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Rewarding Hard Work
Hardworking
employees make the difference for you every day, giving your construction
business the extra edge to turn a profit in a tough market. Rewarding their
extra effort with extra pay is a logical way to say thank you and to
encourage them to keep up the good work.
But what’s the best way to build the reward into your compensation program?
Two popular approaches are profit-sharing and incentive compensation plans.
Profit-sharing plans base the reward on the employee’s contribution to
overall profits, while incentive programs link pay to a clear set of
individual performance targets.
Different Emphasis
Despite the difference in name, both plans are designed to share your
company’s profits, and both aim to increase your employees’ incentive to
perform. The difference is in emphasis.
Profit-sharing plans, a choice often deemed more appropriate for established
firms with relatively steady earnings, are frequently designed as part of a
retirement program. In these arrangements, the reward comes in pretax dollars
directly paid into a retirement plan such as a 401(k).
Advocates of incentive compensation plans laud them for their ability to
dramatically differentiate the pay levels for star performers. Flexibility is
another plus, permitting one-time bonuses for truly exceptional performances.
Profit Pool
In profit-sharing plans, the company usually contributes a small percentage
of its pretax profits to a pool, to be divided among eligible employees
prorated according to the base salary of the individual.
Backers of this approach like it because it encourages team effort focused on
company success rather than individual goals. Also, cost to the company is
tied to profits — when profits are down, so are the costs of implementing the
plan.
But critics say that profit-sharing plans can undermine employee morale by
creating unfulfilled expectations.
Another drawback is the effect that factors beyond the influence of most
employees can have on profits. For example, fluctuating costs of fuel to keep
your vehicles and heavy equipment operating are beyond the control of your
work crews, but these costs can have a big impact on profits.
Also, since payouts are tied to the base pay structure, the rewards may not
be compensating those who have made the greatest effort. To address this
problem, design of the profit-sharing plan should define the positions and
performance standards most directly tied to profits so that key individual
performance is rewarded more generously.
Solid Record
To avoid disappointing your employees, establish a solid record of
profitability — five consecutive years or longer, according to experts —
before considering a profit-sharing plan.
Spot bonuses can fill the gap until then, giving you the time to figure out
the details for an effective program.
Experts also advise delaying the payout until at least the end of the next
quarter after the reward period. That way, you can be sure of your figures
and avoid the embarrassment some firms have experienced when they had to
return to workers and ask them to return a bonus based on overly optimistic
early financial reports.
Defining Objectives
Unlike profit-sharing programs, incentive compensation plans give individual
employees defined objectives and a personal stake in improving operations
crucial to business success. Plans may reward overall performance or
achievements by individuals or teams, or they may combine these designs.
To be effective, incentive compensation plans must weigh employee
achievements against performance measures supporting the company’s strategic
goals. For example, a company may decide to reward employees at a higher
level for completing work faster, cutting the number of errors, or lowering
costs.
Not only should the measurement chosen be relevant to company goals, but its
relevance should also be readily apparent to employees after a simple
explanation. Sometimes this clear connection is called "line of
sight," a term borrowed from military strategy, where it describes the
visibility of a target.
To keep lines of sight clear in incentive compensation, experts recommend
keeping targets simple and avoiding distractions that confuse focus. A small
number of targets — four or fewer — is recommended. Also, management is smart
to invest the time and effort needed to clearly communicate how the chosen
targets will lead to greater company success and how individual and team
efforts can bring the targets within reach.
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