In 2015 the construction industry faces the aftermath of the recent recession, during which many experienced construction professionals moved to other industries. As construction demand bounces back and increases its need for competent, long-term employees, both general contractors and subcontractors must find ways to attract and retain people to fill key executive-level positions.
One method for doing so is to introduce an incentive compensation plan, which can motivate employees to adopt ownership thinking, resulting in strategic actions and decision-making that lead to business growth. This is especially true for companies experiencing or preparing for a transition, which might include a sale or acquisition, organizational restructuring, or a shift from one generation to the next in a family-owned operation.
Many incentive plans are available, so owners should ask essential questions about each one before making a final decision. Here are a few of those:
1 Is the company set up to accommodate this type of plan?
Most incentive plans can be used only by certain types of companies. For example, cash bonus incentive plans and stock appreciation rights can be used by LLCs or S corporations, but profit interests and capital interests can only be used by LLCs. Conducting research online or speaking with a financial professional can help rule out plans that might not be appropriate. However, owners should note that in many circumstances, company structures can be rearranged to accommodate certain plans.
2. Does the plan target the appropriate personnel?
Different plans are designed to benefit different groups. For example, stock options and the option to acquire as capital interest are meant for executive team members, while other plans, such as phantom stock, are intended for the executive team plus senior management. Because different groups have different interests and motivations, owners should ensure the plan they choose is a good fit for the personnel they want to encourage.
3. Does the plan contribute to ownership thinking and assist with retention?
Some plans are designed to contribute to ownership thinking and assist with retention. Because they grant participants a share of future company earnings, profit interests, capital interests, options to acquire capital interest and stock options are particularly useful for encouraging employees to think like owners, and therefore to stay with the company long term. When using incentive plans, owners should be prepared for the difficult trade-off between the value of important personnel for possession of the company.
4. Does the plan tie actions to rewards?
A plan that truly prompts employees to think like owners is one that presents a clear relationship between their actions and eventual rewards. Some executives are surprised to recognize that a bonus plan doesn’t necessarily do so because rewards are presented after the desired outcomes have already been achieved. A good incentive plan is specific in the actions and goals it requires, such as generating a certain amount in sales or staying within budget. Some incentive plans, such as profit interests, capital interests, option to acquire a capital interest, and stock options, are geared more toward aligning behavior with company goals.
5. What cash flow implications does the plan carry?
Some plans, such as cash bonus incentive plans, result in immediate cash flow impact for companies, while with impact is deferred with other plans, such as stock appreciation rights and phantom stock, the impact is deferred. Depending on a company’s financial position and future plans, this consideration could be important. For example, a company with low debt and a number of contracts in place for work yet to be performed (and paid for) might be more comfortable committing to future outlays.
As the construction industry rebounds, construction company owners need to consider how to compete and grow in the coming years. Retaining or placing employees in key positions is a primary element to success, and incentive plans can be a powerful tool to ensure employee loyalty and longevity. There are many plans to choose from, and choosing the right one is critical to meeting company goals.
The five questions mentioned above, as well as many others, should be carefully considered. Owners should have a firm idea of company goals and research incentive plans to find those that will contribute to meeting them.
Eric Stutz, CPA, is a tax partner at EKS&H LLLP in Denver.