Key Employee Retention – Incentive Plans Keep Key Employees on Board

May 26, 2022

It has been more difficult for contractors to attract and retain qualified management personnel. As a result, you need to aggressively address your employees’ concerns about their positions and career opportunities within your company – before they decide to work for someone else who will.

A construction company owner regularly evaluates their key employees’ performance but with market conditions we have experienced over the last 5 or 10 years, employees have the edge and they are evaluating your company too. Employees are constantly considering what the company can – and will – do for them.

Identify Your Key Employees

When you begin to design, or revise, your employee incentive program, first decide which employees you want to include. Key employees typically include senior project managers, the chief estimator, the marketing director, and the chief financial officer. And some companies are recognizing that certain of its lower rank employees can also be a component of an incentive plan.

Define your key employees by these standards:

  • The employee is a major contributor to the success of your company.
  • The loss of the employee could have a significant impact on your organization and its customers.
  • It would take a significant amount of time and effort to recruit and train a replacement.

The most common method of providing incentives and rewards for performance is through a cash bonus program. Employees and contractor’s find that a cash bonus program is more favorable than stock ownership plans, deferred compensation programs or qualified profit-sharing arrangements.

Key steps you should consider to establish, or revise, an incentive bonus program are summarized below. Note that no two companies are alike. Use whatever method you think will work for your organization.

Develop Company Goals

First, define your overall company goals. Determine whether your company’s goal is to increase volume, increase net earnings, improve accounts receivable collections, expand into new markets or just to have better control over your jobs.

Then, quantify those goals in terms of dollars or percentage increases and establish a timetable over the next three to five years to achieve these goals. However, make sure the goals are attainable and realistic and that they fit into the long-term plan for your company.

Identify the Participants

Next, decide which key employees should participate in the program. Plan to include all employees who can help your company achieve its goals. They will recognize that you value them as employees, are interested in their development, and believe they have the skills and ability to help the company meet its defined goals.

At the same time, you may be able to determine who is and who is not committed to the long-term success of your company.

Develop Individual Goals

Begin to individualize the plan by establishing goals for each person.

Make the goals different for everybody and capitalize on the special abilities of each employee. An individual employee’s position within the company will be the determining factor in selecting which goals he or she can help the company achieve. Avoid giving an individual goals that you know are beyond the person’s capabilities or control.

Quantify the goals. For example, meeting established deadlines or gross profit margins on a particularly important contract is a measurable goal. Others may be implementing innovative technology to create controls and efficiencies. By making goals quantifiable, both you and the employee can easily measure the attainment of each goal.

Each participant’s goals should also include some aspects that are subjective as well as objective. Subjective goals include such factors as customer or owner satisfaction.

Encourage each employee to help establish their own goals. This process will assist you in identifying what they think their capabilities are and will help you make the best use of your resources. If an employee has assisted in developing their goals, they will take more responsibility for success or failure.

Measure and Evaluate the Results

The method you use for measuring and evaluating progress toward achieving goals is important. Develop a system for monitoring progress. Your system can include quarterly, monthly, or weekly reports of job cost, contract status or accounts receivable.

The report should be generated on a regular basis and reviewed by you and the employee. Employees should understand the evaluation tools and know how they are progressing.

Be consistent when measuring goals. Determine the method for measuring the goal at the beginning of the evaluation period. But be prepared to change the measurement tools when necessary. Over a period, you will develop better ways to evaluate the plan. However, be sure to notify all involved when the evaluation process is modified.

Establish Method and Time of Payment

At the beginning of the program, establish the method and time when cash bonuses will be paid to those achieving their identified goals. Payout periods can be quarterly, semiannually, or annually.

An alternative to making all the bonus payments in cash currently could be to make a partial cash payment annually with the balance deferred to a future date. This type of alternative program can help you with employee retention and cash outflow.

Determine the Amount of Incentive Compensation

Management should determine the actual amount of incentive compensation after the company’s performance and achievements are reviewed and evaluated. The employees should have an opportunity to list the contributions they made during the past year, so that all the factors they consider important are given attention.

If an employee is paid based on their progress in meeting the goals but the progress turned out to be minimal, the company has two options: 1) It can distribute a small bonus to maintain employee goodwill or 2) distribute no bonus at all.

Re-evaluate Your Plan Regularly

Review your incentive compensation plan annually. Take the time to identify weaknesses in the plan. Be creative with new goals and measurement. Make sure the plan is achieving the results you want.

Got questions? Connect with an experienced Aprio advisor today.

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