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What You Need to Know About Designing Effective Incentive Compensation

By Sal DiFonzo, CCP, CBP, CSCP, and Radek Knesl, FMI Compensation

The construction industry serves as an example of how to design effective incentive plans.

Many companies struggle with where to begin on designing effective general incentive compensation plans, more commonly known as the annual company bonus plan. Privately held enterprises may have limited experience with structured incentive plans. The first plan a company uses may be a discretionary, owner-allocated bonus plan. It is simple to administer, and it provides owners with great control over payouts. However, as an organization grows, the owner may no longer know the performance of every employee. It is at this point that a company may consider moving away from a recognition-styled discretionary plan to a structured incentive plan with defined earnings opportunities and performance measures.

To determine the effectiveness of various incentive practices, the authors’ company conducted a survey called “2014 U.S. Markets Construction Overview.” While the study focuses on the construction industry, the results can be applied to any industry.

The construction sector represents $910 billion or 5.5 percent of gross domestic product (GDP) in 2013, according to the study. This industry is mostly privately held, with many family-run firms. While the Fortune 500 seems to consume the majority of business press attention, these companies do not represent the majority of the economy. Out of the 27 million businesses in America, only about 6,200 are publicly traded on the major exchanges. The rest are privately held. According to the U.S. Small Business Administration, small businesses drive more than 50 percent of GDP.