HOME BUILDERS WRESTLE WITH THORNY challenges as a normal part of each day. Shepherding a land parcel through a tedious, time-consuming entitlement process and adjusting construction procedures to meet ever-changing building codes are two that come to mind. Still, these pale in comparison to the complexity and frustration of developing and implementing an effective compensation program.

Like having something on your to-do list that you just want to avoid at all costs, it's often much easier to put the organization's compensation plan as far out of sight as possible. The opportunity to rethink your compensation strategy, however, could prove invaluable to your company.

An ineffective compensation program not only hinders performance but often can be dangerously counterproductive. Remember: What you reward is what you get. Your compensation program directly affects the behavior of everyone in your organization.

MEASURE FOR MEASURE In order to create an effective compensation program, you'll need to answer many questions, including: How can we measure whether our compensation program is positively affecting performance? How do we balance the constant challenge of managing overhead costs with maximizing performance? How do we attract top talent as we ensure that this talent achieves the levels of performance we believe we are paying for? But the most critical of all is: How do we structure compensation plans balancing the need for short-term results against the need to build long-term value?

Organizations usually determine rewards based on certain measurable objectives. If rewards are based on what we measure, then what we measure affects rewards and drives behavior. A couple of examples illustrate how compensation—and how it ties to what employees accomplish—drives behavior. I heard recently that one company installs insulation and drywall before the home is dried in. This out-of-sequence practice happens because the company awards bonuses to superintendents and construction management based on the number of “moves,” or homes made under their supervision, each month. Since the company doesn't measure the cost of replacing insulation and drywall or delays in construction times as a result of rain damage, construction personnel don't let delays in sequencing stop them from meeting their move and bonus targets.

A second example came up earlier in my career, when I worked for a large public builder whose bonus program compensated management based on annual profitability. It should come as no surprise that divisional managers tended to sell profitable land positions at the end of each year in order to increase their annual bonuses, even if these land positions could have earned far greater profitability in the coming year.

SEEK VALUE DRIVERS The essential challenge for management is to base compensation policy on key values. If employees know what behavior ties to the company's mission and goals, management can forge a link between the company's values and operational performance. You must translate how your people can help achieve the company's business objectives and then motivate them to do the right things, says Phil Creek, senior vice president and CFO of M/I Homes.

“You must make sure, as much as possible, you are stimulating the best business decisions.” Bonuses, done correctly, make a big difference, he adds. “Don't kid yourself. Bonus programs impact behavior. You must review your bonus programs annually to make sure they are working the way you want them to be working.”

So how do you determine the key values for your firm? Creation of long-term shareholder value is at the top of most companies' pyramid of priorities. So, a first step for management is to identify how the company achieves that. Often, more than one key value comes into play, and from one builder to another, the values may differ.

Outstanding customer service may be such a driver in your organization, for example. Your firm believes great customer service reduces warranty expenses, reduces marketing costs, and instills tremendous pride throughout your organization, all of which contributes to profits. Achieving this goal may include, among other things, employing personnel who know how to build homes correctly the first time, with a commitment to fixing problems quickly. Emphasis would also be on hiring people who have the ability to work well with subcontractors, motivating them to complete their work right the first time and on schedule. If you are trying to ensure that field personnel have a baseline of qualifications, the ability to recruit and then motivate, retain, and train becomes paramount. An effective human resources function then becomes a component of a company's value chain.