Bonus Structures in Residential Construction
Managing employee compensation is a huge part of running a business. It starts at the very beginning when you hire talent and needs constant monitoring and adjusting throughout your employees' careers.
Compensation packages can be broken down into several components, such as wages, taxable and non-taxable employee benefits, and performance bonuses - which this article will focus on.
I often see business owners treating annual bonuses as an afterthought around the holidays instead of planning how to account for incentive programs in their overall compensation package. This leaves them scrambling to figure out how much to give each employee and what to base it on. After all, the last thing any business owner wants is to have their employees feel like their hard work all year isn't valued.
Why You Need an Employee Bonus Plan for Your Team
Many of you reading this won't hesitate to purchase a new tool if you need it for your construction company but might feel your wallet tighten up when it comes to providing annual bonuses to your teams.
We must look at both of these items as investments in your business because you cannot grow your company without adding team members. Even the most lean operations in the construction industry rely on administrative support staff and field managers to ensure the level of customer service they are providing to clients matches what they've sold in their pre-construction process.
Your employees work hard for you all year, showing up to job sites day after day in freezing cold temperatures, extreme heat, and bad weather, putting their best effort into their work to help grow your business and your bottom line.
While it is true that they are paid a base salary for this effort, rewarding them with a bonus tells your team that you value them and the work they do, keeping them motivated to continue to perform at that level.
Key Principles of an Effective Bonus Structure
To start, let's lay out the frameworks available and principles of what makes a great bonus structure. Keep in mind that there is no right or wrong when it comes to employee bonus programs. However, I would argue that over and under-compensating team members with no organized approach is like patching a hole in a bucket versus getting a new one. Eventually, the bucket will have too many holes to plug and fail, which can have devastating cultural and project-related consequences for your business.
Let's look at six key components of a bonus plan:
Structure
Determine how you'll structure your bonus plan. Will each individual employee have their own performance criteria, or will everyone work together on common goals in a team approach?
Success Criteria
Outline the "success criteria" for how bonuses or incentive compensation will be measured for either each individual or the team as a whole.
Gamification
Consider how to gamify this to encourage your teams to reach their goals, including possibly using a video game approach, whereby different compensation amounts "unlock" when an employee hits a certain threshold.
Track and Measure
Figure out what you will use to track and measure employee performance and how they will be able to see the results in real time.
Frequency
Set the frequency of when you will pay out these bonuses, so your team isn't waiting until Christmas for their bonus checks only to be disappointed with the amount.
Minimum Threshold
Finally, commit to the minimum threshold amounts that your team receives even if they don't hit a certain target.
Team vs. Individual Bonuses
Start by thinking about the approach to the plan and whether you want everyone to have the same or different criteria. There are a few ways to look at it:
1. Individual bonus
These programs focus on rewarding an employee for their individual contributions to the company and can help foster a sense of autonomy and responsibility.
2. Team-based bonuses
These help focus everyone in the company on the same goal(s) and distribute bonuses more equitably among staff members.
3. Hybrid bonuses are a mix of the two, where bonus pools are assigned based on the employee's position. For example, all project managers have the same bonus structure as each other, and all superintendents have the same bonus structure as each other, but both project management and supervision have different targets and success criteria.
4. Discretionary bonuses are simply the random approach to bonus payments either throughout the year or at year-end. They are not based on too much fact but simply on how you feel in the moment, which is often influenced by your income statement and bank account.
There's no "right or wrong" structure. It should be based on what you think works best for your business and your team.
Success Criteria: What Should You Choose
Your team members perform multiple tasks on a daily basis that are all tied into the overall success or failure of a project. As their employer, you should have a solid outline of their accountabilities in their position agreement so that each employee has a clear understanding of:
The big-picture outcomes of their roles
The specific accountabilities they will be assigned success metrics to, even if others contribute to those tasks.
The specific job functions (SJFs) they will perform daily, weekly, bi-weekly, and monthly as part of their role
The positional and company standards they need to use on a dailly basis in their role.
If you're using a team approach to bonus your staff, you'll look at the position agreements for all team members for commonalities and use them to create the success criteria of the bonus structure or incentive plans.
If you choose an individual approach, you'll need to determine the success criteria based on each person's role, outcomes, accountabilities, and SJFs.
With a hybrid approach, you assign the same metrics to each job classification. For example, one set of success metrics will apply to all project managers, and a different set of metrics will apply to all superintendents. This way, each role within a category is measured the same way, but each category is built to reflect the specific responsibilities of that group.
Either way, you should ensure the bonus structure criteria you use to measure employee success are visible, within their control, and connected to the outcomes of their role.
Gamification: How To Build Excitement
Let's face it, anyone's job becomes mundane at some point, and as a leader of your organization, it's on you to continue to inspire and motivate your team. But it can be challenging to figure out how to do that.
This is where gamification comes into play.
Once you've assigned the structure and success criteria of your team's bonus plan, it's time to build that excitement and motivation for them.
One of the best ways to do this is to gamify the metrics teams will be measured against and give them the visibility to track their progress. Just like playing Super Mario Bros., where you can continue racking up points as you proceed to successive levels, the same can be true for your employees and their bonus payouts.
In this approach, you add incremental bonus amounts based on teams meeting or exceeding different benchmark levels. For example, if project managers and/or site superintendents hit "X" amount of gross profit on a project, they get "Y" bonus. If they exceed "X," they get "Z" bonus, which is a higher percentage or amount than "Y".
Review the success criteria you've selected for each person, role, or collective team, and think of different ways to gamify your bonus systems accordingly.
Visibility: Don't Hide This in Plain Sight
Once you have the bonus structure in place, you need to determine how you will measure and track it and how you will give your team members real-time visibility of their progress. It can be hard for employees to stay motivated on the promise of a bonus at year-end, but if they can see the results in real time, they are more likely to continue performing at the level they need to.
Which means you need to ask yourself this: based on the success criteria I'm using, what is the best software or method I can use to share with my teams both the targets I've set for them and the real-time progress they are making?
In reality, tracking employee progress against their bonus criteria is similar to the way you would track job costing on your projects. When job costing, you're constantly monitoring how much you've actually spent on your cost of goods versus what was included in your original estimate and change orders issued to date and how much gross profit margin you've gained or lost along the way.
Giving your teams visibility into their ongoing results is crucial to helping them achieve this.
Frequency: How Often Should You Payout Bonuses?
Once you figure out the success metrics for your bonus program and whether you're going to bonus your employees individually or collectively, you need to determine when to pay them out.
Typically, bonuses are thought of as yearly offerings and are associated with the holidays and paid out in December regardless of when your fiscal year ends. And while there's absolutely nothing wrong with that tried and true practice, it's also worth considering using a quarterly payout schedule that rewards employees every 90 days.
There are three reasons for this, all of which are equally important:
Quarterly bonuses keep your teams more motivated and focused because the tasks they are required to complete to earn a bonus are smaller and more easily achievable.
Quarterly payments are easier on your cash flow.
Quarterly payments are also easier on your employees' cash flow as many are likely living paycheck to paycheck and will appreciate the added compensation more frequently.
Remember, the goal is to keep your team performing at the highest level consistently, not just at specific periods during the year. Quarterly payouts help achieve that goal because it keeps employees from losing focus by resetting them every 90 days. And the result is a more productive team, reduced project cycle times, and happier clients.
Baseline: Avoid Making Bonuses an "All or Nothing"
Running a business is a risky venture, and there are times when, despite all your best efforts, business doesn't go as planned, and you might not be as profitable as you'd hoped or projected.
But your team is still working hard all year round for you, and the quickest way to demotivate them is not to acknowledge that effort with some sort of bonus.
I worked for two companies as a Site Supervisor and Project Manager, respectively, and there was a year with each company where we found out at year-end there was no bonus. And it sucked, honestly. Meanwhile, we had a team dinner at a fancy restaurant that likely cost $500-1000 per couple – that was money I would have rather had vs. a dinner.
So, even if you are experiencing hardship in your residential construction business and it's affecting your overall profitability, that's something that is likely out of your team's control. So look for some way to bonus them - and then click here to get help changing your business so it is more profitable.
Incentivize the Right Behavior
Bonus plans are a great way to influence your team's behavior and align them on the outcomes expected from their roles. But it's also important to use caution when using incentive compensation to ensure you aren't rewarding the wrong behavior.
For example, you might look at creating a bonus structure for your sales team that assigns a monthly sales target for them to achieve.
That might seem like an excellent accountability to hold your sales team to, and when they hit that target, it seems like a great achievement.
Until you're in the project and realize that the salesperson either undersold the job to hit their target or the job is outside your typical service area or project scope you offer, and now you've rewarded an employee for an action that will cost your business money.
Case Study: High-End Luxury Home Builders Structure
I've seen a lot of different bonus structures in my years in business and as a coach, and I always applaud the ones who come up with unique frameworks for calculating and applying them.
For example, I had a client who needed to strengthen their employees' approach to completing three regular routine tasks:
Daily Logs: The reports that were sent to each client about the daily details of their project
Daily Timesheets: Because nothing burns your bookkeeper more than having to chase down timesheets
Daily Checklists: This secret weapon covered standard questions each team member needed to check off to ensure their role's accountabilities were being completed correctly
To help build their team's habit of completing these tasks regularly, they tied their bonus pool to them.
1. They determined the approach
Knowing that the challenge of completing this task was a commonality among all their site staff, they assigned the bonus to the team as a whole.
2. They drafted the success criteria
They determined that a successful outcome meant all team members were completing each task every day as part of their regular routine.
3. They turned it into a game
They created four levels of the bonus, starting at 50% completion and adding incremental levels, with the highest level paying out the maximum bonus. Each level was tied to a percentage completion of each of the three tasks.
4. They gave the team visibility
They used a Google Sheet workbook that everyone had access to so they could track their results.
5. They set a payout schedule
Each employee received a bonus payout at their all-hands quarterly meetings.
6. They set a minimum baseline
Each employee received at least a 50% minimum payout regardless of if they hit the target.
Why This Works
It's achievable
A fair bonus program is one that directly ties the work an employee does on a daily or weekly basis. That way, the employee knows they can execute it. Think of a project manager, for example, who has a bonus structure tied to the company's net profit. A company's net profit is heavily influenced by an owner's discretionary spending, which is something out of a project manager's control. Tying their bonus to something they can't control the outcome of is unfair.
For that profit sharing bonus to be achievable, it should be tied to the company's gross profit targets because that project manager can directly affect that number based on how well they run their projects.
It's visible
This company created a bonus pool that was clearly communicated to their team members, and everyone had full visibility as to how it was tracked. This helped encourage and motivate their employees to participate daily.
Each employee had access to the PM software so they could see everyone's actions (Daily Logs, Daily Timesheets, and Daily Checklists). As well, they also had access to the scoreboard on the Google Sheets so they could root each other on or encourage anyone falling behind to complete their tasks.
And what's more visible than being handed a check every three months at your company meeting? This ensures they are in full control of the process and can see where they stand on any given day, staying motivated to hit their targets.
How Much Should Bonuses Be?
Now that we've covered why you should incorporate a bonus structure into your overall compensation plan, it's time to look at how to actually start implementing one.
A general rule of thumb is that a bonus should be equivalent to one to two weeks' pay. Think of it this way: most companies typically bonus their employees at the end of the year, right before the holidays. For many team members, that's a time period where they are off work but still have bills coming in to pay, holiday expenses to cover, and the like.
So, a bonus that is equivalent to the earnings they would make during that time period essentially covers them for the time they are off, allowing them to recharge and come back motivated in the new year.
Keep in mind that this is just a minimum amount that you should consider. Many of our clients have much higher bonus compensation plans as they scale their businesses.
When calculating how much to spend on employee bonuses, a good place to look is at your company's net profit because, after all, you can't spend what you don't have.
Here's how to calculate it:
Make a list of all your employees
Beside each name, include a dollar amount equivalent to either one or two weeks' gross pay
Add up all the entries and divide it by your total net profit
That percentage is the amount of net profit you're using to fund bonus pools. The next step is to take that number and determine your bonus plan:
Structure
Success criteria
Gamification
Visibility
Payout schedule
Baseline amount that everyone gets regardless of hitting targets
If you need help crafting your bonus plan, you can sign up here to learn more about our Team Development Program and work one-on-one with us to build your compensation and bonus plan.
Are Bonus Structures Taxable for My Employees or Myself?
Generally speaking, bonuses are taxable in the US and Canada because they are earnings.
That being said, there are ways to include non-taxable bonuses as well as part of a well-rounded overall compensation package.
Stay tuned to our blog for further conversations on compensation packages, including non-taxable benefits packages.
The Bottom Line on Bonus Structures
Finding and retaining good talent is a time-consuming process. One thing that eases that burden is ensuring you're offering your employees a competitive overall compensation package.
That includes a bonus structure that is developed as part of that compensation package, not something that you're reminded of every year when December rolls around.
Your teams are on the job site day after day, in all kinds of extreme weather conditions, doing the hard work that helps make your remodeling or custom home-building business successful.
The best way to acknowledge that is by rewarding them accordingly with a bonus structure that either rewards them for individual work or rallies them together as a team to work towards a common goal.
As their employer, it's up to you to make sure that their bonus structure is easily understandable and achievable and that your teams have complete visibility and are able to track their progress throughout the year.
That means having a solid understanding of your financials so that you can plan for year-end bonuses the same way you do for other business expenses. I created the BUILD AND PROFIT SYSTEM for builders and remodelers like you to help you fully understand your business' financials so you can be more profitable.
Click here to learn more about the BUILD AND PROFIT SYSTEM and how it can help you.
