the role of effective incentive compensation programs …
TRANSCRIPT
© 2014 FMI Corporation 1 © 2014 FMI Corporation 1
THE ROLE OF EFFECTIVE INCENTIVE COMPENSATION
PROGRAMS IN CONSTRUCTION
Construction HR & Training Professionals Conference
October 17, 2014 Phoenix, Arizona
Sal DiFonzo, CCP, CBP, CSCP
Managing Director, FMI Corporation
© 2014 FMI Corporation 2
State of the Construction Industry
FMI Labor Market Analysis
FMI Incentive Compensation Study
Today’s Discussion
© 2014 FMI Corporation 3
Construction Spending and Nominal GDP
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000 1
99
4
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
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20
05
20
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07
20
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20
09
20
10
20
11
20
12
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20
14
*
20
15
*
20
16
*
20
17
*
20
18
*
Co
nst
ruct
ion
in M
illio
ns
GD
P in
Bill
ion
s
GDP Construction
Construction Put in Place and GDP
© 2014 FMI Corporation 4
* FMI Forecast
Construction Put in Place Construction Spending
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Mill
ion
s o
f C
urr
en
t D
olla
rs
Recession Residential
Nonresidential Buildings Nonbuilding Structures
© 2014 FMI Corporation 5
* FMI Forecast
Construction Put in Place and GDP Construction as a Percentage of GDP
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
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03
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20
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*
20
14
*
20
15
*
20
16
*
20
17
*
20
18
*
© 2014 FMI Corporation 6
Source: U.S. Department of Labor
Employment and Unemployment Rates | 1970- 2014
Jobs and Unemployment
0%
2%
4%
6%
8%
10%
12%
0
20
40
60
80
100
120
140
160
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Un
em
plo
yme
nt
Rat
e
Emp
loym
en
t (M
illio
ns)
U.S. Employment U.S. Unemployment Rate
© 2014 FMI Corporation 7
Source: U.S. Department of Labor, AGC of America
Construction Unemployment vs. National Unemployment Jobs and Unemployment
0%
5%
10%
15%
20%
25%
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
Un
em
plo
yme
nt
Rat
e
Construction
National
Construction added 232,000 jobs over the past year.
© 2014 FMI Corporation 8
History and Consensus Forecasts – U.S.
2010 2011 2012 2013 2014 2015
Real GDP 2.6 2.5 2.0 2.8 3.2 3.1
CPI 1.5 3.0 1.7 1.6 2.1 2.0
Unemployment Rate 10.0 8.5 7.8 6.7 6.0 5.8
3-mo. Treasury 0.2 0.1 0.1 0.05 0.03 -
10-yr. Treasury 3.8 1.9 1.72 2.68 2.41 -
Housing Starts (mm) 0.76 0.57 0.76 0.91 1.09 -
Oil (U.S. $/Barrel) 77.6 86.9 89.7 99.7 93.65 -
© 2014 FMI Corporation 9
Source: ENR, FMI
ENR 400 Share of Total Construction Put in Place
0%
10%
20%
30%
40%
50%
60%
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
q1
Shar
e
© 2014 FMI Corporation 10
Source: Risk Management Associates, Philadelphia, Pa. Annual Statement Studies 1985-2009
Recession Periods Are Shaded Red
Contractor Profit Before Tax
0
1
2
3
4
5
6
7
8
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Pe
rce
nt
Utilities HVAC Paving Heavy Construction Commercial Electrical
© 2014 FMI Corporation 11
Source: Risk Management Associates, Philadelphia, Pa. Annual Statement Studies 1985-2009
Recession Periods Are Shaded Red
Contractor Pretax Return on Equity
0
5
10
15
20
25
30
35
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Pe
rce
nt
Utilities HVAC Paving Heavy Construction Commercial Electrical
© 2014 FMI Corporation 12
Construction Industry Macroeconomic Conclusions
The industry is recovering
Unemployment rates are decreasing
The big are getting bigger
Higher profits will allow for more hiring
© 2014 FMI Corporation 13
Construction Pay Index – 2.7% Growth Rate
100%
105%
110%
115%
120%
125%
130%
135%
140%
145%
2000 2002 2004 2006 2008 2010 2012 2014 2016
FMI Construction Pay Indexes
© 2014 FMI Corporation 14
Construction Base Pay Trends
50
60
70
80
90
100
110
120
130
140
150
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Avg
Bas
e (
$0
00
)
Year
Construction Professional Base Pay Trends 2005 - 2014
Business Development
Project Management
Estimating/Engineering
Project Superintendent
General Foreman
Project/Field Engineering
© 2014 FMI Corporation 15
Jobs With Highest Base Pay Increase
Position Base Pct. Change Since ‘10
Business Development 29.0%
Estimating/Engineering 23.8%
Safety Engineering 22.6%
Project Superintendent 22.5%
Project Accounting/Office Management
13.0%
© 2014 FMI Corporation 16
Jobs with Lowest Base Pay Increase
Position Base Pct. Change Since ‘10
Building Information Modeling
2.3%
Project Management 4.0% Project Controls 4.3% Equipment Manager 5.5% Project/Field Engineering 5.5%
© 2014 FMI Corporation 17
Construction Bonus Pay Trends
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Avg
Bo
nu
s
(% o
f B
ase
)
Year
Construction Professional Bonus Pay Trends 2005 - 2014
Business Development
Project Management
Estimating/Engineering
Project Superintendent
General Foreman
Project/Field Engineering
© 2014 FMI Corporation 18
Top 5 Bonus Increases
Position Bonus Pct. Change Since ‘10
Safety Engineering 60.9%
Purchasing 45.0%
Estimating/Engineering 26.1%
Project Superintendent 16.5%
Business Development 15.6%
© 2014 FMI Corporation 19
Top 5 Bonus Decreases
Position Bonus Pct. Change Since ‘10
General Foreman -65.1%
Equipment Manager -59.4%
Building Information Modeling -40.5%
Project/Field Engineering -35.2%
Project Controls -32.8%
© 2014 FMI Corporation 20
Construction Labor Market Conclusions
Base salary increases are pacing at about 3% per year
Bonuses are recovering
Smaller talent pools
Higher profits will allow for more hiring
© 2014 FMI Corporation 21
Construction Companies Offering Incentive Pay
83% 81%
93% 96% 96%
100%
17% 19%
7% 4% 4%
0%
Less than 100 100 to 250 250 to 500 500 to 1000 1000 to 5000 Over 5000
Yes
No
© 2014 FMI Corporation 22
Compensation Benchmarks
2%
3%
3%
12%
14%
17%
16%
23%
11%
N/A, Haven't been offering ICP long …
More than 35% of pre-tax net income
Between 30 to 35% of pre-tax net …
Between 25 to 30% of pre-tax net …
Between 20 to 25% of pre-tax net …
Between 15 to 20% of pre-tax net …
Between 10 to 15% of pre-tax net …
Between 5 to 10% of pre-tax net …
Less than 5% of pre-tax net income
% of Respondents
Bonus budgets average 15.67% of pre-tax net profit
© 2014 FMI Corporation 23
1%
27%
28%
28%
53%
54%
75%
Other
Executive Short-Term
Incentive Plan
Sales & BD Incentive
Plan
Executive Long-Term
Incentive Plan
Profit-Sharing Plan
Structured/Formulaic
Incentive Plans
Discretionary Incentives
Very
effective,
21%
Somewhat
effective,
51%
Neutral, 24%
Somewhat
ineffective,
3%
Very ineffective,
2%
Incentive compensation
plans used
Perceived effectiveness of
incentive comp plans
79% are not
achieving
expected results
Most incentive compensation plans don’t work
© 2014 FMI Corporation 24
4%
8%
49%
67%
68%
71%
77%
79%
82%
85%
Other
Support community programs
Improve customer service
Support the company
strategy/mission/culture
Attract the best people
Improve productivity
Improve morale
Improve profitability, ROE, ROI
Reward the best employees
Drive empl. commitment to the
company success
0%
0%
2%
3%
3%
5%
15%
16%
27%
30%
Other
Support community programs
Improve customer service
Attract the best people
Improve morale
Improve productivity
Reward the best employees
Support the company
strategy/mission/culture
Drive empl. commitment to the
company success
Improve profitability, ROE, ROI
What do we expect?
What is most important?
Why do companies offer incentive compensation?
© 2014 FMI Corporation 25
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Profit
Employee Retention
ROI
Productivity
Revenue
Efficiency
Attract New Talent
Increased Significantly Increased Stayed the Same Decreased Decreased Significantly
The impact of incentive compensation
© 2014 FMI Corporation 26
You have to get it right!
Incentive Compensation is a HUGE Investment!
© 2014 FMI Corporation 27
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
© 2014 FMI Corporation 28
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Discretionary
Structured
Mixed combination
Very Effective Somewhat Effective Neutral Somewhat Ineffective Very Ineffective
Perceived effectiveness of structured, mixed and purely
discretionary incentives
Implement a structured incentive compensation plan
© 2014 FMI Corporation 29
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
© 2014 FMI Corporation 30
12%
21%
25%
36%
38%
Use FMI Compensation Surveys
for References or Benchmarks
Other
Use Other Industry Related Surveys
Arbitrary Amounts
Feedback from Peer Groups/Peer
Reviews
How do construction executives determine incentives?
© 2014 FMI Corporation 31
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
3. Balanced Design incentivizing what’s strategically important
© 2014 FMI Corporation 32
Balancing incentives to fit your culture
Corporate Business Unit/Team Individual
Desirability
High for Owners
High for
Managers
High for
Individuals
Control
level
Low
Medium
High
Reward
Collaboration
Across Units
Growing a
Geography or
Segment
Individual
Excellence and
Advancement
Risk
Free-Riding
Silo Mentality
“All about me”
© 2014 FMI Corporation 33
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
3. Balanced Design incentivizing what’s strategically important
4. Utilization of Bottom-Up Funding Mechanism
© 2014 FMI Corporation 34
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
3. Balanced Design incentivizing what’s strategically important
4. Utilization of Bottom-Up Funding Mechanism
5. Employee Empowerment
© 2014 FMI Corporation 35
Low High
High
Low
Leve
l of
Enga
gem
en
t
Likelihood of Staying
Tenants Champions
Disengaged Captives
Source: PWC
Engagement matrix
© 2014 FMI Corporation 36
What makes incentive plans very effective?
Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
3. Balanced Design incentivizing what’s strategically important
4. Utilization of Bottom-Up Funding Mechanism
5. Employee Empowerment
6. Periodic Communication and Transparency
© 2014 FMI Corporation 37
Division A
Division B
Division C
Division D
Division E
Division F
Division G
Division H
Division I
Full Company
1.00
1.50
2.00
2.50
3.00
3.50
1.50 2.00 2.50 3.00 3.50 4.00
Sati
sfac
tio
n w
ith
C
om
mu
nic
atio
n
Satisfaction with Package
Correlation between employee satisfaction and communication
© 2014 FMI Corporation 38
Best practices for communication and transparency
• Initial communication
• Quarterly progress updates (scoreboard)
• Plan assessment
• Timely payment of incentives!
© 2014 FMI Corporation 39
What makes incentive plans very effective? Seven best practices for incentive compensation
1. Structured Incentives rather than Discretionary
2. Incentives based on Market Value
3. Balanced Design incentivizing what’s strategically important
4. Utilization of Bottom-Up Funding Mechanism
5. Employee Empowerment
6. Periodic Communication and Transparency
7. Clear and Measurable Stretch Goals/Objectives
© 2014 FMI Corporation 40
About FMI
Visit us at www.fminet.com
Sal DiFonzo
Managing Director
FMI Corporation
602-772-3427
www.fminet.com
Founded in 1953 by Dr. Emol A. Fails, FMI provides management consulting and investment banking for the worldwide construction industry.
FMI delivers innovative, customized solutions to contractors; construction materials producers; manufacturers and suppliers of building materials and construction equipment; facility owners, managers and developers; engineers and architects; surety companies; and industry trade associations.
FMI’s experienced professionals assist businesses with strategic planning, leader and organizational development, business development, research, mergers and acquisitions, peer groups, private equity placement, project execution and training.