In 2005 executives have enjoyed unprecedented bonus packages, as companies search for ways of getting peak performances from their upper echelon, according to the Building/Hays Executive salary guide. But they’re also making them harder to collect …
2003 was the year construction’s top dogs enjoyed average salary increases of 8%. 2004 was the year that that party came to an end. What will 2005 be remembered for? Well, according to Stuart Cullum at Hays Executive, this year will go down as the year of the bonus.
“We’re now seeing that companies don’t want to have rampant salary increases because that doesn’t incentivise people. Bonuses do,” he says. “It’s a logical step.”
Executives have enjoyed bonus rises almost across the board, and Cullum says this is good news for businesses because it will help them evolve. “The trend is towards increasing the criteria for rewarding the executives who are able to embrace changes in their industry,” he says.
At contractors with more than £200m turnover, bonuses for chief executives, managing directors and main board directors are 50% of their salaries this year, compared with 40% in 2004. That means that for an average chief executive, a £275,000 annual wage packet could come with £137,500 on top. The trend is repeated in smaller companies; chief executives at contractors with a turnover between £50m and 200m are also being offered bonuses of 50%, compared with 30% last year. People in the top jobs at the smaller contractors are also in line for 50% bonuses, up from 20%. The chief executives at the larger civil engineering firms are also running after bigger bonuses. Medium-sized firms have hiked the incentive from 20% to 50%; for large firms, it has risen from 30% to 50%.
And bonuses are currently hitting the headlines. Jarvis is trying to persuade shareholders to approve plans to offer senior managers 200% in share options if they stay at the company and hit growth targets to rebuild its share price. Meanwhile, at Laing O’Rourke, thousands of staff lost their bonuses as the contractor’s profit dropped by more than 57%, from £61m to £26m.
But according to Cullum, bonuses are being linked to more than financial performance. “Not only do you have to achieve a financial result and a personal development result, you have to take into account client satisfaction and supply chain measurements,” he says. “It’s a much more rounded system.”
Last year’s Barker Review emphasised the importance of client satisfaction and good relations with the supply chain, particularly for housebuilders. As a result, bonuses are being tied to increases in customer and supplier satisfaction. And this is part of the explanation for the increase in the value of bonuses. Cullum says: “If you have to hit four criteria rather than one, targets will be harder to hit. But if you hit them it’s worth more.”
Steve Stone, executive director and chief operating officer at Crest Nicholson, says his firm has taken customer satisfaction into account when working out bonuses for more than five years. However, he says the Barker Review showed housebuilders that the industry’s customer service was not up to scratch. “If you bought a car and drove out of the showroom to have a windscreen wiper fall off you’d be furious,” he says.
In fact, housebuilding is the only area where bonuses are down for the top people – by one-third in many cases. Chief executives at housebuilders are getting between 35% and 40% this year, compared with an average of 60% in 2004. Cullum says this is because there has been a levelling off in the amount of housebuilding going on, meaning less ambitious targets are being set for the numbers of units to be built and therefore smaller bonuses are being awarded for doing so.
If executives are enjoying higher bonuses than they were last year, the growth in salaries is decidedly lacklustre. Some have dropped or remained static, and although others have had small rises, they are a far cry from the heady days of 8%. The average pay for chief executives at housebuilders with a turnover of more than £200m went up 0.6% to £315,000, while those in charge of firms with a turnover between £50m and £200m dropped nearly 5% to £225,000. The heads of the biggest civils firms are on salaries 0.4% higher than in 2004. Chief executives at contracting firms bucked the trend, however: their wage packets leaped 16% to £275,000.
Keith Clarke, chief executive at multidisciplinary consultant Atkins, says in the past two years he has had pay increases of 0% and 1.8%, but he can get an additional cash bonus of 12% for hitting financial targets and a further 60% for making other targets over the longer term. Of this 60%, one-third has to be taken as shares.
Clarke argues that higher bonuses improve construction’s public image because they show that the industry is “trying to get good performance”, he says.
But bosses at smaller civil engineering firms are still enjoying salary increases. In those with turnovers of less than £50m, the minimum wages for managing directors and board directors have gone up between 11% and 18%. And chief executives at civil engineering firms with turnovers of between £50m and £200m are now making £135,000, a rise of 9.5%.
John Pritchard, director of engineering policy and innovation at the Institution of Civil Engineers, says that civil engineering companies are also moving into other areas, with the effect that the range of skills they have becomes more valuable. “It’s a reflection of that diversification, and also the strength of the market that these firms don’t have to chase after lower-margin work,” says Pritchard.
Cullum agrees: “I think civil engineering companies have lagged behind for some years and are now catching up. The market is becoming more confident and there’s evidence that the gap that has existed with the civils is closing.” This is partly because of the prospect of big civil engineering projects linked to the 2012 Olympics, he adds.
Not that the Olympic effect is going to rub off on the others any time soon – the industry’s execs will just have to keep working hard for those bonuses. “Over the past few years we’ve seen some substantial increases and now everything’s levelled off,” says Cullum. “We’re not seeing increases in salary and we probably won’t see any impact of the Olympics for a few years.”