A good incentive compensation program needs to be carefully matched with the specific goals of your firm.
Incentive compensation is a hot discussion topic, particularly toward the end of the year. Defined as any kind of additional pay or rewards offered by a firm to employees in addition to base wages, it’s an important motivator and can make up a significant portion of a person’s salary.
Is it better to give someone a big holiday bonus or multiple spot bonuses for extra effort? How should bonuses be calculated – by division profitability, firm profitability, employee tenure? Most importantly, what types of incentive compensation help AEC firms with one of their top issues, recruitment and retention?
Zweig Group’s 2019 Incentive Compensation Report of AEC Firms found that firms spent an average of $9,471 per person and 9 percent of net service revenue on incentive compensation last year. Results of the survey over the past few years are consistent in firm leaders’ views that monetary awards continue to be among the best motivators for staff. When asked, “Have you found any alternative forms of incentive compensation to be more motivational to employees than cash or monetary awards?” 89 percent of respondents answered “no.”
Recruiting and retaining upper-level managers with incentive compensation became more attractive last year. In 2018, 62 percent of firms said equity-based incentive compensation did not help them recruit/retain upper-level managers. In 2019, only 45 percent of firms reported these types of plans were not helpful. More than one-third (35 percent) of firms said that equity-based plans encourage loyalty, and 33 percent said they were attractive to recruits.
Although ranked among the least successful forms of incentive compensation, 59 percent of firms provide signing bonuses, which can take the form of both cash (88 percent) and extra vacation time (35 percent), or in lesser amounts, things such as stock options, training, or relocation expenses paid. Very high-profit firms were significantly more likely to use this form of incentive compensation. While amounts vary significantly based on geography, firm type, and other factors, signing bonuses were on average 9 percent of base salary. On a scale of 1-5, firms ranked signing bonus 3.4/5 as a means to recruit staff and 2.4/5 as a means to retain staff.
One significant challenge with signing bonuses in the current labor market is what to do if an employee leaves before receiving their entire signing bonus. Thirty-six percent of firms make the employee forfeit the remaining amount but allow him/her to keep what they have received. Thirty-four percent of firms make the employee repay what they have received already.
We define retention bonuses as unscheduled compensation primarily awarded during leadership transitions and mergers or acquisitions to help firms retain key employees. The dollar value of retention bonuses varies widely throughout the industry, depending on the situation and the particular worth of the skills the individual who is being offered the bonus brings to the table. Just 20 percent of firms surveyed offered these types of bonuses, most often at the discretion of the leadership.
Referral compensation can be an effective way to encourage the recruitment of new qualified individuals and can also aid in retention when employees feel affinity toward those they were responsible for helping recruit. Overall, just over half of all firms offer this form of compensation, but the practice is much more common at larger firms (71 percent of firms in the 100-249 person range and 100 percent of firms with more than 250 people). Forty-two percent of firms report this has helped their firm increase their percentage of referrals and aided in employee motivation, 30 percent report it has increased the percentage of qualified recruits, and 28 percent report it has decreased recruiting costs. Still, the practice is reported as having no effect on recruiting whatsoever by 30 percent of firms.
A good incentive compensation program has to be carefully matched with the specific goals of a firm. When it comes to recruitment and retention it’s clear that a one-size-fits-all approach isn’t practical, and plans have to work carefully in conjunction with policies, procedures, benefits, base compensation, and, most importantly, firm culture in order to attract and retain people who will create value for your firm. Click here to learn more about Zweig Group’s 2019 Incentive Compensation Survey Report.
Christina Zweig Niehues is Zweig Group’s director of research and e-commerce. Contact her at czweig@zweiggroup.com.