Stephen Howell, owner of Howell Design & Build, North Andover, Mass., remembers what it was like when he founded his company six years ago. Howell says he was always motivated to get jobs done on time and on budget. If he did, "I'd make more money and have a happier customer."
Now, with 10 people working for what has become a $2.3 million business, there's a different challenge: motivating his employees to do the same.
To resolve that dilemma, Howell and his wife and partner, Susan, recently introduced a plan whereby between 2% and 2.5% of the company's gross sales, based on beginning-of-year budget projections, is set aside as a bonus pool. The pool is shared by everyone in the company, with different percentages allotted for office staff, lead carpenters, and production carpenters. "Remodeling projects have a lot of unknowns," Howell points out, "so you have to have someone out there who really wants to finish on time and on budget."
Still relatively rare at remodeling companies, bonus systems are standard issue at many U.S. corporations, which use them to ratchet up productivity and promote efficiency and teamwork. Edward Marshall, whose North Carolina-based business, The Marshall Group ( www.marshallgroup.com) assists companies in creating bonus plans, says whatever the company's size or business, a plan must be tied to performance targets. Employees "have to meet those thresholds, and they have to be reasonable thresholds." In addition, Marshall says, a bonus plan must be fair and equitable and should never be structured as just another human resources program. "Top management," Marshall says, "must own it."
Who should, who shouldn't
Owners of remodeling companies who have struggled to implement bonus systems agree with Marshall. For starters, they point out, a bonus system has to be carefully planned. Employees must be educated on how it works and why it will benefit both them and the company. Because goals and targets -- production, sales, or otherwise -- drive the system, information must be given freely. Companies that decline to share sales and profitability numbers with employees are limited in their ability to offer a bonus plan.
Bonus plans that aren't well thought out can easily backfire, puncturing morale. "I don't know a bonus system that exists that doesn't have the potential to be interpreted as unfair," says David Bryan, owner of Blackdog Builders, Salem, N.H., whose four-year-old bonus system based on gross profit distributes rewards to field crews for productivity.
Remodelers, says Idaho contractor Jim Strite, owner of Strite Design + Remodel in Boise, often lack managerial skills, which doesn't bode well for the success of a bonus plan. "We tend to be crisis managers," he says. "The bonus program doesn't work under that situation. You have to be a business rather than a practice, and a business requires a policy manual, an operating procedures manual, a bulletproof sales-to-job packaging and production system, and a strong administrative system that can put those numbers out so that people have full confidence in them."
Some companies favor rewarding individual performance. Some reward team performance. Some distribute a bonus to everyone in the company when certain organizational goals have been reached. Experts such as Marshall suggest that small companies issue rewards in some combination of the three.
Who and how
This sounds easy, but most remodeling contractors find that setting up an effective bonus plan is by no means simple. For many with systems that work, getting there was a matter of trial and error.
Back in the early '90s, Grand Rapids, Mich., remodeler Pat Thompson offered a company-wide bonus based on hitting gross profit targets, with the amount of each employee's bonus check weighted for hours worked. Thompson says he scrapped that system when he realized "people like to be rewarded for their individual efforts." The plan created animosity instead of cohesion, pitting highly productive employees against those considered less so.
So in 1996 he set up a different plan, one that rewards lead carpenters and designer/salespeople, and only them, and only if the company makes a minimum of 30% gross profit. The system divides Thompson Remodeling's projects (approximately 100 per year) into four revenue categories, with a different lead carpenter bonus and designer/salesperson bonus for each category, provided the job comes in on budget.
For example, successfully completed jobs priced between $50,000 and $100,000 earn the lead a $600 bonus and the sales-person/designer $200. Jobs over $200,000 net the lead $2,000 and the salesperson/designer $500. Whether or not leads wish to re-distribute money to other employees, say, a helper, is entirely up to them. (The company mostly uses one-man crews, so it rarely becomes an issue.) Checks are passed out at a "safety meeting" the company holds every two months. Thompson estimates 95% of jobs come in on budget, vs. about 80% before the current system.
Start with a goal
Experts always suggest that getting a functional bonus system in place takes months of preparation and several years to refine. Thompson, for instance, added a 1% to 2% margin of error to the profit margin so that carpenters who were, say, $10 over budget on a $60,000 job would still get their bonus. He later added extra bonuses for carpenters who save the company money otherwise spent on trade contractors by taking on the roofing, siding, HVAC, or drywall portion of some jobs.
When designing a bonus system, start by asking yourself what exactly you want to accomplish. Increased sales? Better productivity? Employee retention? Teamwork? Then design a system that leads employees in that direction.
A prime goal for Pennsylvania remodeler Bob DuBree, owner of Creative Contracting, was reducing turnover in the field. Last year DuBree lost 50% of his field staff. This year he introduced a system that pays up to 10% of salary on a sliding scale if the company hits its 36% gross profit target.
Phil Gettum, owner of Gettum Associates in Indianapolis, initially set up a system designed to reward individual carpenters for hitting gross profit targets. "But it never got off the ground," he says, "because I couldn't figure out a way to quantify both productivity and gross profit." What sometimes happened was that jobs came in at predicted gross profit but off schedule.
The system Gettum finally settled on assumes each lead works 40 hours a week, meaning 1,890 hours a year. On that basis, he calculated how many dollars of gross profit each lead had to earn for every hour on the job. When leads exceed the gross profit per hour figure, they share in a bonus pool according to the profitability of the project. The more profitable the project, the larger the bonus they will draw. The company's production manager and sales manager are bonused based on the number of projects they managed or sold.
"Once we make our intended budget," Gettum says of the system, "they get a bonus on everything that's above that. So it's a real bonus -- which is extra -- not an entitlement. If you earn it, you get paid."
Ultimate buy-in
In the past year, Geno Benvenuti, co-owner of Benvenuti and Stein, a $6.5 million Chicago-area remodeling company, introduced a bonus system for his 43 employees. The point, he says, is "to make the company self-governing -- to take away some of the responsibility for the company's success from me and give it to [employees]."
Reasoning that in order to have an effective bonus system "you have to make a profit, and know you made a profit," Benvenuti and his accountant isolated key elements of the company's balance sheet: income, cost of goods sold, gross profit, overhead, and net profit. Benvenuti and Stein set a target in each area, beginning with sales ($8.5 million for its current fiscal year), 70% cost of goods sold, 30% gross profit, 22% overhead, and 8% net profit. If the company hits its net profit and other targets, the company keeps the first 5% of net profit; the remainder goes to employees. Disbursements would be weighted on the basis of salary. All employees can make as much as 10% of salary.
Benvenuti posts a chart with the targets on his office door and updates it monthly. Early this year, net profit was tracking at 4.4%, but, says Benvenuti, "in the next seven months we're really going to hit our stride." So far, the company has $7.8 million worth of work signed for 2003, and by August 31st, four major jobs have to be completed.
Budget conscious
Marshall suggests that a well-designed and properly implemented bonus plan will begin to show results the first year. The effectiveness of a plan designed to be collaborative -- that is, measurable and systematized rather than based on impulsive acts of generosity -- builds with time.
David Bryan, whose plan distributes bonuses among project managers and lead carpenters as determined by certain gross profit milestones, says the difference is two-fold. When he started the plan four years ago, the company had a gross profit of 33%. That rose to 39%, and Blackdog Builders is now shooting for 42%.
"It's raised and solidified the consistency of our gross profit," Bryan says. It's also led to what he calls "a huge change" in the mentality of field staff. "Four years ago, if I'd asked a lead how many trips to the lumberyard he'd made, he probably couldn't have told me. Today virtually every lead can say whether or not he's ahead and, if so, by how much. It makes that lead budget-conscious, a steward of our finances. They're not giving things away."
Bonus Systems Do's and Don'ts
* Make sure you're able to produce accurate job cost reports. You have to know how profitable you are and how productive employees are if you plan to reward them.
* Put the plan in writing -- either in your company handbook or as a separate handout -- and make sure everyone understands it.
* Set realistic performance targets. "You can't create expectations that aren't met or benchmarks that are so hard to meet only Superman and his buddies can get there," says Indianapolis remodeler Phil Gettum.
* Keep it simple. Pennsylvania remodeler Bob DuBree took the bonus plan he'd drawn up to his accountant. "He said to simplify it for the first few years, until you get some appreciation and buy-in."
* Resist the temptation to change the plan. "Some owners start seeing money go out the door and think, 'Gosh, I'm giving away too much,'" Thompson says. "If they've earned it, give it to them."
