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Spreading the Wealth

Nov 1, 2008 12:00 PM, By Brad Dawson, LTV Dynamics

For owners of electrical contracting firms, it's important to remember that every employee has an impact on firm value — even the forgotten administrative personnel. For many companies, the bookkeeper is the employee with the most tenure (a logical assumption if it is your spouse!).

The three-tiered compensation approach

Should you reward an exemplary employee even though the firm lost money for the year? Cash flow logic suggests that paying out any bonuses in a down financial period further risks the cash reserves of your firm. Conversely, punishing an employee who has exceeded his or her performance metrics sends another less attractive message — specifically, the firm has let you down. The answer may actually be a compromise that ensures good employees obtain some reward but not to the complete detriment of the firm. Enter the three-tiered compensation approach, which examines upside bonuses based on the performance of the following: the individual, the business unit, and the corporation.

To illustrate this approach, let's say a large electrical contracting firm had two divisions — a residential and commercial business. The employees were assigned to a specific division by the owners, and rarely did an employee work for both divisions simultaneously. The firm followed the three-tier approach where bonuses were calculated equally based on the success of the individual, the division, and the entire firm. In 2007, it was not unusual for employees in the residential division to only receive 66% of their bonus allotment — 33% for individual performance, 33% for overall firm performance, and 0% for the performance of the residential division. For this firm, exemplary employees were still rewarded — recognition that they achieved their objectives — even though the firm, as a whole, may have come up short.

Contrast this approach with a smaller firm — also located in the same geographic area. The owner, ever mindful of his bottom line, took the approach to cancel all compensation sharing arrangements when his firm suffered an operating loss for the year. While this reaction was prudent from the owner's perspective, it had negative connotations to those employees who had “busted their humps” that year. Not surprisingly, the firm's two top electricians resigned soon after the end of the year.

In general, employees should be rewarded for those activities that are under their control and not be punished for the actions of others in the corporation.

Owner benefits

Owners of electrical contracting firms are always suspect of implementing a shared compensation arrangement. Many argue that such a process reduces their personal take-home compensation or unfairly rewards “lucky” customer situations where an employee just happened to be at the right place at the right time (see Luck of the Draw on page C22).

One reason is because the workforce is changing. Today, where terms such as “work-life balance” have entered the lexicon, owners are finding it more difficult to attract and retain employees with a real drive to succeed. Gone are the days when electricians joined an electrical contracting firm and were driven to maximize chargeable hours and reap larger monetary rewards. Those employees will find employment elsewhere nowadays.

Because of the competitive job market, downturn in economy, and labor shortage in the electrical industry, owners may want to take a second look at the benefits of implementing a shared compensation plan. Beyond ensuring a productive environment for driven employees, it provides you, the business owner, with ever-increasing corporate value — the real measure of your success and, for many owners of electrical contracting firms, your retirement.

Dawson is managing director of LTV Dynamics, an international sales management and business consulting firm in the suburbs of Washington, D.C. He can be reached at BLDawson@LTVdynamics.com.

Sidebar: Luck of the Draw

Sometimes, you're just in the right place at the right time. A junior electrician who had accepted a position at an electrical contracting firm learned this lesson firsthand. Little did he know that his rather impressive network of contacts (thanks to his new wife's family connections) would pay off big time.

As had been its practice for many years, the firm provided a 10% bonus to any employee that brought new work into the company. After only a couple of months, the electrician “lucked” into a connection that yielded a $1 million project — an amount that was approximately one-third the annual revenue of the firm. At first, the owner of the firm was hesitant to pay out the $100,000 bonus due to this new employee — an amount that was far more than the electrician's current annual compensation. However, after much reflection, he realized that the revenue associated with this new customer had substantially increased the corporate value of his firm, making the $100,000 payout a reasonable business development expense.

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