Can you retain your workforce? Incentive compensation strategies for workforce retention

Authored by Laura Cataldo

The demand for trained employees has never been higher and with this comes more competition to attract your desired workforce. 45% of contractors are having a hard time filling key professional positions and 65% of contractors believe it is or will become harder to hire qualified professionals[1]. These statistics validate the need to focus on employee retention. In today’s competitive employment climate, you cannot afford to lose your talent, as it is highly unlikely that you could replace it. 

People are your most valuable asset. They are responsible for your business results and competitive advantage. Compensation can be much more than a way to recruit and retain employees. Best-in-class contractors are using incentive compensation to improve organizational effectiveness, incent desired results or improvements in productivity or profitability, achieve strategic goals and serve as a funding source for future ownership transition.

Compensation strategy

To remain competitive, contractors should understand how to align compensation strategies and trends with organizational goals. Total compensation is comprised of five factors; base salary, short term incentives, longer term incentives, benefits and culture.

The effectiveness of each component of compensation is determined by the goal or objective you seek; recruiting, rewarding or retaining employees. 

Culture and employee engagement are two of the most important issues faced by companies and especially critical to recruiting and retaining key employees. Employees want to feel connected to their companies and have their core values align with the company’s mission and their desired culture. As a result, some companies utilize weighted performance and core value criteria in compensation scoring.

The future of typical benefits is also changing. WorldatWork reports in 2018 Future of Work and Rewards “employers need to greatly increase non-monetary benefits such as flexible work schedules, telecommuting and employee/career development in the next three to five years to meet workforce demands.”

Both the employer and employee benefit from an investment in career development. The employer benefits from a higher trained employee and the employee advances their skillset and becomes more valuable. According to the Society for Human Resource Management (SHRM), companies on average spend $1,195 or 3.6% of payroll per employee for training. Is your company keeping up with these averages? If not, it will influence your ability to both recruit and retain talent. 

Short-term incentives such as spot, project completion or annual bonuses are extremely effective at keeping employees engaged and driving performance. Most companies use 1-3 short term practices. Effective bonus plans incentivize desired performance through a formula based plan, versus discretionary award. The trend is for companies to measure performance using 3-4 metrics that calculate the amount of bonus earned. Transparency of performance scores and incentive award are critical for an effective bonus program. In order to drive desired results, the employee must understand how performance is measured and how they have performed, in order to improve. 

Long-term incentives are pertinent to retaining key employees. Long-term incentives typically target employees at management level and higher to achieve longer-term shareholder expectations and link rewards to organization success over a multi-year period, such as substantial market growth or entry into a new geographic area. Deferred compensation is a form of long-term incentive pay that is more commonly being used as a strategy to help fund future ownership transitions. 

Compensation system best practices

Understanding the goals you are trying to achieve through compensation (recruit, reward or retain employees) is the first step in creating an effective compensation program. Based on our experience assisting the construction and real estate industry to meet their organizational and workforce needs, we recommend the following best practices for building effective compensation systems:

• Benchmark compensation with industry-related surveys
• Align compensation with the strategic plan
• Fund incentive compensation on net profitability to preserve operating equity
• Use formula-based reward (vs. discretionary) incentive practices
• Provide transparency and open communication with employees on compensation matters

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

This article previously appeared in Chicagoland Association of General Contractor’s blog.

[1]Computer Guidance Corporation