Guide to Productivity-Based Compensation in Construction

As technology has improved the productivity of construction contractors, it has also contributed to the disparity between the top producers and those at the bottom of the production ladder.

In every team, there are usually several employees who seem to have a natural ability to work more effectively and produce more with their time.

Under traditional compensation models, the top producers frequently express their frustration at carrying the brunt of the weight but still earning pay equivalent to the least productive team members.

This is where a properly implemented productivity-based compensation (PBC) program can reward top-performing employees, encourage smarter work, and guide team members towards a more entrepreneurial style of operating.

What is Productivity-Based Compensation?

With the advent of a highly modernized and tech-savvy construction industry, contractors have a new challenge in balancing the relationship between innovation, safety, team morale, and profitability.

Productivity-based compensation (or Results-based compensation, Piece-work, Pay-for-performance, etc.) is an alternative to traditional compensation (hourly or salary).

It uses performance analytics, department scores, and project reports to determine payouts for completed work.

In other words, the business only pays based on what has already been accomplished, and how well it was accomplished.

Productivity Based Compensation Contractor Websites

Many owners are looking for key strategies to keep their company on the top of their game, and productivity-based incentives are one of the best ways to maximize your company’s success. 

Rewarding employees on a performance basis is a proven way to motivate them to continue performing at their best. Yet, it’s important to incentivize them in ways that are meaningful, safe, and make sense for the company’s long-term goals.

How Productivity-Based Compensation Works

The traditional compensation system of salaries and hourly rates has resulted in the construction industry rewarding time spent on work over effectively producing work.

This doesn’t match the compensation structure of the business, where productivity, quality, and safety performance are the most critical in ensuring project profitability.

If a contractor performs well, they thrive financially.

If they perform poorly, they earn less profit or record a net loss on the project.

PBC aligns the employee’s compensation structure and incentives with the employers, and improves employee performance.

Profit sharing KPI Contractor Websites

 

How to Implement Productivity-Based Compensation

New pay structure systems can be met with resistance, especially from long-term employees who are used to receiving pay increases based on years of service.

This can be challenging to overcome, but in most cases, it provides an incentive for top-performing employees to take more ownership of their projects, excel at their craft, and increase their earnings.

PBC must be a win-win situation for the employer and employee, and you need to put yourself in your employee’s shoes (or work boots) and empathize with how they approach their work.

Focusing only on productivity, instead of looking at the plan holistically, is the first and most common mistake. You need to look at the entire cycle of your employee’s involvement in a project or product. From designing, crafting, to finishing, and from their first day on site, how they interact with the client and other trades, to their last day on site.

Building a system that encourages employees to consider the company’s long-term goals and values, while giving your employees the chance to take advantage of their abilities and earn more income as a reward for their refined skillset and quality output, is the ultimate goal of the implementation.

Companies Successfully Using Different Types of Creative Incentive Plans

Type of IncentivePercent of Companies Reporting Success
Skills-based compensation89%
Earned time off85%
Gain-sharing plans81%
Small-group incentives75%
Individual incentives73%
All-salaried workforce67%
Lump-sum bonus66%

Rice University, OpenStax

 

PBC has been shown to promote efficiency as well as quality, as the employee is held responsible for a properly completed task as a condition of their bonus pay.

Pros and Cons for Employers

  • Increased productivity

    By nature of this compensation system, employees who contribute more to the company and team are paid more, encouraging higher productivity.

  • It reveals opportunities for improvement

    PBC affords businesses the insight to find the areas of their business that needs to be improved. First, identify the low performers, and then analyze why they're performing below expectations. This process will discover areas in your business that need improvements, such as inventory control, shipping, estimating, and just about every other aspect of the business.

  • Increased employee retention and overall workplace morale

    High-performers want to understand what's expected of them, and understanding how they can achieve or surpass those expectations to earn higher pay incentivizes them to stay.

  • Attractive to high-performers and improves hiring quality

    The HR team should analyze the qualities of your high-performers and then identify those traits in hiring candidates to build the ideal team.

  • Company revenue & employee compensation alignment

    In companies without a PBC plan, employees may have trouble understanding what leads to a raise. Linking compensation and performance will provide clarity and a clear path towards career advancement.

  • Entrepreneurial mindset adoption

    Employees compensated on a PBC model gain the power to increase their wages by rethinking their approach to the work. They may conceive of a better execution plan than the one provided by management and will help deliver the project faster and more profitably.

  • Defective incentives with unintended outcomes

    Poorly thought-out incentives can lead to secondary outcomes that are undesirable (see Perverse Incentives in the Best Practices section below). Businesses must be aware of the consequences of incentivization and how employees will react to different measurements.

  • Internal resource constraints

    Operating on a PBC plan definitely adds stress to the business operations if incentives, departments, or managers are not aligned, which may cause friction between crews and/or departments. It can negatively affect collaboration and teamwork, as PBC tends to focus on an individual’s or crew’s achievements over the team's wellbeing.

  • Difficult to reverse

    Once a team has adjusted to the PBC plan and is seeing the benefits it provides, it can be difficult to revert back if it’s not working. If you find another compensation structure that would work better, you will face resistance and may even lose some of your highest performers.

Pros and Cons for Employees

  • Higher compensation

    Employees that are highly skilled, effective, and that work well in a competitive environment will thrive, and likely be the highest-paid people in their trade.

  • Task focus instead of time focus leads to better engagement

    When you provide employees with the objectives they need to meet to receive compensation, they have a much clearer idea of your expectations. It also shifts their mindset from “How much time is there left in the workday?” to “How many more sheets/walls/widgets until I’m done?”

  • Adds flexibility

    Employees that are evaluated on their results and performance are allowed more flexibility in their workday. You won’t need to focus on how many hours they work, how long their breaks were, or what time they got to the site. As long as they operate safely, deliver a quality product/project, and have a happy client, they have autonomy in their day.

  • It may demotivate lower-performing workers

    Not all people are meant to work on a performance-based compensation plan. Some employees may be demotivated by the success and results of the higher-performers. This isn’t necessarily a bad thing. You want the best employees on your team, but not all performance is measured the same. Some low-production workers may have brilliant design skills, or are able to communicate effectively with a client.

  • It can create tension among co-workers

    Some crews may be jealous of the rewards and compensation of the high-performers. This can create difficult situations where bonuses can create resentment between crews, where low-performers feel pressured to operate at a level that they aren’t capable of.

9 Best Practices in Productivity-Based Compensation

1. Define a set of standards by which the work must be delivered.

PBC encourages efficiency, so the crew may cut corners to expedite the work. Therefore you need a set of standards by which you will accept a finished project or product. You will need modifiers for things like client satisfaction, internal team satisfaction (Did the shop foreman feel respected? Was all documentation to payroll submitted on time?), and you will need non-negotiables that will wipe out any performance bonus entirely, such as missing safety documentation, negligent actions, and mistreatment of other employees.

 

 

2. Start small with a pilot crew and experiment with different variables.

By starting small, you can test the new program to get data on important metrics, incentive flaws, and that compensation is fair to all employees.
Some companies only incentivize the foreman of the team/crew and let them decide how the rewards should be distributed. Greedy foremen rarely last for long, and the generous ones garner the respect and admiration of their crew.
Other companies may pay out a percentage of profits to the whole crew, relative to their hourly wage, based on project performance.

Not every employee will view higher pay or performance bonuses as the ultimate reward. The company needs to recognize what drives engagement and productivity in its top performers and experiment with their system and rewards.

Productivity Tracking Contractor Websites

 
3. Make it fun.

If you want to implement PBC in order to motivate your teams, it helps to make it fun and exciting. Put up leaderboards that track performance, client satisfaction, safety ratings, quality ratings, and other metrics you find important to share.
(Tip: Read the Great Game of Business)
Include non-monetary rewards, such as lunches and dinners on the companies dime, or gifts and gadgets (e.g. a tablet, smartwatch, headphones, gift cards, sports tickets) that you display in the office that are awarded based on certain criteria. Ask for prize recommendations and requests. This gets employees excited and gives them something to work towards.

 

 

4. Include your team from the start.

Building an effective PBC model relies on both the employee’s and the employer’s ability to agree on what good performance looks like. When your employees are involved in the planning of the model, their ability to understand and adopt the model increases greatly.
Your employees are also the best source of knowledge on how to effectively measure good performance.

 

 

5. Think of best and worst-case scenarios.

Planning for extreme events, however unlikely, is critical to maintaining the plan during stressful events. Having a pre-defined process for dealing with extremes will prevent rash decisions from damaging your relationship with your employees.
For example, ask yourself the following questions:

If we severely underbid a project, how do we rectify that with the employees to ensure they are fairly compensated?

How do we compensate employees that resign/quit/are laid off before completion of a project?

In the event of an accident or safety infraction, how do we determine negligence? How does it affect their pay-outs?

On the bright side, your employees have the chance to become the highest-paid tradespeople in the country and feel more engaged in their work.
What does extreme success look like for you and your employees?
If one of your employees knocks it out of the park and is making +$100/hr, is that fair and equitable? If not, why not?
Figure out if it’s because of your existing beliefs about compensation, or if it’s a miscalculation in your system.

Trades for PBC Contractor Websites

 
6. Consider second and third-order consequences.

Familiarize yourself with the concept of Perverse Incentives.

A perverse incentive is an incentive that has unintended and undesirable results that is often opposite to the intentions of its designers.

A famous example is the “Cobra Effect”:
The term “cobra effect” was an anecdote of perverse incentives in India during British rule.
The British government offered a bounty for dead cobras. Initially, this was a very successful strategy as large numbers of snakes were killed for the reward.
However, enterprising people began to breed cobras for income.
When the government became aware of this opposite effect, the reward program was scrapped, and then the wild cobra population exploded when cobra breeders set their now-worthless snakes free.

Work to understand the cause-effect relationships of your decisions to the point where you can create decision-making rules in the form of “if/then” statements.
I.e. if X happens, then Y will happen.
Chaos increases the further you move from the first-order consequence. The more knowledgeable you are of a system will allow you to predict further down the chain of events.

Simple examples:
“If we solely incentivize productivity, then safety, quality, and documentation will deteriorate.
If safety, quality, and documentation deteriorate, then our reputation will suffer.
If our reputation suffers, we will lose work.
What can we implement to counter these effects?”

 

 

7. Make the system transparent.

Visibility into the payment structure should be readily available and easily interpreted.
Every employee should be able to see how their performance on a project affected their earnings, what modifiers were applied, and how they could have performed better.

The Expectancy Theory states that employees exert effort comparable to the reward they expect to achieve.
Accordingly, managing time to maximize productivity without a correlating increase in compensation can reduce employees’ motivation and job satisfaction.
Expectancy Theory states that employees will think of time-management improvements and boost their output to the extent that their compensation will increase as a result.

 

 

8. Keep it simple.

Most work can be classified into one of two categories:

Quantitative Performance: This is where productivity tracking is applied to observe metrics such as pieces installed per hour, square feet of drywall installed, paint hours, repair orders completed, etc.

Qualitative Performance: These are more intangible measurements that are difficult to nail down an exact measurement system for, but it’s not impossible. These metrics include customer satisfaction, employee satisfaction, job quality reviews, and department-to-department reviews to ensure collaboration.

Identify key metrics for each position under the PBC plan and categorize them accordingly. Ensure you have counter-metrics that prevent a key metric from being abused.
E.g. if you’re tracking productivity, you need to track safety, quality, customer satisfaction, and team satisfaction.

 

 

9. Err on the side of over-compensating your employees.

It’s absolutely imperative to hire and keep the best employees possible, so don’t scare them away by being too demanding of their results. You should base your productivity metrics on the LOWEST performing crew, and build from there.
Never make changes to the plan without consulting the crews (or leaders of the crews e.g. foremen).
Most companies pay as little as they can get away with paying, but this results in employees who will do the bare minimum, and this ultimately cripples performance and damages the long-term prospects of the company.

 

 

Conclusion

PBC aligns the employee with the employer in terms of objectives, as a skilled, motivated employee can thrive financially under a PBC system and only gets bonuses if their project is successful, which in turn makes the project successful for the company.
Also, it takes the mystery out of running a contracting business, as you know exactly how much profit each project will net.

Some would argue that the burden of program administration may overwhelm the benefits, but that depends on your metric collection system. The estimating department provides the data needed to calculate how much can be earned from a project, and the estimating department should also have a feedback loop that gathers post-project productivity metrics, which can then be supplied to management/payroll for disbursement.
This productivity tracking will in turn provide better resources for your estimating department to bid on projects.

As an employer, you have to be vigilant of the hazard that employees may excessively prioritize quantity over quality, so you have to implement a rigorous QA process and have a way to subtract compensation from an employee delivering low-quality results, presenting safety issues, or getting complaints from stakeholders.

Every company is different, and you can’t apply a cookie cutter to compensation. Instead, owners and managers need to create a compensation system that pays employees based on their overall performance and results that are specifically tailored to their business, their culture, and their industry.

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