How to Start an AE Firm

Learning Series

July 25 2016 // 5:00 AM

Compensation Packages for Your A/E Firm

Written by Jared Perry | @PAEVENjared

Part 7: Compensation Packages for Your A/E Firm

When considering how you are going to run your firm, one of the most important items to consider is how you will handle paying yourself and future employees. Part 6 of this blog discussed open book management and how to implement that philosophy in your firm. If you adopt this method of operations, the way you compensate will be available for all to see. This is important to note because how you compensate will also be a great way to recruit the best talent to your practice. So let’s take a look at what goes into a compensation package and how to set up your new firm for success.

Compensation Package Components:
 

  1. Base Pay 

  2. Bonus System

  3. Paid Time Off

  4. Holidays

  5. Health Benefits

  6. Continuing Education

  7. Professional Dues and Registration

  8. Liability Insurance

  9. Work Schedule

  10. Special Considerations


I’ve outlined the above components for discussion in this article because they are all part of how an employee will be compensated. These items play a huge role in how a person can approach both their personal and professional lives. Remember: the goal here is a happy employee. If an employee feels appreciated and respected for the time and effort they put in, the rewards are tenfold. Going back to Part 1 of this blog, “The Rhombus Rule” isn’t just for owners. It’s for everyone. So your employees are going to have their own priorities set in order, which makes your compensation package all the more important. They will ask themselves, “What about this company gives me the opportunity to stay true to my priorities?” You see, the key thing to remember is not everyone measures wealth in dollars. A lot of people value free time and flexibility just the same. So with that in mind, let’s look into these components in more detail.

1.    Base Pay

This is how much you intend to pay an individual for their time. You can do this either hourly or salary. I will spend the entire next article on how to set up your A/E firm’s rate table, which will take into consideration base pay and where to start for different professional levels. For now, just know that you have the option to pay employees hourly or salary. From a marketability standpoint, professionals are going to be looking for salary pay. I always advocate making the base pay system lower than what can be found at other firms. I want to keep base costs as low as possible and then give employees the opportunity to win with bonuses when the firm wins. Those bonuses would make their “dollar compensation” higher than those competing firms mentioned earlier. Another little nugget worth mentioning is that when explaining this lower base salary to prospective employees, let them know that with lower base salaries it is easier to make it through downturns in the market or slowdowns in work. They won’t have to worry about getting their hours cut or not receiving a paycheck.

2.    Bonus System

In the Great Game of Business (GGOB)—mentioned in Part 6 of this blog—the author Jack Stack gives some great ideas on how to incentivize your employees. I recommend having at least two “games” you can award bonuses to. Speaking to A/E firms specifically, the first game should be directly tied to a metric that affects your business, such as pre-tax margin (PTM). We use this at my firm and I highly recommend it, because if you hit your pre-tax margin target, then you will always have enough coin in the bank to pay said bonuses, provided you set them accordingly. The second game I would target would be your biggest perceived weakness. For A/E firms that might be sales, new business vs. repeat business, accounts receivable, or countless others. Take what it is that you are concerned about and set a game with a target in mind for employees to work toward. You can make it an individual or team game. Hit the target – pay the piper. It’s simple. Your total bonus packages should be enough to put your dollar compensation 10% (at a minimum) over that of your competitor’s salary package. The great part about paying employees this way is it will weed out folks there just to collect a check. 

3.    Paid Time Off

This component will encompass all time an employee might want to be paid for while not in the office working for you. This encompasses sick time, vacation, prenatal or pregnancy leave, etc. Anything out of the office that they want to be paid for. It should be noted this is only for salaried employees, not hourly. This time should also be use-it-or-lose-it. No carryover from year to year. If your employees are hourly, then no need to consider this. If you are planning on salaried positions, then you can expect to be competitive in the market place with 15 days for entry to lower level employees. Middle to upper level employees will command somewhere between 20 – 30 days. On the face it looks like a lot, but honestly employees rarely take that much time off. You really only see spikes in PTO for sick time. The average person will take 1 -2 trips per year as well as the time around Christmas through New Year’s. I recommend not being stingy here. People like to see a big number even if they don’t use it.  You have to remember trips cost money, which isn’t always in everyone’s budget, and if you’re hiring the right people they aren’t going to just take off to sit at home. The people you are hiring are doers and love their craft – not warm bodies.

4.    Holidays

This one is very straightforward. I do not recommend giving a ton of holidays. Your clients don’t have a ton of holidays. You are not a government agency. Don’t act like it. To keep it simple I recommend “closing” your office and paying employees for the following:
 

  1. New Year’s Day

  2. Memorial Day

  3. Independence Day

  4. Labor Day

  5. Thanksgiving Day

  6. Christmas Day


In addition to offering the above days as paid holidays, I recommend allowing each employee the opportunity to take two additional paid holidays off of their choosing. This could be for religious reasons or Victory over Japan Day. Doesn’t matter. It’s up to them. Just be sure they give you one month notice prior so you can plan your schedule accordingly.

5.    Health Benefits

Ahh health benefits...where do we begin? I’m actually going to advocate two things here. The first is that you don’t offer health insurance when starting out. Covering and offering health insurance can be something to aspire to, and for the record, it should be. Starting out, however, it is not a necessity. As a recruiting tool offering health benefits is huge. At my firm we didn’t offer health benefits until we had a few years under our belt. When we did offer, we went big. 100% for employees’ health, dental, and vision. This is a sizeable check each month so don’t dive headfirst, but definitely keep it on your radar as something to incorporate into your overall compensation plan when you can. Employees like it when employers do things because they feel it is the right thing to do, not because they feel they have to or because they are forced to.

6.    Continuing Education

When employees work hard for their license you want them to keep it up to date. To be a cutting edge firm you also want them to know the latest and greatest technologies out there. It is my belief that employees need to be challenged and educated each year rather than just taking classes to fulfill CE credits. They need to be challenged to learn new things that can help your firm. Asking an employee to become the best at something and then paying for them to be trained gives them ownership and pride over that skill. It helps them integrate with other employees from an authoritative level—they know a task better than anyone. They are the go-to person for “X” and that makes them feel needed and valued. We typically put aside a general fund of $500 per employee for CE and then if something specific pops up we have a separate fund in our business plan we can tap for larger investments. For purposes of this article, $500 per employee is enough to get them into good CE courses that aren’t just internet quizzes. 

7.    Professional Dues and Registration

First let me start with professional registration dues. This should be a no-brainer but I’ve actually heard of a few firms out there that don’t do this. I don’t advocate being one of them. You are the owner of the company and if they are holding a license that you expect them to use then you should be footing the bill for keeping it up to date. Typically, these are small fees around $50 to $100 every two or three years so it’s really not that big of a deal. Switching gears and talking about professional dues like being a member in an organization is a different story. For each employee I would set aside $250/year to be a member of a trade organization. It teaches them networking and keeps them sharp. The key here is not everyone will take advantage of this and that’s okay. Again, this perk is just another item you can add to the long list you are offering as part of your compensation plan.  

8.    Liability Insurance

I don’t know of any company that makes their employees own and pay for a separate E&O insurance policy. However, this doesn’t mean the employee knows that. So educate them. The more licensed professionals you have at your firm, the more people your policy will need to cover, which means the higher your insurance premiums will be. I include this perk in our package description because it is something we pay for that many employees don’t realize. Each time we add a licensed professional, this policy gets adjusted and costs go up. I am reluctant to include an estimated number here because they will vary significantly based upon your geographic location, engineering or architectural discipline, and percentage of work you do in specific industries. Consult an insurance provider for quotes specific to your firm.

9.    Work Schedule

Forty hours. That is what an employee is looking for. It doesn’t mean that is all they are willing to give you, but rest assured they are looking for 40-hour work weeks. So how can you be different than any of your competitors? Easy – be flexible. And for the love of all that is good and holy don’t just talk about being flexible – BE FLEXIBLE! They are professionals; even if they aren’t licensed, they are professionals. They work in a professional office and will act accordingly. If they don’t, send them packing. Being flexible means they can make their own hours so long as they are able to get all of their projects done and fulfill all of their obligations to your clients in a professional manner. It is absolutely amazing how much ownership an employee will take on when treated like a professional.

10.    Special Considerations

This is a catch-all that varies from firm to firm. Some firms provide employees with cell phones, vehicles, or other fringe type benefits. As a startup I don’t recommend going out of your way to include these because I am a huge advocate of making your bookkeeping as clean and simple as possible. The one exception I will make here is for health. If an employee wants to join a gym, then within the by-laws of your company you could pass a motion that would allow the company to become a member of a gym. The employee could then use the membership and have the cost deducted from his or her salary. The benefit to the employee is that the deduction of pay happens on the gross pre-tax salary similar to health benefits. In other words, the employee isn’t absorbing the cost of a gym membership with post tax money, they are absorbing it with pre-tax money which can save them a few bucks each month. This is especially true if they are close to a tax bracket. For example, if someone makes $45,000 per year and they have 2 kids, a house, and student loan interest, then after deductions they may be close to the threshold of $37,000 net income.  That is the difference between a 15% Federal tax bracket and a 25% Federal tax bracket. Little things like this might just be what they need to swing the pendulum in their favor and put 10% more money back into their pockets. All thanks to you, the employer who thinks outside the box. 
    
Takeaways:
    

  1. The more creative you are with your compensation packages, the more power and leverage you will have when recruiting talented architects and engineers to your firm.

  2. All employees are not created equal. All employees think and operate differently. Therefore, don’t assume that the only thing that matters to someone is money. Wealth can be measured many different ways.

  3. Think outside the box. Don’t just take what I’ve shown you here. Take what I’ve shown you here and make it better. That’s the sign of a good leader. That’s the sign of someone your employees will be happy to work for.


UP NEXT >> Part 8: How to set your A/E firm’s rate table

 

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