Originally published in Modern Contractor Solutions
By Shane Brown
With U.S. unemployment rates at generational lows, construction companies face one of the most severe talent shortages ever. Faced with this challenge, companies are becoming inventive with compensation to attract and retain skilled workers, particularly project managers, superintendents, and general superintendents.
With tax cuts and a strong U.S. economy, construction industry executives are optimistic about their business. However, a survey by the Associated General Contractors of America, conducted with Sage Construction and Real Estate, reveals that while 75 percent of firms want to increase headcount in 2018, they may struggle to fill those jobs because of labor shortages. The survey finds 82 percent of firms expect to have difficulties hiring qualified workers. That makes it crucial that firms retain productive manager-level employees in order to complete important projects on schedule.
Builder magazine summed up conditions neatly in a recent article, headlined “Help Wanted: Securing and Retaining Labor Has Grown Difficult.” The story quotes National Association of Home Builders Chief Economist Robert Dietz declaring, “We have a labor shortage.”
Issue across all sectors
The problem is endemic throughout all sectors, but especially hard hit are heavy highway contractors, mechanical and electrical subcontractors, and roofing contractors. With talented managers and supervisors (typically earning salaries in the low six-figures) in short supply, contractors routinely poach talent from the competition with signing bonuses of up to $20,000 to lead important projects.
Now, construction companies are battling back by using inventive compensation plans to retain talented staff. The idea is to tie the compensation of managers to the long-term performance of the firm. Too often, construction companies pay large bonuses on years when they outperform. Then, when those same bonuses do not appear the next year, managers either leave or are lured away by competitors offering signing bonuses. Compensation plans that pay bonuses over the long-term, such as 3 to 5 years, or tie them into project completions give managers motivation to stay during critical periods.
Here are four potentially effective approaches that help construction companies retain their best talent:
Group retention bonuses: Losing and then replacing a productive, mid-level manager costs on average 100 percent of the manager’s salary. That adds up to a considerable sum: Turnover at construction companies is 21.4 percent annually, according to the ADP Workforce Vitality Index for the fourth quarter of 2017, but runs as high as 30 percent in construction hotspots. Setting a group retention bonus that is tied to staff retention can provide a significant incentive to staff while also saving the firm money. For example, if a firm had a 30 percent staff turnover rate in a particular city, it could tie a cash bonus to turnover dropping to 15 percent for the course of a particular project. Firms can then calculate the savings made by reaching that retention goal and distribute 50 percent or more of those savings back to staff, once the project is completed. It’s a win-win scenario as the company experiences greater cost savings from lower turnover and the employees receive an additional bonus from staying with the project. Similar group retention bonus programs have worked effectively in the booming tech sector, where talented programmers are in high demand. This program also has the positive residual effect of increasing morale and camaraderie amongst the employee group since the retention bonus is tied to the group staying together.
Deferred compensation plans: Encouraging staff to defer compensation into a savings plan can improve retention. For example, a firm could offer to match contributions of up to 10 percent of a worker’s salary dollar-for-dollar, putting a 3- to 5-year vesting schedule in place for paying out the firm’s contribution. Such “golden handcuffs” can be effective with higher-paid executives and for managers earning in the low six-figures in locations where costs of living are low. However, deferred compensation is only effective if there is excess compensation to defer. For example, a construction project manager earning $110,000 in a construction hotspot like San Francisco or Seattle may struggle to save 10 percent of that salary, given the high cost of living in that location.
Employee Stock Programs: Offering managers a bonus that pays out in company shares through an Employee Stock Program is an effective strategy to align talent with the long-term growth of the firm. Like deferred compensation plans, shares can vest over several years, encouraging retention. Issuing actual stock, however, has some drawbacks. For owners, it dilutes ownership and gives shareholder rights, such as voting rights and information rights, to the employee recipients. In addition, these plans come with a significant administrative and regulatory burden that may be impractical for small- to mid-size firms. These plans also have a challenge for staff—vested shares come with a tax bill that can be hard to fund by the employee, especially when the stock is illiquid.
Phantom stock plans: Companies can gain the benefits of stock ownership without the headaches by issuing phantom stock instead. For owners, this removes dilution, voting concerns, and eliminates most of the administrative burden. With a phantom stock plan, staff will pay higher tax rates than they would under an actual stock program. However, the minor inconvenience of the modestly higher tax bill is more than compensated by phantom stock plans paying out in cash rather than shares.
Actual stock and phantom stock plans can also be an effective component of succession planning for owners that want to eventually sell their firm. By retaining key talent, equity plans help the firm develop a deep bench of talent that can improve the long-term growth prospects of the company.
Finally, any company promoting incentive plans should ensure that these benefits are well communicated to staff. With many managers working at project sites and often not checking emails, site visits to promote such plans make sense. Done well, these plans can make a construction company more productive and can also improve the sense of community and shared purpose—sentiments that many firms struggle to sustain.