Ed Lane had run a successful remodeling company for 20 years before he hammered out an effective bonus plan for his project managers. The breakthrough idea, suggested by his production manager and finessed over a period of months, was to focus on actual job costs, rewarding project managers for each job they completed on budget. “We just said, ‘Make the numbers and get 1.5%'” of the job's estimated costs, says Lane, president of Lane Homes & Remodeling, a $3.5 million design/build company in Richmond, Va.
To monitor job costs, project managers get a complete, workable budget at the job's commencement; biweekly reports tracking costs in 25 categories; and considerable freedom in choosing and negotiating with suppliers and trade contractors. But they cannot cut corners. “They get a list of specifications and a set of plans for each job,” Lane says, “and they are to build that job based on those plans and specs.”
Profitability rose almost immediately. In 2004, job overruns had exceeded $130,000 for the company. By October 2005, the first full year of the plan's execution, that deficit had been replaced with a $13,000 surplus, even after paying thousands more in bonuses. One of Lane's six project managers in particular was thriving — under budget $27,000 for the year, over his target gross profit by 10.5%, and on track to finish 11 jobs, 3 more than in 2004. “He's picking up a bonus on each job,” Lane says, “where last year you had to beat him with a stick.”
Quality has improved as well. “Project managers are actually doing a better job because they know it's going to affect their bottom line if they have to go back and redo something. You might say we're controlling the jobs more at the grass-roots level,” Lane says, rather than mandating results from the proverbial corner office.
The Next Level of Benefits Though rare in the industry as a whole, bonus plans for production staff are a logical fit for upscale remodelers who have sophisticated systems in place, according to Joe Zanola, a management and compensation consultant. “You're ready for the next level of benefits, and you want incentives to help the company work well together. An effective bonus plan creates a necessary and healthy dynamic between production, sales, and estimating,” he says, by encouraging field staff to study proposed budgets to make sure that the project can be built on that schedule and on that budget. “You want them to think ahead and raise objections if it's not right,” Zanola says.
Indirect results can be equally powerful. Not only do well thought-out bonus plans reward excellence, but they create role models who lead by example, often inspiring others to achieve similar results.
And not necessarily because of the bonus money. David Bryan says that monetary recognition ranks four or lower on the list of what motivates and retains employees. Yet his $5.6 million design/build company, Blackdog, of Salem, N.H., is committed to a bonus plan that has “stabilized and solidified” gross profit, while reducing waste and debugging projects proactively.
A Custom Plan Blackdog's bonus system differs widely from Lane's, illustrating the degree to which remodelers can customize. “Everything is gross-profit-driven,” Bryan says. The basic goal is to hit a targeted gross profit of 42%. When that happens, the production team shares 4% of GP, with a sliding scale adjusting upward or downward, based on the actual GP produced.
The sliding scale mitigates other variables too. For instance, the bonus is typically divided 75/25 between the lead carpenter and the project manager. The reason, explains Bryan, “is that while the lead carpenter runs one job, the project manager typically runs four.” The two then give discretionary bonuses to carpenters and other field staff, with Bryan approving all amounts.
Subjective feedback can also impact bonuses. “We actually have a bonus grading sheet,” Bryan says. Using www.guildquality.com, clients rank the production team and the overall experience of working with the company. Blackdog's administrative staff, in turn, rates the team on matters such as promptness in submitting receipts and time cards. A 95% score would reduce a potential bonus of $1,000 to $950.