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					 BONUS STRUCTURE ANALYSIS



 Executive Summary

 The current bonus structure is fundamentally flawed because it rewards an employee for essentially
 performing their basic job description. As a percentage of annual salaries, current bonuses are three to
 four times higher then the home construction industry average as illustrated in Exhibit 1.

 Exhibit 1       Typical salary/bonus matrix – Industry Comparison
                                                                                      Average       Average Total
                                          Base Salary          Annual Bonus         Percentage      Compensation

 ABC Industries                               46,500         41,850 – 51,150            100%                69,750
 Home Construction                   30,000 - 55,000          5,000 - 15,000             24%                52,500
 Commercial Construction             50,000 - 70,000            3,000 - 9,000            10%                66,000
 Institutional Facility              55,000 - 85,000            3,500 - 7,700             8%                75,600
 Oil and Gas                        50,000 – 100,000         11,250 – 18,750             20%                90,000

 The current bonus structure is cumbersome to manage and is fraught with opportunities for employee
 manipulation. The myopic focus of the current structure promotes an “us against them” mentality and
 fosters a silo culture. It is reasonable to assume that the current investment in bonuses does not
 reciprocate a proportionate value back to the firm.

 Observations – Current Bonus Structure
  Rewards employee for performing basic job description
  Fosters silo culture
  Cumbersome and bureaucratic to maintain
  Easy to manipulate employee input and data
  Difficult to verify accuracy of employee input and data
  Siphons resources and focus away from other critical priorities
  Erodes competitive advantage

 Recommendations
  Develop controlled/measurable weighted tier bonus evaluation scale
  Establish financial targets/goals for evaluating performance
  Link performance indicators to budget, scope, and schedule
  Track performance with system data (AS400)
  Incentive the Trades as one unit
  Hire consultant firm to evaluate and implement new bonus process

 Exhibit 2       Performance Illustration – Weighted Tiered Bonus Structure

                                          Tiered           Tiered          Tiered          Tiered          Tiered
                        Current        Structure        Structure       Structure       Structure       Structure
                       Structure             0%              25%             50%             75%           100%
Employee Bonuses               1               0             0.25             0.5            0.75               1
EVPO's                         1               1             0.75             0.5            0.25               0
Service Calls                  1               1             0.75             0.5            0.25               0
Warranty Calls                 1               1             0.75             0.5            0.25               0
                               4               3              2.5               2             1.5               1



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BONUS STRUCTURE ANALYSIS cont’d



Home Construction1

Typical bonus criteria for home construction

     Quality – minimal punch lists and warranty items equate to quality
     Schedule – on time turn around for new housing starts
     Budget – construct home at original budget or less

Exhibit 3           Typical salary/bonus matrix – Home Construction

                                                                                        Average    Average Total
                                       Base Salary             Annual Bonus           Percentage   Compensation

Salary range                       60,000 - 80,000          10,000 - 20,000                21%          85,000
Salary range                      80,000 - 100,000          20,000 - 30,000                28%         115,500

Supervisor 1 - 3 years             30,000 - 45,000             5,000 - 15,000              27%          47,500
Supervisor 3 - 7 years             45,000 - 55,000             5,000 - 15,000              20%          60,000

Project Manager                                             15,000 - 30,000




Commercial Construction2

Typical bonus criteria for commercial construction

A bonus pool is established as a percentage of the job profits. This bonus pool is distributed once a year
to qualified managers based on several categories. These categories are weighted towards areas of
importance concerning the company’s goals and objectives as well as the manager’s job description. The
average bonus is typically five to fifteen percent of the manager’s annual salary and is awarded based on
meeting specific company objectives such as safety records and project close out duration. One hundred
percent of the bonus compensation is discretionary

Exhibit 4           Typical salary/bonus matrix – Commercial Construction

                                                                                        Average    Average Total
                                       Base Salary             Annual Bonus           Percentage   Compensation

    Salary Range                   50,000 - 75,000             3,250 – 9,750               10%           71,500




1
    Joe Smith, interviewed by Don Huml, telephone, Sanford, FL. , 30 January 2006
2
    Jill Ashley, interviewed by Don Huml, telephone, Sanford, FL. , 30 January 2006



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BONUS STRUCTURE ANALYSIS cont’d



Institutional Facility Management3

Typical bonus criteria for institutional facility management

     Customer Satisfaction
     Financials
     Performance Indicators

Bonus criteria is weighted on a tiered system that focuses on customer satisfaction, department
financials, and specific performance indicators with financials counting the most toward the employee’s
bonus at forty percent of the bonus opportunity.

Targets/goals are established on all financials as it relates to the yearly budget per department. For
example, a $10 million target for revenues and a $ 9 million target for expenses. Then at the end of the
fiscal year, the actual financial performance is measured against the established targets and ranked
according to the over/under percentages as follows;
                                           Commendable                       3%
                                           Target                            5%
                                           Distinguished                     8% and above

If the system does not meet the targets/goals then no bonus compensations are awarded towards the
financial tier portion for the employees in that particular department. If the department meets the
financial target, then the numbers are factored into the evaluation scale accordingly.

Performance indicators focus around areas of operation that are in the control of the department manager
and that can ultimately effect the department’s bottom line. For example; reducing utility costs or
improving turn around time on equipment rentals.

The bonus evaluation scale is a controlled process that is defined and measurable. Two thirds of the
employee’s bonus opportunity is non-discretionary and one third is purely discretionary. The average
bonus compensation is typically around eight percent of the employee’s annual salary and a fifteen
percent bonus is considered “stellar”.

Exhibit 5          Typical salary/bonus matrix –institutional Facility Management

                                                                                   Average    Average Total
                                      Base Salary             Annual Bonus       Percentage   Compensation

    Salary Range                  65,000 - 95,000             4,000 – 8,000            8%             86,400




3
    Frank Brown, interviewed by Don Huml, telephone, Sanford, FL. , 03 February 2006


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BONUS STRUCTURE ANALYSIS cont’d



Oil and Gas Industry4

Typical bonus criteria for oil and gas industry

     Company Financial Performance
     Alignment with Company Core Values
     Individual Performance

Company financial performance goals are established for a fiscal year as a benchmark in which to help
evaluate employee bonus compensation. On a weighted tier evaluation scale, the financial performance
component comprises seventy five percent of the employee’s bonus opportunity. Bonus compensation
for company financial performance is linked to a sliding scale. If financial goals are met, then the
employee will receive 100% of the seventy five percent bonus allocation. However, if the company fails
to meet financial goals, then the bonus allocation will be reduced proportionately and if the company
exceeds financial performance goals, then the bonus allocation will be increased proportionately. The
bonus compensation allocations for the tiered evaluation scale are as follows;
                                               Company Financial Performance                75%
                                               Core Values                                  10%
                                               Individual Performance                       15%

Exhibit 6          Typical salary/bonus matrix – Oil and Gas Industry

                                                                                    Average   Average Total
                                      Base Salary              Annual Bonus      Percentage   Compensation
Supervisor                         50,000 - 60,000                     8,250           15%          59,125
Low Manager                        60,000 - 70,000                     9,750           15%          69,875
High Manager                       70,000 - 80,000                   15,000            20%          82,500
Low Director                       80,000 - 90,000                   17,000            20%          93,500
High Director                     90,000 - 100,000                   23,750            25%         106,875

Observations – Current Bonus Structure

     Rewards employee for performing basic job description
     Fosters silo culture
     Cumbersome and bureaucratic to maintain
     Easy to manipulate employee input and data
     Difficult to verify accuracy of employee input and data
     Siphons resources and focus away from other critical priorities
     Fails to reciprocate proportionate value for percentages awarded
     Erodes competitive advantage

The current bonus structure is fundamentally flawed because it rewards an employee for essentially
performing their basic job description. As a percentage of annual salaries, current bonuses are three to
four times higher then the home construction industry average. The current bonus structure is
cumbersome to manage and is fraught with opportunities for employee manipulation. The myopic focus
of the current structure promotes an “us against them” mentality and fosters a silo culture.

4
    Jennifer Taylor, interviewed by Don Huml, telephone, Sanford, FL. , 06 February 2006


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BONUS STRUCTURE ANALYSIS cont’d



Recommendations

   Eliminate current bonus structure
   Develop controlled/measurable weighted tier bonus evaluation scale
   Establish financial targets/goals for evaluating performance
   Link performance indicators to budget, scope, and schedule
   Track performance with system data (AS400)
   Incentive the Trades as one unit
   Hire consultant firm to evaluate and implement bonus process

The current bonus structure should be phased out or eliminated because of the inefficiencies previously
mentioned. A new bonus structure should be developed to better align the resources of the firm as it
relates to people, rewards, systems, structure, process as illustrated in Exhibit 10 to maximize
competitive advantage. The goal of the bonus structure is to provide incentives that drive performance
towards objectives critical to creating value for the firm.

Existing employees under the new bonus structure can still earn the same bonus opportunity percentages
they enjoyed previously under the old structure. However, in order to capture those margins, they will
need to realign their focus and efforts to accomplish a different set of criteria similar to those illustrated
in Exhibit 8. Employees should be awarded only for accomplishing certain specific tasks that provide a
direct positive impact for the firm in terms of budget, scope and schedule similar to Exhibit 7. This type
of bonus structure should be implemented utilizing a weighted tiered evaluation scale similar to Exhibit
9. To be effective, these tiers should be linked to high impact areas such as EVPO’s, Service Calls, and
Closings.

In order to help discourage silo cultures, the following incentives should be considered to promote
collaboration between divisions and nurture a team environment.
                                            Incentive the Trades as a single unit
                                            Link rewards to tasks that require team cooperation
                                            Structure incentives requiring overall team success
                                            Reward the big picture (the whole vs. parts)

The engagement of a consultant firm would be very beneficial for the development and implementation
of a new bonus structure. As a neutral third party, a professional consultant firm could flush out many
valuable concepts and strategies. They will also help to deflect potential employee resentment toward
upper management. A consultant assignment of this magnitude may cost $ 50,000 to $ 100,000.
However, the monies captured from reducing inefficiencies as a result of the consultant assignment could
quickly offset this expense.As illustrated in figure Exhibit 9, the potential savings captured as a result of
a successful bonus program could be significant.




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    BONUS STRUCTURE ANALYSIS cont’d



    Exhibit 7      Example of Recommended Tiered Bonus Evaluation Scale

     EVPO's                          20%
     Service Calls                   20%
     Warranty Calls                  20%
     Superintendent Rating           10%
     On Time Closings                10%
     Discretionary Evaluation        20%
                                    100%


    Exhibit 8      Example of Recommended Weighted Bonus Evaluation Scale

                               100%                  75%                   50%                      25%                   0%
EVPO's                  $ 0 - 25,000      25,001 - 50,000       50,001 - 75,000         75,001 - 100,000    $ 100,001 - Above
Service Calls                 0 - 150          151 - 300              301 - 450                451 - 600          601 - Above
Warranty Calls                0 - 150          151 - 300              301 - 450                451 - 600          601 - Above
Superintendent
Rating                           10, 9                  8,7                    6,5                   4,3              2 - Less
On Time Closings                100%                   75%                    50%                   25%                    0%
Discretionary
Evaluation                  100 - 90               89 - 70                  69 - 50               49 - 30           29 - Less


    Exhibit 9      Performance Illustration Chart – Weighted Tiered Bonus Structure

                                              Tiered               Tiered                Tiered          Tiered         Tiered
                       Current             Structure            Structure             Structure       Structure      Structure
                      Structure               100%                   75%                   50%             25%             0%
Employee
Bonuses             (2,500,000)          (2,500,000)          (1,875,000)         (1,250,000)        (625,000)               -

EVPO's              (4,500,000)                    -          (1,125,000)         (2,250,000)       (3,375,000)    (4,500,000)

Service Calls       (1,825,000)                    -           (456,250)              (912,500)     (1,368,750)    (1,825,000)

Warranty Calls      (1,825,000)                    -           (456,250)              (912,500)     (1,368,750)    (1,825,000)

                   (10,650,000)          (2,500,000)          (3,912,500)         (5,325,000)       (6,737,500)    (8,150,000)




                                                  Page 6 of 7
BONUS STRUCTURE ANALYSIS cont’d



Exhibit 10              Star Model of Organizations




                Star Model of Organizations
                                          Strategy



                           People                              Structure




                           Rewards                         Processes




    (Galbraith, 2002)



Assumptions

Portions of this report are based on the following assumptions;
 600 service calls per month for all trades combined
 $ 250 total average cost per service call
 Annual EVPO costs are $ 4.5 million for all trades combined
 Costs and frequency of service calls and warranty calls are identical
 The concepts illustrated as part of this analysis are for discussion purposes only




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