Most engineering and construction firms use some type of financial incentives to motivate employees, but many find them ineffective. There are, however, ways to improve these reward systems.
Research reveals that the most effective incentive programs are structured plans based on market research and tied to company goals.
August 13, 2013—The vast majority of businesses in the engineering and construction industry offer some form of incentives to employees, but most of these programs are highly discretionary, blurring the link between improved performance and enhanced compensation.
FMI Corporation, a management consulting firm headquartered in Raleigh, North Carolina, recently surveyed 224 firms in the engineering and construction industry to determine the state of incentive programs in the field and discern best practices. “Many of our clients were asking for this information,” said Radek Knesl, a consultant with FMI, in written comments to Civil Engineering online. “What is the rest of the industry doing? What are the best practices for incentive compensation? Why should I move from a discretionary to a structured incentive plan?”
Knesl is the author of the report “Incentive Compensation Effectiveness Study,” which details FMI’s research into incentives. The survey indicates that 88 percent of firms offer incentives of some kind, and 91.7 percent of them have had their incentive program in place for more than three years. Yet only 21 percent of respondents identified their incentive plan as highly effective.
“The fundamental message is that 79 percent of construction firms are not fully achieving the desired results given the significant investment in incentive compensation,” said Knesl. “The results of this survey indicate that there is ample room for improvement.”
Respondents identified return on investment (ROI), profit, and productivity as three areas in which their incentive programs have produced the greatest results. Nearly 64 percent of firms said incentives have either increased or significantly increased their profits. Approximately 59 percent said incentives had either increased or significantly increased ROI; productivity improved for 57.8 percent of firms.
“[ROI] and profit are the main reason why the majority of construction firm offer incentives,” Knesl said. “You get what you pay for. Incentives motivate behaviors and outcomes.”
Incentive programs at the firms surveyed were less effective in attracting new talent and also in improving efficiency. Nearly 60 percent of firms surveyed said incentives had either no effect on—or actually decreased—their ability to attract new talent. Nearly 53 percent of respondents said incentives had no effect on boosting efficiency.
“It is important to tie the incentives to the desired outcomes and behaviors,” Knesl added. “Fewer contractors are incentivizing efficiency.”
The research identifies seven key areas that firms should investigate if they want to develop an effective incentive program. The first is instituting a structured plan as opposed to a discretionary one. Structured plans have clearly stated incentives that employees are made aware of in advance and can therefore strive to earn. Of the firms with structured incentives, 36 percent identified their plan as “very effective,” compared with just 12 percent of companies with discretionary incentives.
“Many do not define the incentive opportunities in advance and use too much discretion,” Knesl said. “Owners need to ask themselves if they are incentivizing the desired behaviors and outcomes.”
Setting incentive levels based on market values is another key element of a successful incentive program, according to the report. More than one-third of respondents said their company sets incentives arbitrarily, rather than through consultation with peer groups or industry surveys.
“A company with a formal written incentive plan may be able to articulate the advantage of working there over those companies who simply offer a ‘trust me’ bonus,” Knesl said.
The survey indicates that incentives between 5 and 10 percent of net income are the most common in the industry, used by 23 percent of respondents. That range is the outlier in a bell curve that ranges from 11 percent of companies offering 5 percent or less to 12 percent of companies offering between 25 percent and 30 percent of pretax net income.
Other key areas that firms should focus on include implementing incentives that align with the strategic goals for the company; developing a program that foregoes bonus pools in favor of a bottom-up funding mechanism focused on profits; concentrating on empowering employees; creating an atmosphere of transparency and clear communication; and implementing clear, measurable goals.
“Owners and top executives in the industry would benefit from addressing all seven of the common practices that are critical issues if they wish to make their incentive compensation programs more effective,” Knesl said.