The Bonus Onus
October 2006The word recession is on a lot of people’s minds these days largely because of the dramatic slowdown in the U.S. housing market. In August new home sales plummeted almost 22 percent year over year, while inventories jumped to record levels after 17 consecutive increases in interest rates by the Federal Reserve. The impact on the building industry could be significant. With that in mind, can construction workers still expect to see bonuses this holiday season? We talked to a number of building company owners about their bonus programs, how they work and what impact a downturn might have on them. Some of the responses were surprising.
Jerry Reicks Jr., CEO of Jarco Builders Ltd., says he has made a point over the past 31 years in business to give bonuses to all employees, regardless of the profitability of the company. While the past two years have been profitable ones for the Sioux City, Iowa–based company, that hasn’t always been the case. In fact, there have been many times when Reicks Jr. has had to borrow money to give bonuses.
"I have been a firm believer that even if I don’t have the money in the bank, come Christmas time I will borrow the money to do that, even in our losing years.” Christmas bonuses are in the range of 1 to 2 percent for workers in the field, while office workers generally get bonuses in the range of 2.5 to 5 percent. Reicks believes that Jarco’s approach instills "a little bit of loyalty” in its employees.
He is no stranger to incentive or performance-based bonus systems. He tried it and has a "very pretty innovative manual” to show for his efforts. However, after two years, he gave it up. The problem with a performance-based bonus system, he says, is the difficulty in accurately measuring employee performance. "The incentive has to be grounded in the reality of what our people are facing in the complexity of a job,” he explains.
For example, the contractor assigns his best workers to the most challenging jobs—ones such as hospitals that are difficult to accurately estimate from day one. These are the jobs that are least likely to make a good profit for the company. "Our best guys are getting, pardon the expression, screwed over because we put them on the toughest jobs,” he says.
Things are different at Texas-based Marek Brothers Systems Inc. Bonuses there are based on performance, rather than entitlement. But it hasn’t always been that way. Prior to 1985 bonuses were handed out annually at Christmas. They were "strictly subjective” and employees expected them, regardless of the company’s financial position, explains Stan Marek, CEO.
Back then, Marek Brothers’ financial statements remained private, adds Marek, one of three partners in the firm, all second-generation Mareks. In 1985, things changed. "We started sharing financial results with our employees—primarily office staff and anyone in the field that was at least a foreman,” he says.
While it may be unusual for a private firm like Marek to open its books to its employees, the CEO suggests the move was a no-brainer. "When we got away from the entitlement bonus and moved to the performance bonus in 1985, we realized that if we didn’t share the numbers, no one would know whether the reason they got more or less was because of profits,” Marek says.
Furthermore, when employees don’t see the numbers, they tend to think the company is making bigger profits than it is, Marek says. "I really believe that if you asked supervisors in the field how much money the company is making, their guess would be much higher than the actual number. Same for the office.”
To fill in staff on its financial picture, the company sets up meetings with them in January, March and August. Discussed are statements on revenue, cost of goods sold (such as labor/materials and who controls them), overhead, net profit, federal income tax and net after tax. Safety information, results of investments and goals and objectives are reviewed as well. It’s a chance for each branch president to talk about the year.
Giving staff a financial overview sets expectations for performance bonuses, which, in Marek’s view, must be based on profits. If the company doesn’t profit, no one gets a bonus. "We have had a situation once in the eighties when we lost money overall, but one branch had a good year and we paid bonuses to that branch only. That hurts but it’s the right thing to do,” he says. The contractor has branches in six cities.
At Marek Brothers, bonuses are not based on a formula or profit percentages. It is important that each team or department shares in the pool, based on their contributions. "Everyone’s contribution is different. It has worked well for the past 20-plus years and everyone pretty well knows what to expect based on what they made in previous years and what their profit center makes the current year,” he explains.
As for this year, Marek says he expects to pay out bonuses to all branches but one, and "some will be up, some will be down.” The percentage of bonus varies from division to division, depending on net profit. Typically they can range from 3 percent to 25 percent.
Meet Those Targets
The slowing economy hasn’t yet affected manufacturer Sto Corp., says Robert Lanier, Sto’s director of human resources. All of the company’s 180 or so employees are tied to a bonus system, which is driven by the company’s performance and the employee’s work over the year. Bonuses kick in when the company hits a minimum profitability target. Employees then can be rewarded with bigger bonuses based on their achievements within their departments. For example, employees at each manufacturing plant might receive a bonus when the plant meets safety and/or productivity objectives. Specific target objectives are tailored for each division or department of the company.
Employees paid at an hourly rate are under the Flying High bonus program, a baseline incentive program that pays out between 5 and 9 percent of their salary—the equivalent of one month’s wages. Lanier says last year about 90 employees hit the 9 percent max, and "we expect to hit between 5 and 9 percent this year.”
For other workers at Sto, such as sales people on commission, mid-level and senior-level managers, bonuses are structured differently, driven again by the company’s profitability and a multiplier based on individual department objectives.
Budget targets have been met since the program was implemented in 2003, and Sto is on target to meet or exceed its budget targets this year. The program has been well-received by employees since its inception. Prior to that, there was no bonus program in place for the rank and file. The change was largely due to a shift in corporate philosophy to recognize every employee of the company. "Everybody has skin in the game, so to speak,” says Lanier. "They see the success of the company and it impacts them directly.”
The philosophy at Delaware-based manufacturer All-Span Inc. is to pay out bonuses every year. The size of those bonuses varies typically from the equivalent of a one- to a two-week paycheck, depending on the company’s year-end revenues, explains David Miller, president. While commercial construction has slowed over the past year, the 70 employees at All-Span should still be able to count on a decent bonus as the market for steel truss systems continues to grow. "Bonuses should be about in line with last year,” Miller says.
Seattle-based Steeler Inc. isn’t experiencing tough times and plans to give out company bonuses at the end of the year. It paid out mid-year bonuses to all of its employees in July, says Donald Woodruff, the distributing/manufacturing company’s CFO. Year-end bonuses will be much in line with others in recent years. While the company has tried out numerous bonus plans in the past, such as tops-ups to retirement plans, time off, vacations and even tools, Woodruff says "cash awards” go over best of all with employees.
If the folks we talked with are any indication, employees in the wall and ceiling industry will be getting at least a little bit extra in their last paycheck of the year. But what you don’t know is that for the few folks who talked with us, there were 10 times more who did not want to be interviewed for this article. Why? Not because of the talk of a slowdown in the economy, but because their bonus plans are confidential. Draw your own conclusions, but it seems to us that nothing is putting a damper on the holiday cheer that will be passed out by the construction industry this year.
About the Author
Don Procter is a free-lance writer in Ontario, Canada.