For the second year in a row, executive's pay packets have climbed, according to the 2003 Hays Montrose/Building executive salary guide. But, as we find out, there are signs that this trend may have peaked.
Christmas has come early for many construction executives. They have just enjoyed the biggest pay increases in years. According to the 2003 Hays Montrose/Building executive salary guide, the building, housebuilding and civil engineering sectors have surpassed last year's 5% average increase, and are now reaching the dizzy heights of 8%.

The only niggling thought on the minds of construction executives will be, how much longer before the party is over?

But for now, the latest guide give Hays Montrose reason to be optimistic. "Salary increases are quite high this year in recognition of the shortage of good people. Companies accept that they have to pay good money in order to attract them," says Chris Cheetham regional director of Hays Executive. Housebuilders are forking out the most for their top people, paying on average a tidy £158,751 a year for a main board director, whereas builders manage £101,418 and the civil sector, which pays a typical £101,376.

The biggest spenders are medium-sized and large firms in the building sector and medium-sized housebuilders, with average salary increases of 8%. The lowest salary increases for all three sectors were in the small company bracket, with increases of only 5% in the building and civil sectors, and 6% in housebuilding. This pattern may reflect the fact that the large number of high-value public sector and PFI projects now hitting the market are beyond the scope of these smaller outfits.

One notable trend is that many of the larger salary increases are for executives working outside London. While the commercial market is still depressed in London, the increase in work, particularly in public sector projects outside the South-east, is forcing up executive pay in the regions. Hays Montrose reports "a stronger percentage growth for salaries in the regions rather than within the M25".

Executive bonus bonanza
Salaries are only half the picture, though, as a quick glance at the executive benefits table overleaf will reveal. On top of their basic salaries, executives also receiving generous bonuses. Again, it's the housing sector that is paying the most, with bonuses at a higher percentage of salaries than in building or civil engineering.

"Housebuilders' bonuses are way over the odds, compared to building and civils," Cheetham says. According to Hays Montrose, bonuses in the housing sector can be as much as 150% of salary, although more frequently the figure is between 70% and 100% of salary.

Housebuilders are increasingly using bonuses E E and perks to recruit and retain their best managers. And they can justify bonuses on this scale because they are making big profits and their margins are a lot higher than civil and building contractors. "When you are working on a 1% or 2% margin, it is difficult to justify paying a large bonus," says Cheetham.

Housebuilders’ bonuses are way over the odds, compared with building and civils

Chris Cheetham, Hays Executive

Paying executives a bonus rather than simply increasing their basic salary makes sense for construction firms – particularly those involved in the development arena – because when the market is buoyant and they are making large profits, they pay a bonus, and when the market crashes, executives are paid just a basic. This has the double benefit of rewarding the most talented individuals at a time when other firms will be trying to poach them, while keeping the wage bill low during a lean period. A bonus has the additional advantage of not being linked to pension or redundancy payments for a company – thereby reducing the risk to a company.

Do-it-yourself benefits
Bonus payments are not the only area where companies are looking to offload risk: the continued trend toward car allowances rather than providing a company car is another. Instead of providing an executive with a car, companies increasingly expect executives to buy their own car with a monthly car allowance added to their salary. Then, should an executive leave, the firm is not left with the problem of deciding what to do with their car.

Companies are also side-stepping the pension minefield and the risk associated with company pensions. More and more companies are offering money purchase schemes to new executives rather than the much more expensive and risky option of a final salary pension scheme. And with many contractors closing their existing final salary schemes, this is a trend that is almost certain to continue. So while pay and bonuses are at a current high, this reluctance to make long-term financial commitments may cause some executives to pause for thought. It could be that when times get tougher, as some are predicting for 2004, only the executives with modern business skills will be secure in their posts (see "How to improve your marketability", opposite page).

Playing salary catch-up
It is not just the need to attract business hotshots that is driving up executives' annual pay: another, less benevolent reason, is that the industry's top brass are attempting to maintain a pay differential between themselves and their colleagues further down the corporate ladder. Executives working on projects such as BAA's Terminal 5 scheme, where workers have been offered a wage deal of £55,000 a year, will be looking to preserve a pay gap. "If you look back over the last three to five years, there have been significant salary rises further down the ladder, which has narrowed the pay gap – and this has forced these rises," explains Cheetham.

These increased salaries are allowing firms to attract executives from other industries. "We are looking to get people whose experience is not directly construction-related – we are looking to bring in businesspeople," says Joe Webb, business development director at Miller Construction.

How to improve your marketability

As companies embrace partnership deals, managers with experience of working collaboratively are hot property. “There is a fundamental change in the way construction businesses are being run,” says Cheetham. “It is no longer about pricing a job against four other firms; there is now a much higher percentage of work in both the public and private sectors being run in partnership.”

This is good news for construction firms as a partnering deal often means that, for the first time, a company is able to forecast its workload two or even three years ahead. Cheetham says that companies will pay a premium for people “who can demonstrate an ability in all aspects of running a business and move it forward in line with partnering”.

Joe Webb, business development director at Miller Construction, agrees with Cheetham: “Because we do a lot of partnering work with developers and the public sector, when we interview people now, we look for people who have the ability to work in a collaborative environment.”

This change in the way construction firms carry out their business means a different set of management skills is needed by executives. Cheetham says executives must have “a basic understanding of construction”; in addition, they must “understand their customer’s business” in order to add value and they should be able to generate “a decent profit margin”. “A successful construction company is not just about turnover and cash generation any more,” says Cheetham.