Getting ahead of the competition with incentives
- The construction industry under-utilizes incentives as part of their labor strategy.
- Well designed and implemented incentives will pay for themselves in reduced costs and improved performance on the job site.
- We recommend using behavior-based incentives as part of your labor attraction strategy: referral bonuses, sign on bonuses, and attendance bonuses.
- We recommend an accrue-then-pay format to the incentives so that employee retention is built into the strategy.
- Incentives have a shelf life and should be updated on a regular basis.
We know labor shortages are going to get worse in 2022. We also know that pay rates are the easy button in attracting labor.
(For the record, raising pay rates works really, really well when you're in need. The key part in making a pay rate increase work is making sure the word gets out to the folks you’re looking to attract.)
The problem is raising pay rates after you've bid the jobs can eat into profit margins that are already razor thin - which is why incentives can be an attractive option.
Which incentives should I offer?
Putting effective incentives in place takes planning. To start, understand what you’re trying to incentivize.
There are two ways to incentivize people.
- Behavior-based incentives. These incentives pay out based on quantifiable actions that people take. Examples of behavior-based incentives are pay outs for completing training programs, meeting attendance goals, participating in a near-miss program, staying employed for certain durations of time, etc.
Incentives to attract labor to your projects
- Outcome-based incentives. These incentives pay out based on meeting certain quantifiable results. Examples of outcomes-based incentives are achieving OSHA recordable rate targets, meeting financial results, and schedule completion milestones.
For attracting people to your company and your projects, we recommend a series of behavior-based incentives.
The decision you have is whether to pay a lump sum for the bonus or offer them as a rate increase to the employees. While rate increases will be seen as more valuable by many craft professionals, it can create a situation of varying pay rates that can create unintended consequences on a job site.
When in doubt we recommend a default to lump sum payouts.
In the examples below we’re assuming a 10-week project that will work 50 hours per week. This means that each person on the jobsite could expect 500 hours of work. This is also the basis of converting incentives into pay rate per hour.
We lay out expected ranges for the various incentives and work off the assumption companies split the cost savings noted for each incentivized behavior. So, for example, a referral will save your company $1,000 and we recommend allocating the equivalent of $500 to the incentive payout.
- Referral bonus. This is paid to existing employees based on the number of craft professionals that they refer and are hired onto the project. Paying for referral is an effective way to mitigate recruiting costs. The cost for construction companies looking to find, vet and hire employees is $1,000 per hire. This number includes the time spent looking for employees, costs to advertise the open job and lost productivity on the site waiting for the new hire. Half of this savings is $500 which we also recommend is split between the referral bonus and the sign on bonus (discussed below). So, taking the $250 value for the referral and a project working 500 hours, and adjusting for overtime, this bonus is worth $0.45/hr.
- Sign-on bonus. This is where the other half of the $500 saved from the referral bonus comes in. This works because it incentivizes both the person making the referral and the person accepting the referral. The math is the same on this bonus for overall value but given the sensitivity around “new” employees getting a pay rate bump that “old” employees don’t, we recommend this bonus be paid as a lump sum of $250.
- Attendance bonus. People missing work can be a serious drag on productivity. Re-configuring work crews and having people work together are also disruptive and unsafe. To keep people showing up, set attendance targets that incentivize people to show up. If a project is working 5 days a week, a reasonable attendance target is missing 1 day every two or three weeks. Calculating the value of this incentive is tougher because the impact is project specific. We recommend matching the referral bonus which in this example is worth a pay rate increase of $0.45/hr or in this case we recommend a raffle / giveaway with eligibility for only those who meet the attendance criteria.
Limitations of incentives
Regardless of how well designed an incentive program is, its impact will decline over time. The longer an employee has received incentive payments the more likely that employee will view the incentive as part of their standard pay.
Another problem will be if the program is not communicated effectively. Nothing can sour an employee’s view of a construction company faster than a perception of the company taking money out of the employee’s pocket. Take the time up front to work through the details of the program and then communicate the program clearly up front.
We recommend you look into your incentive programs and decide if this should be part of your labor strategy heading into 2022.