Adding to the worry, more than two-thirds of architecture and engineering firms are offering signing bonuses to staff as an incentive to leave their current firm and start over with a new one. In order to thoroughly train new staff, firms need to invest at least two years in an employee. Developing a comprehensive compensation and incentive package that is attractive to millennials is critical to a firm’s survival and ultimately its long range plans.
When it comes to employee retention, even though it’s not just about the money, my focus here is on what incentive compensation programs have been working best among architecture and engineering firms in recent years to attract and retain their talent. With staff turnover on the increase and most firms reporting incentive programs that are falling short of motivating staff, firms will need to revisit their potentially stale compensation programs and take a fresh look at what motivates their employees from a financial point of view.
According to a recent survey, the average percentage of payroll spent on incentive compensation in architecture and engineering firms was around seven percent, with most firms expecting to increase the level of this spending in the upcoming year. Performance bonuses are still the most popular method of incentivizing employees, with most firms leaning toward paying large bonuses at year-end, after there’s been some degree of certainty about the year just ended. On a per employee basis, performance bonuses averaged approximately $6,000, with the most profitable firm’s bonuses averaging almost $18,000 in recent years. That stinging sensation that many firms experienced after the last recession is all too fresh in the minds of many firm leaders to let their incentive compensation programs get too rich or the payout too frequent. But with one of the top concerns in the industry being talent management, firms may need to reconsider these programs to retain their top employees. In the same survey, 25% of respondents indicated that profit sharing was working the best for them, setting aside an average of 13% of pre-tax profits for their staff. Many firms use a formulaic approach to calculate their bonuses or profit sharing, factoring in many different variables, such as skills and experience, specific targets or goals set at the beginning of the year, and of course financial metrics. From my experience, the best plans are those that still allow management to have some element of discretion over rewarding their top performers. Plans need to allow for some level of flexibility due to the fact that some of the best employees are assigned to unique or complex projects and by using only objective criteria, employers may not value their contribution properly.
The best incentive compensation structures will also tie incentive compensation to actual cash basis profitability of the firm as well as individual performance on projects. It will keep pushing the bar higher each year with a point or two of additional profitability being required. Some of the best performing firms are not waiting until year-end to pay their bonuses. Only 10% of firms will use spot bonuses and around 8% will pay a bonus upon completion of a project. In these cases, it is advisable to structure a plan which rewards performance that exceeds expectations, and not just upon the completion of a project that meets budget.
Architecture and Engineering firms should begin looking at this by comparing their salary and incentive programs against firms in their peer groups. There are surveys available that will help benchmark your firm against others by relative size, region or market area that your firm works in.
Firms will need to revisit their incentive compensation programs in the next several years as we are now seeing a pickup in Baby Boomers leaving the workforce after delaying their retirement in recent years due to the impact of the last recession. More than half of A/E Firms still have no formal succession plan to deal with this, other than addressing a few key employees. The experience gap left behind Boomer retirements and the changing behavior of the new millennial workforce will require firms to incentivize their workers better and more efficient to keep them in one place a bit longer. The time for A/E firms to address this is now as the talent war heats up—don’t wait for your best employees to leave to do something about it.
Source of all referenced surveys came from 2016 INCENTIVE COMPENSATION SURVEY OF AEP & ENVIRONMENTAL CONSULTING FIRMS, produced by Zweig Group.To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.