High-performing, highly productive employees help drive a business toward growth and financial success. A compensation package that includes something more than base pay can help keep valuable employees on board and performing at peak levels. But an incentive compensation plan can do more than retain and motivate skilled employees – it can align employee goals with overall business objectives. Developing an incentive compensation plan should be a priority for every construction firm. However, contractors have to determine what type of incentive compensation structure will work best for their employees and meet their company’s unique needs.

Variations on a Theme
A compensation plan ties pay to performance and the achievement of certain goals. It can be in the form of:

  • Merit pay
  • Bonuses
  • Profit sharing
  • Corporate stock ownership

Bonuses and merit pay tend to be the most common forms of incentive compensation in the construction industry. However, some larger, privately held firms offer top performers the opportunity to share in the ownership of the company, often in the form of restricted stock units. This arrangement grants employees an equity interest in the company that fully vests (by the elimination of restrictions) over a predetermined schedule.

Stock appreciation rights and “phantom” stock are other forms of incentive compensation plans that allow contractors to reward top performers without giving up any equity interest in their companies. Under these approaches, employees share in any increase in the value of the company stock while not actually owning any shares in the company. Phantom shares merely track the value of the underlying, real shares.

An incentive compensation plan can be purely discretionary. It can also be targeted specifically to individual employees, work crews, a craft group, or a combination of these groups. In addition, it can be paid currently to employees or deferred to a future date, very often retirement.

Clarifying the Standards
An incentive compensation plan will generally be effective only if the participants fully understand what’s required of them to qualify for the payment. That’s why it’s critical that contractors clearly define performance standards or benchmarks that will be used to determine who gets rewarded. Sometimes, pure performance-based plans may not work for certain employees whose contributions to the company may be difficult to measure. Discretionary plans may work best in this circumstance.

Performance-based Plans
Performance-based plans typically give key employees a fixed percentage of profits per contract or division. To receive the added compensation, employees must meet clearly defined goals. Some contractors require managers and supervisors to bring in a certain percentage of projects on time, on budget, or under budget in order to receive the added compensation. Other performance goals relate to reducing or eliminating on-site accidents. Still other contractors reward managers for recording and billing owners for all change orders.

Discretionary Plans
A discretionary plan is typically used in situations where it’s not possible to assess an employee’s contributions solely through an objective set of criteria. For example, an employee may be assigned to oversee the most complex projects because of his or her unique skills. Under a discretionary plan, a contractor can reward certain employees based on the contractor’s subjective determination of how much value the employee brought to the company.

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Matt Eckelberg
I joined Hawkins Ash CPAs in 1997. I began as an intern and have advanced to partner. I have thorough experience in audit and tax and provide these services to commercial entities, individuals, and profit-sharing 401(k) plans. I am a former member of the firm’s tax committee.

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