Get Your Compensation Systems in Good Order for the Market Upswing

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Is it easy in your market to recruit and retain top estimators, project managers, and superintendents? Have you been surprised by the recent turnover of a high-potential employee? Many of your peers have. Just a year or two ago, FMI was hearing from clients that there was plenty of available talent on the street because of downsizing during the recession.

Now those same clients are reporting difficulty finding qualified candidates for open jobs, multiple competing job offers when they do find them, salary compression (having to offer new hires salaries at or above tenured employees), and a large group of baby boomers ready to retire without obvious replacements. Now is the time to get your compensation and performance management systems in line with the new normal of higher competition for talent, worries about retention, and experienced managers aging out of the workforce.

The "New" Best Practice Approach

The process seems simple to describe in a few bullet points, but, in practice, it requires a hard look at how you do things on the “support side of the house.” The overhead-cutting approach that got you through the Great Recession is simply not an effective method to address the upswing that seems to have arrived in most markets. In many cases, companies have not looked seriously at their compensation or HR systems since the Great Recession. Now that things are turning around, they are surprised that they are having a hard time attracting talent, or they have lost one or more high-potential employees for which the company had big plans.

At the very least, a company should migrate to known best practices in the following systems:

  • Establish a compensation philosophy for your company and share it with your people.

  • Benchmark base compensation levels to objective, external market data.

  • Benchmark short-term incentives (annual bonuses) to the same objective, external market data.

  • Offer an incentive (bonus) system with clear structure, including measurable goals where the employee understands what the incentive opportunity is and how he or she can “move his or her number” based on predefined behaviors and outcomes.

  • Offer long-term incentives in senior positions that are vested over the course of a few years to create “golden handcuffs” that will retain key management talent when it would be disruptive to the business to lose them.

Establish a Compensation Philosophy

Let’s define a compensation philosophy first. For our purposes, it is the mix of base salary and bonus that a company offers versus what is available for a given title in the labor market. For example, consider a company that has a compensation philosophy that states, “We pay less than market base salaries, but pay more than market incentive compensation in order to deliver an overall compensation package that is market competitive or better.” Another common philosophy is, “We pay our employees more than market base salaries because we want to attract top talent, but in order to stay market competitive with our labor costs, this means fairly low bonuses.” Finally, a common, but often unstated, philosophy could be described as, “We play it safe. We try to pay as close to average as possible on both base and bonus; that way we rarely lose a person over compensation.”

Many companies in the construction industry have never formally articulated a compensation philosophy, but even if they have not stated one, there is a “phantom” compensation philosophy that exists based on their historic practices. The trouble comes when actual practices do not match up with the company’s self-image, or when the company leadership believes they are follow