Annual business planning, employee reviews, and changes to compensation and bonus programs—it's all part of New Year's business tradition. But face it, home builders should rethink compensation and bonus programs. Home building management has enjoyed an upper hand over employees on pay for a couple of years, but the tables could begin to turn.
In home building, the relationship between employers and employees parallels other industries. We've seen an 8.2 percent increase in annual productivity growth over the past two quarters. Employees are stretched painfully thin because of head count cuts without a decrease in work load. Growth cannot continue to be fueled by increases in productivity.
It's hardly a surprise that the Bureau of Labor Statistics reports that the “quit rate” is way down: Only 1.3 percent of employees voluntarily left their jobs in August. Business Week notes that Watson Wyatt, a benefit consulting firm, finds “the loyalty of top performing employees has dropped 25 percent over the past year.” Laurie Bienstock, Watson Wyatt's national practice director for strategic rewards, was quoted as saying, “Employers are really nervous that the minute the job market picks up, all of these people that are disengaged are going to take off.”
Home builders should prepare to retain their top performers; they're precisely the ones you can't afford to lose.
Still, a critical disconnect divides what employers and employees regard as important to employee retention. Employers prioritize “management climate” and “supervisor relations,” according to a Business Week analysis of Spherion Staffing Solutions' 2009 biannual survey. In contrast, employees cite “benefits and compensation” as most important. Big difference there.
What's more, it's problematic that traditional compensation programs center on annual net income. Compensation should reward employees for value created. Net income and metrics derived from it overstate value created in strong markets and understate it when the market weakens. So, employees tend to get overcompensated in good times but undercompensated through the rough stretches. Undercompensated top performers get disenchanted.
If the value of a home builder is greater at the end of the year than it was at the start, a management team created value. One caveat is that the increase or decrease in value should not derive from value created or lost as a result of changes in overall market valuations. The increase in value may be a result of earnings, new land opportunities that generate cash flow in the future, entrance into a new market, or a reduction in the risk profile of the company.
Some companies will create more value than their peers. The bigger the pie created, the more one should receive. No one should share in the value created if the result of his actions did not add value. Rewarding poor performers negatively impacts top performers.
In my Big Money column in December 2005, I recommended aligning Economic Value Added methodology and bonus compensation. While I remain a proponent, this methodology hasn't gained widespread use in our industry. I would also recommend the Capital Asset Pricing Model (CAPM), requiring changes in builder market valuations to be held constant. CAPM is a widely used business methodology and takes into account future cash flows of assets owned or optioned, the balance sheet of a company, and the risk profile of the company and its impact on the company's cost of capital.
Don't wait. It's no time to have your best talent thinking of bolting for greener pastures.