Incentive Packages Part II: Bonus Structures

The goal of all compensation and incentive programs is to drive desired behaviors across the organization. In our previous article, we dove into the history of performance assessments and what the construction industry can take from the recent trends of corporate America.  In this article, we will be looking at the individual portions of bonus structures for different roles in typical construction companies and try to discern if they are accomplishing what they are intended to produce. 

From our previous article, we uncovered that performance reviews and bonuses all stemmed from the US Army in WWI to eliminate poor performers and has evolved over the last 100 years to where we are today.  Currently, most companies differentiate between accountability and employee growth by providing different rankings for each. But no matter how progressive your firm is in regard to evaluations, odds are your compensation packages are still tied to the employees’ performance, as this is the measurable aspect of the individual and organization.  So, how do we know if your compensation and bonus structure are truly driving the behaviors you need from your associates?  We have to look deeper at each plan and the potentially unintended consequences from putting pay-for-performance incentives in place. 

If you’re like most firms, you will evaluate each business unit, or person, in your organization and ask, “What do I really need them to do?” Then you can structure their bonus plan around them achieving their primary function. You might also include additional incentives for minimizing resource usage.  This works by enabling each business unit, or player on your team, to perform their role to the best of their ability.  Unfortunately, there are a few situations when this approach creates situations that can hinder an organization’s ability to drive the correct behaviors from their associates. 

incentive 2First and foremost, it creates a principal-agent problem: the notion that what’s best for an individual isn’t necessarily what’s best for the organization.  You see the worst impacts of this typically at the highest levels as short-term gains override long-term strategies.  While your intent was to drive the unit or person to achieve their primary function at the highest level, a situation is created where achieving their personal goals take precedence over the long-term position of the company. 

Secondly, it can inhibit your business units from working together.  They may no longer have the ultimate goal of the company’s success as the primary motivating factor, but are now focused on achieving their individual goals.  When this happens, the methods they choose may directly conflict with other business units, and a war for business resources ensues. 

Project Management roles have a very wide variety of ways to configure their bonus structures and are somewhat immune to the above situational problems because they are often the ones dealing with the fallouts of poor bonus structures.  They typically do not have any direct reports or authority, but are still tasked with achieving the overall goal of project completion on time and under budget while managing scope by influence alone.  So, a common way to incentivize them is to compare projected schedule and budget against the actuals after project completion.  We won’t get into details about how this can be calculated as companies can base a doctorate thesis on it if they choose to make it complicated, but typically a PM can make an additional 10-15% of their annual salary on these performance factors.  One scenario that can happen in the realm of a PM is they crunch resources to complete a project without taking heed of certain constraints or appropriate workmanship because their motivations are tied to the overall project metrics.  This can result in higher service costs for the customer, or having to rework phases which jeopardize the long-term standing of your firm against the short-term gains of the project and PM. 

Read more about the key to an effective Incentive Plan.

Business Development professionals have the full range of unintended consequences, and as a larger percentage of their income is typically based on their performance (up to 100%), companies will tend to let it continue as they also see B.D. professionals as the “engine” that drives the business.  Typically, a B.D. professional will be incentivized based on the sizes of contracts they secure, ability to sell profitable work, and/or number of new clients/projects they bring in.  The methods they choose to accomplish this are just as varied as the individuals, but can lead to a) severely overworked estimators if they use a numbers game, b) performing work outside of your core competency if they are looking for new clients, or c) attempts to skirt policy that can lead an entire organization into hot water in attempts to maximize profitability. 

Estimators/pre-construction professionals will often get measured on the profit margin of awarded jobs, win/loss rate (which can be shared with Business Development) and accuracy of the bids.  For estimating professionals in this structure, it’s a delicate balance of margin vs. win/loss, and their choice of how they manage this tug-of-war can directly impact your ability to win jobs, especially if they do not have any collaboration from other business units.

When it comes to bonus structures and incentive plans, it’s best to take a reflective look at how your business operates with these plans in place to optimize collaboration vs. competition and strive to ensure that the choices your associates are making are in the best interest of the company rather than the individual.  We should always be striving to put our people in situations that set them up for success, which includes their incentive plans. 

 

Part III - coming soon! 

In our next few articles we will explore and explain several common incentives plans that successful contractors use to drive both employee and company performance.

Written By Josh Coakley, Senior Consultant at Ascent Consulting.

Read Part I: Performance Pay History

 


 

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