Take Action to Retain Star Employees

Contractors need to offer appealing work environments to keep their best performers. For the top ranks, companies should consider offering special compensation plans.

By Marc Newman

A growing construction firm presents a unique set of challenges. A thriving company usually has a team of talented employees who handle various aspects of the business. You count on these people to ensure your company is running well. Yet any one of them can leave, and your company will not fall apart. Or will it?

Gauging the value of a star performer is a lot easier to do once that person is gone and you realize what's missing. But the idea is to avoid that scenario altogether. You should give your best employees reasons to stay.

It's smart business. These employees have navigated the intricate workings of your company. Their knowledge is very difficult to replace. They carefully monitor projects and systems, squeeze extra profits from construction jobs, and make decisions that help the business in the short- and long-term. Replacing that contribution with a less competent - or incompetent - employee could cause not only financial damage but also a dent in the firm's reputation.

Furthermore, replacing any employee, let alone one of your best, is a time-consuming effort that distracts from the task of adding new customers or improving the business.

For any contractor, the best protection against such losses is creating an environment that your best employees won't want to leave. Anything that helps to reward and retain these employees will help boost your company's profitability and long-term value.

While there are various retention strategies available, one that would especially appeal to your top echelon - the executives you count on to mind the big picture - is a special compensation plan.

Initially, select only the staff that is truly critical to the company and its future for this plan. It is typical to select one to five of your higher-level people who you want to keep in the long term. Most likely, these people have responsibilities that affect the company's bottom line the most.

One approach is establishing a nonqualified compensation plan. Unlike qualified plans, such as 401(k) or profit-sharing programs, nonqualified plans permit you to select which employees receive this fringe benefit. Examples of these plans include bonuses, incentive programs, deferred compensation, and phantom stock, which is a bonus pegged to the performance of company stock without actual ownership of shares. Spend the time necessary to select the most appropriate nonqualified plan for your company.

A smart strategy in this regard would be to involve your employees in the design of the plan. Listen carefully to what your top employees say matters most to them. By tailoring a plan to their recommendations, you likely will avoid promising too much or wasting cash on benefits they do not value.

Another important step is to seek counsel from an attorney experienced in labor law who can document the plan's specifics. Do not go it alone or assume that documenting the details is not important. Plans drawn up casually, without documentation, can easily lead to misunderstandings and disputes that take extra time and resources to resolve.

In addition, establish a plan that has the same overall structure and benefits but that can still offer slightly different terms to accommodate the various needs among the >> star employees. For example, your employees' age or life plans may impact what type of bonus they prefer. One employee may want a greater portion of his money now. Another may think that the best "bonus" would be additional life insurance to protect her family.

In keeping with the "retention" aspect of the bonus plan, never give the entire bonus up front. Always include a payoff for longevity in your bonus plan, even if the employee would prefer all the cash up front. For instance, pay a portion of the bonus now and accumulate the remaining amount over a set number of years or until the employee reaches a specified age. By including a longevity clause, the employee may think twice before "walking away" from accumulated nonqualified plan dollars.

Despite all of these considerations, your plan should be as basic as possible. Stay away from complicated formulas. Your employees are more likely to undervalue the benefit if they don't understand how the rewards work. And make clear what the plan represents or doesn't. If the nonqualified plan bonus ties in directly to company profitability, make clear to the employees that they don't have stockholder rights.

A properly designed nonqualified compensation plan should help you and your top employees focus on building the business and its value.

Marc Newman is a CPA, executive partner, and co-chairman of the construction services group at Anchin, Block & Anchin of New York.