Performance-related pay pushes up rewards for company decision-makers at every level.
COSTAIN caused a stir a couple of weeks ago when it announced that it was to offer top managers mouthwatering share options and bonuses of up to half their salary if they hit certain targets. At the time, industry watchers put the move down to the contractor's need to keep the board together during its dash for growth. But it could equally be seen as the latest development in the trend towards offering performance-related pay to key staff – a category that includes project managers and secretaries as well as finance directors.

This trend is being driven by two contradictory pressures: the need to keep the wage bill as low as possible in an edgy business climate, and the need to retain and motivate successful decision-makers at a time when every other firm is trying to poach them. Leslie Kent, a construction analyst with stockbroker Seymour Pierce, is in no doubt that this strategy makes sense. He says: "It's a good way to get staff on board to lift shareholder returns by increasing company performance. It makes sense and everybody wins if it the firm does well."

So far, these kinds of pay deals have been associated with contractors and housebuilders rather than consultants, but there is no standard form for bonuses in the construction industry. Most of those paid to top executives are triggered when the company hits a certain earnings per share ratio or share price. Bonuses for lower-ranked staff are usually tied to finishing projects ahead of schedule. Other companies, such as Kier, favour granting share options to staff regardless of rank. This means a project manager may earn a salary of £40,000 but also hold share options worth £50,000.

This democratisation of reward is one of the striking features of the new remuneration packages.

Richard Milsom of construction recruitment specialist Potensis says: "Most companies have some form of performance-related scheme for their staff. This has grown hugely in the past couple of years and now includes most staff levels."

In its latest move, Costain has announced two bonus schemes.

One offers its 50 top staff up to 50% of their salaries if they meet performance criteria. The other will give the top 12 share options, but the final amount depends on whether the contractor reaches its goal of increasing turnover 15% and margins 3%.

But both schemes will only pay out if the targets are met – there are no sliding scale payments. Stephen Hall, Costain human resources director, sees the bonus schemes as the ideal way of getting staff to get in tune with the goals of the company. He says: "These are tough but achievable targets and we are trying to push the business as hard as we can. Bonuses are geared only to increase shareholder value. We've got to achieve these targets: no ifs or buts."

But Costain's bonuses are not the most generous in the sector. Fit-out specialist Overbury, a subsidiary of contractor Morgan Sindall, pays site-based workers double their salaries if targets are met. That can mean an extra £50,000 a year for a London-based project manager.

A Kier project manager may earn £40,000 but also hold share options worth £50,000

Morgan Sindall executive chairman John Morgan has always used bonuses as a way to ginger up staff, right down to secretaries. "Overbury has very happy clients and that is the key to the scheme. Salaries need to be fair, but bonuses are a very important way of rewarding people who contribute a great deal."

But Morgan warns that firms cannot rely on bonuses alone. "They are useful, but there needs to be other ways to motivate staff, like pride in the company," he says.

The other role of bonuses is to act as golden handcuffs. Finding ways to keep the best staff is estimated to take up 15% of the time of construction bosses. Potensis' Milsom says: "If you've had a project manager for five years, it's probably taken the first two to get him working the way you want. You don't want to lose him, so you pay him £10,000 in bonuses because that'll be cheaper than finding a replacement."

Options and fat cats
Milsom says share options are a better option: "If you had a load of options it would take a lot to get someone to move on."

Despite the millions of pounds that are spent each year by companies on bonuses, they are a relatively low-risk way of rewarding staff – most are only paid if the firm's division reaches certain levels. This is one reason why the City loves them – not least, of course, for its own staff.

Higher bonuses usually mean lower basic salaries and therefore lower fixed overheads. Tony Williams, analyst at ABN Amro, believes the bonuses paid out to most construction and housebuilding executives and their staff over the past year are justified.

"Last year was a bumper year for construction and housebuilding with the likes of Persimmon and Wimpey really raising shareholder value. In these cases it is totally justified to reward those responsible," Williams says. Berkeley managing director Tony Pidgley received a £1.1m bonus last year, and Persimmon chief executive John White took home £898,000 in performance-related bonuses following the acquisition of Beazer last March.

How it works: the Willmott Dixon way

Willmott Dixon’s staff bonus scheme has paid out £615,000 since it was launched in January 2002. It is open to more than 800 staff in the contractor’s construction, housing, fit-out and property divisions. The programme creates a pool for each project calculated at 10% of the agreed operational staff cost. A sliding scale means that 100% of the pool is paid out if all the targets are achieved but that none is paid if no targets are met. If all of the targets are exceeded, the payments could increase 40%. The targets that are most heavily weighted are “client satisfaction” and “completing on time”. Others include “resolving defects at end of maintenance period”. Profitability is encouraged by giving rewards for negotiating favourable subcontracts, buying materials at a good price, maximising “design gains and shared savings’’, eliminating “non-recoverable costs”, agreeing final accounts and collecting the money at the end of the project. One recent example of the scheme in operation was the Neasden Open Space project for Fortunegate Community Housing Association. The 14 staff on this scheme achieved the company’s first ever 100% customer satisfaction score, which meant that they shared an incentive payout of nearly £32,000 – that is an average of about £2300 an employee.