half that amount in a budget for a "show-up" incentive program.

For every month of perfect attendance, employees would receive a bonus along with their paycheck. The amount of the incentive would be dictated by the budget. The company brought front-line supervisors in on the deal too, giving them a stake in their crews' show-up performance.

This approach is successful because it provides “line-of-sight” targets — goals employees can influence immediately by their own actions, which seem less abstract than gross margins at project end.

The program had a big impact, and a year later its returns were plain to see. The drop in absenteeism (and the resulting drop in costs) saved the company significantly more money than the show-up incentives cost. And since the program was self-funded, paid for by the savings generated from improved performance, it carried little risk.