Although I'm not privy to other builders' compensation programs, here at Holiday Builders we have restructured ours to provide financial rewards for enhanced performance. The higher up the organizational ladder the employee climbs, the more his or her compensation is based on performance. Our Compensation Enhancement Programs (CEP) are all designed on a sliding scale. The lower end of the scale is the minimum acceptable performance with the lowest bonus, while the other end offers the greatest rewards. This provides a strong incentive for employees to perform at a higher level. If an employee doesn't reach the minimum acceptable standard, he or she does not receive a bonus.

We use several performance measurements in our CEP. Holiday Builders is a production builder, and as such we are very focused on our success drivers. Our performance standards measure the elements that we have determined are crucial for our success. These success drivers all contribute to the bottom line; that means higher-performing employees share in a greater percentage of the profits.

This same "sliding scale" premise is used for all employees. Regional managers, for instance, have a low base salary, but their compensation enhancement program enables them to earn as much as five times that. All of our performance standards are quantitative, and most are measured (with bonuses paid) monthly.

The table on page 38 shows how our system measures several aspects of performance and provides bonuses accordingly. Each level of performance is linked to a percentage of net profit the employee will receive. The criteria for performance standards are based on a 12-month average.

So, if construction time is averaging 92 days at the end of the month, the regional manager will receive .9 percent of the region's profit as a bonus. If the Division Satisfaction Rating for the divisions under their supervision is 76 percent, they will receive an additional .4 percent of profits. For a Construction Manager Rating of 7.7 percent, they will get .5 percent of profits. In total, they can receive a maximum of 3.25 percent of their region's profit that month.

The best feature of this plan is that each year, the standards are evaluated and adjusted for enhanced performance. This annual examination also allows us to add or delete performance standards, adapting to our changing industry environment.

Getting Started

Our programs have all been designed to reward and encourage better performance. Providing similar compensation for employees with the same duties but different output had resulted in overpaying some -- and underpaying others. I wanted to have a program that rewarded employees who made money for Holiday Builders.

Fair Pay: Richard Hawkes, president and CEO of Holiday Builders, believes his company's compensation program encourages better performance. Courtesy Holiday Builders As we began to implement compensation programs, we met some resistance. Everyone was scared that such programs would result in a pay cut. They were afraid of earning less money even if they performed well. So I guaranteed that they would make at least as much money in the first year as they had before, if they met the minimum performance standards. At the end of the year, most of them actually earned more.

As we're seeing here at Holiday Builders, such compensation programs are working. We really haven't had to make any adjustments other than raising the expected performance standards. The financial health of our company is strong, our customer service ratings are high, and we are paying employees what they are worth.

We've chosen to implement these programs companywide. A CEO's compensation must be based on the same measurements as those for top managers. I am compensated on the same key variables but for the entire company. This helps me keep my focus on the key drivers.

Sound Advice

There are two things builders must consider when implementing such programs. First, many builders pay a yearly bonus based on ... whatever. I believe this is a waste of money, since the compensation is separated by up to 12 months from the activity that generated it. Second, some builders initiate performance-based programs and then turn around and micro-manage every aspect of the employee's job. An employee who is not empowered to do his or her job will never rise to the next level of performance.

We are in a great industry for those individuals who want to be managers. Builders with compensation programs based on performance will quickly realize that the most talented individuals, those who excel at managing processes, will be attracted to their companies.

One thing to remember is that money is not the "be-all-end-all" motivator. Employees still want to be recognized for their contributions with a pat on the back. The creation of a positive work environment and a caring company culture goes a long, long way.

Motivating Factors
Construction Time 100-109 Days 95-99 Days 90-94 Days Less than 90 Days
Bonus Percentage Earned 0.20% 0.70% 0.90% 1.00%
Division Satisfaction Rating 70%-74% 75%-77% 78%-80% Greater than 80%
Bonus Percentage Earned 0.20% 0.40% 0.45% 0.65%
Construction Manager Rating 7.01-7.50 7.51-8.0 8.01-8.50 Greater than 8.50
Bonus Percentage Earned 0.40% 0.50% 0.75% 0.85%
Bonus Points: The compensation plan at Holiday Builders aims to measure several aspects of performance and provide rewards for a job well done.