Putting Together a Workable
Incentive Compensation Plan
Attracting and retaining
employees whose skills and commitment contribute significantly to the growth
and profitability of the business should be a priority for every owner.
While high-performing project managers, supervisors and engineers are
typically driven by their own high standards, a satisfactory compensation
package can often motivate them to continue performing at peak levels.
Business owners have found that providing compensation “over and above” base pay
has helped retain and motivate key employees. Here’s what you need to know
if you think you might want to introduce some form of incentive compensation
plan into your workplace.
What It Is
An incentive compensation plan is designed to tie pay to performance and to
achieve gains in worker productivity. A compensation plan can take the form
of merit pay, bonuses, profit sharing, corporate stock ownership and
commissions. The reward can be paid currently or deferred to some time in
the future, typically at retirement. An incentive compensation plan can be
purely discretionary and may be targeted to individual employees, work
crews, the organization as a whole or a combination of these groups.
Irrespective of which approach is chosen, managers and supervisors should
understand what’s expected of them to qualify for the incentive
compensation. Your company should clearly spell out minimum performance
standards, even in situations where the compensation is purely
discretionary. Many firms have found it helpful to link
corporate goals to managers’ and supervisors’ performance objectives in
order to earn incentive compensation. Indeed, the most successful incentive
compensation plans are customized to the company’s specific needs and
goals.
Performance-Based Plan
A performance-based plan employs objective criteria to determine incentive
pay. Generally, the plan gives managers a fixed percentage of profits per
division or contract. Some plans establish clearly identified objectives
that the manager must accomplish in order to receive the compensation. For
instance, since punch lists significantly impact a contractor’s bottom line,
some contractors award incentive pay to managers or foremen for minimizing
punch lists and/or for resolving them efficiently.
Discretionary Plans
Discretionary incentive compensation plans can be very
flexible. For example, it’s not always possible to grant incentive pay or
to assess the contributions of top performers solely through a set of
objective criteria. Since these individuals are often put in charge of the
most complex projects, a more subjective analysis of their performance may
be warranted. A pure performance-based plan could end up undervaluing a key
employee’s overall contributions, particularly on difficult or unusual
projects where certain skills may be difficult to measure. However, a
discretionary plan would allow you to reward a key employee based
on your own assessment of the value of the employee’s various
contributions.
Deciding on Payment
Many firms have traditionally relied on cash bonuses. However,
a growing number of privately-owned firms are offering top performers the
opportunity to receive an equity stake in the business. Typically, ownership
interests come in the form of restricted stock. Under this arrangement, the
employee is granted an equity interest in the company but would forfeit some
or all of the stock if he or she leaves the company prior to a predetermined
vesting schedule.
Other contractors who are less willing to give up any actual ownership in
their firms rely more on “phantom” stock and on stock appreciation rights to
reward key employees. These incentive payment strategies allow recipients to
benefit from and share in any increase in the value of the company stock
while not actually owning any shares.
We Can Help
We can help if you think that your company could benefit from introducing an
incentive compensation plan or if you are dissatisfied with your current
plan’s operation.
Please contact us to discuss your
company's plan.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
