Retaining employees in an era of tight labor

March 29, 2000
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Most everyone knows the construction industry is suffering a labor crunch. Companies in many areas of the country are clamoring for all types of personnel, from electricians to roofers, to project managers, to superintendents, to the accounting staff.

This crunch has had a dramatic effect on the cost of labor (salaries, hourly wages, bonuses, perks, and companies’ responses to higher labor costs).

The average increase in compensation costs for all employees in the construction industry has settled between 4% and 5% in the last two years. That average increase, however, is just the tip of the iceberg as compensation costs for some key positions have risen much faster.

High-performing project superintendents, other field managers, and project managers are extremely difficult to hire. Companies are responding by increasing their compensation well above the 4% to 5% range. Some companies are also offering signing bonuses.

Construction management companies have realized the cost of losing good employees and recruiting replacements and have placed renewed emphasis on retention. The cost to hire an employee, train them, and pay them for five years and hire a replacement often approaches $500,000 to $750,000.

There are also hidden costs in lost productivity, reduced morale, burnout for remaining employees, and sometimes increased competition. It is obvious that, in most cases, it is advantageous to retain high-performing employees.

The question is, how should companies structure compensation packages to keep high-performing people while holding down fixed compensation costs?

Compensation packages

The most effective compensation elements to retain key employees are incentive compensation, deferred compensation, and stock. Let’s take a look at what many companies are doing with these different elements.
  • Incentive compensation — Large base salaries have bowed out in recent years in favor of incentive compensation or pay-for-performance plans. Many companies have minimized base-salary increases in favor of aggressive incentive-compensation plans that potentially pay large bonuses if individual and company performance warrants such amounts.

A word of warning: Make sure base salaries are competitive before you implement this type of plan. The incentive compensation plan needs to be designed to differentiate bonus amounts even within the same positions for the highest-performing employees.

For example, average-performing project managers may have the opportunity to make a bonus of 10% to 15% of their salary, whereas superstar project managers have the opportunity to make 20% to 40% of their salary. The higher bonus amounts are deferred over three to five years.

This occurs yearly, so employees bank bonus amounts for years into the future. Accumulated deferred bonuses are forfeited if the employee leaves the company voluntarily.

Generally, the highest-performing employees like these plans since they give them the opportunity to make large bonuses.

  • Deferred compensation — These plans defer money above base salary and bonus for pay-out at some point in the future. They are usually established as non-qualified plans to give companies flexibility in design, allowing them to offer it to a limited number of employees.

A typical plan defers a portion of the annual calculated amount until retirement at a specified age, and the balance vests over a five- to seven-year period. Again, employees bank the deferred amounts for a period of years.

This type of plan creates “golden handcuffs” for retirement, but also allows employees to receive distributions once vesting requirements are met.

Phantom stock is a variation of typical deferred-compensation plans. These are stock-appreciation units, not real stock, that increase in value over time if the company achieves stated levels of performance.

The simplest phantom stock plans peg the value of the phantom stock to the value of the “real” stock. Thus, as real stock value increases, so does the phantom stock value. This is an employee-retention vehicle since the greatest benefits occur over a relatively long period of time.

Stock options that may be exercised over several years help retain employees who may be reluctant to forfeit the right to exercise the full amount of the option.

  • Stock — Stock plans have not been used extensively in the construction industry for a variety of reasons. The construction industry often perceives that stock plans and buy-sell agreements add complexity to personnel changes.

Owners, who are used to making decisions quickly and decisively, are concerned that adding stockholders will create management by committee. However, stock ownership usually creates considerable loyalty and devotion to companies. It can reinforce correct decision-making and retain employees who perceive it as the ultimate reward for long-term performance.

Stock options that may be exercised over several years help retain employees reluctant to forfeit the right to exercise the full amount of the option. This benefit requires the stock price to continually increase in value. Thus, companies must achieve long-term and consistent financial performance to realize the retention benefit of stock.

  • Non-monetary considerations — Many non-monetary facets in companies facilitate employee retention as well.

Developing and communicating career paths for employees increases job satisfaction. Training is also tremendously satisfying to employees. So is allowing them to work in self-directed work teams.

Developing a positive and inspiring company culture based on rock-solid core values will help retain employees and decrease compensation importance. In other words, employees will choose to work for companies with positive and nurturing cultures for less total compensation.

Do not push this too far, however, as employees will accept only small differences in total compensation.

Conclusion

In this era of tight labor and increasing compensation costs, companies must develop and take advantage of every possible strategy to keep key employees.

The design and implementation of creative compensation plans that reward superior performance and motivate key employees to stay with the company are critical.

In addition, non-monetary areas must be continually developed and thoroughly communicated to employees.

By melding elements, you can create a best-of-class, highly productive organization with low turnover and tremendous motivation.

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