How to Structure Compensation for Owners + Key Employees

The construction labor market remains extremely tight, forcing employers to battle for talent. As your firm grows and expands, you may be concerned about maintaining the quality workforce needed to reach your goals. 

Now would be an excellent time to reconsider how you structure compensation for your key staff and owners, both current and future. Not only could this help with hiring and retention, but it could also set the stage for business transition planning and your eventual successful exit from the firm. 

Before reviewing your construction company compensation plan, it could first help identify the key employees you’re most interested in retaining, such as senior-level project managers and estimators. These employees are the foundation of multi-year projects and are also more likely to build relationships with your clients and other important sources of influence for your business. Losing them, especially partway through a project, would likely create significant challenges for your bottom line—not just in dollars but also in lost knowledge and relationships. 

Long-term, losing key employees would additionally impact your ability to eventually sell the business. Other firms know the value of a construction business often centers around these top employees, and will instead try to poach them rather than paying to buy you out. That’s why your compensation structure should prioritize keeping these top employees happy. 

Consider your past losses of talent over the years. How much did the departure of a key employee end up costing your firm in terms of lost revenue, project delays, and time wasted on recruiting/training? Chances are, it was significantly more than a boost in compensation. You could offset future losses by creating a competitive package based on these areas. 

Salaries are, of course, a crucial part of employee compensation. Wages must be competitive for your firm’s type of work, location, and required experience. Since market conditions change over time, it makes sense to review your compensation packages at least every two to three years, especially given the recent swings from COVID-19. 

As you bring in new employees at higher market rates, ensure you also increase pay for your long-term staff. Otherwise, these loyal employees could start looking elsewhere for a raise. 

Another potential trouble spot is watching how you pay yourself and the other owners. It’s common to set construction executive compensation on variable factors, like bonuses after completing a project, versus a larger salary. However, this can set a ceiling for the rest of employee compensation, as it may seem strange to pay others more than the “boss.” If you feel like this is an issue at your firm, consider increasing construction executive compensation to allow other employee raises. 

While pay is an important factor for retention, it’s far from the only factor. You don’t have to offer the highest salaries in the area to get the best employees, provided the other parts of your construction compensation package are also competitive. 

To keep your key employees committed for the future, you could offer bonuses as long-term incentives. There are a few ways to structure these payouts: 

• Deferred bonus plans: In a deferred bonus plan, you agree to pay a key employee a performance bonus while splitting the bonus over two payments. First, they get a portion of their bonus for hitting project milestones. Then, they receive the second installment after staying at your company for a set period of time. For example, you might offer a 30% bonus of their salary, with 15% paid after reaching milestones and 15% paid after a defined period. 

• Employee Stock Ownership Plans (ESOPs): ESOPs are a type of retirement plan that gives employees shares of your company. You can design these plans with a vesting schedule, meaning employees must work a minimum number of years to unlock all their shares. If they leave, they forfeit some or all their shares, depending on the rules and how long they were with your firm. The downside is that ESOPs are harder to target just to key staff, as government nondiscriminatory rules for retirement plans apply. For example, you generally need to cover any employee who has worked at least a year at your company under an ESOP. 
• Phantom stock plans: Phantom stock plans are another way to pay cash bonuses to top employees based on profits and stock share performance. It’s a way to provide the financial rewards of being an equity shareholder without the risk and complication of giving away actual shares. You could also design this bonus plan with the long-term goal that key employees could allocate the funds to acquire equity in your company. 
• Equity: You could give key employees equity in the construction business itself. As part owners, they would have a greater commitment to your company and its success. You could offer the shares on a vesting schedule to keep them loyal. Providing equity to key employees over time could also prepare for a future transition where they take over the company in a buyout. Now, you only have so much equity to give away. Save this bonus strategy for your very best employees. 

These methods have different tax implications, advantages, and disadvantages. Make sure to consult with a financial expert before launching any of these plans. 

In some states, you could also ask top employees to sign a noncompete clause. If they leave, this contract would temporarily restrict their ability to work in the construction sector or access any client relationships built while at your company. Whether a noncompete is enforceable depends on your state. For example, they are enforceable in Florida but not in California for employees. However, in California, you could use them with owners, which could be another advantage of giving equity to your very best employees. 

While a noncompete offers risk protection, it potentially also impacts your ability to hire and hurts morale, especially in a hot labor market. In addition, it’s essential to work with a qualified attorney to check whether noncompete agreements are enforceable in your area and, if so, ensure your contract is legally binding. 

Workplace benefits are another vital tool in your employee compensation toolkit. In addition to the standard benefits you offer to every employee, you may want to include extra perks for senior employees like: 

• Life insurance (as a multiple of an employee’s salary) 

• Disability insurance 
• Reimbursement for education spending, such as when an employee gets their masters in construction management 
• Company discounts on cell phones and gym memberships 

Besides financial benefits, you could increase loyalty by offering more time off, on-site training, a clear path for career advancement, and workplace flexibility, such as the option to work from home. 

Soft benefits like workplace training and professional coaching can also improve your workplace culture. They are a chance to teach your unique company values and show employees that you care about their future beyond what they deliver as part of their daily responsibilities. Even just giving acknowledgment for a job well done, like a written note or praise in a company newsletter, can improve employee retention without you spending more on financial compensation. 

In general, you should be cautious about giving equity to employees. While it does give them added motivation for long-term performance, it also creates additional risks and responsibilities. For example, you may have a fiduciary duty to minority shareholders as the controlling shareholder. You can offer that same sense of ownership in your construction firm’s success without providing equity through phantom stock plans and deferred bonuses. 

With that said, it could be worth considering whether your best employees should eventually buy out the business as part of your succession planning. As potential future owners, they would be all the more committed to seeing the company succeed. This buyout would also provide a future exit strategy to fund your retirement and life outside the construction industry. 

Preparing your business for a future sale is a long-term process with many steps, including finding a proper valuation. This is not a compensation strategy to prepare overnight; however, if your top employees know it’s something you’re working on, they will be highly motivated to support a business they will take over one day. 

If you’d like more information on structuring your construction company compensation plan, consider connecting with Aldrich’s construction experts.