Get Results with a Performance Pay Plan

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.