As the economic malaise continues for our country and our industry, homebuilding companies struggling to survive have done everything they possibly can to control costs, as hoping for increased profits through price appreciation and sales velocity has been futile for some time. They’ve changed product specifications, pressed suppliers and trades for lower pricing, consolidated operations and reduced staff to bare-bones levels. For most, this austerity has included a reduction or a freeze in wages for their entire teams (including company leaders) – a step seen as necessary to keep costs as low as possible. Many people I know in the industry enjoyed their last pay hikes in 2005, while bonuses shrank or disappeared entirely. This downturn has been extremely tough on every homebuilding professional I know.

The Myth of "Shared" Sacrifice

Everyone understands the extraordinary difficulties we face in our industry, and keeping our overheads as low as possible makes good business sense. What many well-intentioned company leaders fail to understand is the immense difference between a stagnant income level at $1 Million for a CEO and at $60,000. for a Construction Manager. For the highly paid, these difficult times likely mean a shrinking asset portfolio, but not a lifestyle change. For the Construction Manager who hasn’t seen a merit increase for five years, he struggles to buy bread, gas and sneakers for his kids. I marvel at the company CEO who says, “We’re all feeling the pain of this downturn. I haven’t had a raise either, so my employees aren’t the only ones suffering.” Sharing the pain? Really?

Using frozen wages as a way to control costs is a shortsighted approach – and not a very effective one. Look at the numbers. Consider a company with 500 employees at an average pay of $60,000. A 2% merit increase for everyone would cost the company $600,000. That sounds like a lot of money until it’s compared to company revenues. If the company generates $500 Million of revenue, that $600,000 amounts to little more than one tenth of one percent of revenue. I’m betting that if you gave those 500 employees the task of finding $600K in cost savings, they could do so within hours. That is if they really cared about the company’s future, or were willing to work extra hard to help.

Company leaders need to understand how damaging their pay freezes are to company morale and to the commitment of their staff. With smaller staffs being asked to do more, (every builder has experienced deep cuts in staff) their commitment and willingness to work hard is all the more important. If you REALLY think people are working harder with no pay increases for five years, you’re kidding yourself. Sure, they’re showing up, and are probably glad they at least have a job, but their commitment to the Company will last only as long as the downturn does. As soon as opportunities arise elsewhere, they will remember the pay freeze, interpret it as a lack of concern for their welfare and lack of understanding of the difficulties they face, and leave.

Retaining "A" Players Isn't Expensive

We’ve all heard the justification for pay freezes in tough times and the rationale of “Where else are they going to go?” While it’s certainly true that your remaining employees would have a difficult time finding employment elsewhere in this difficult market, they’ll be great recruits when the market comes back. After all, they are you’re “A” players, aren’t they?

On the other hand, think about what an $1800 merit increase would mean to that Construction Manager who doesn’t know if he can pay his utility bill this month! How much would he appreciate the company’s demonstration of its commitment to him and his family? A lot. Further, imagine how much harder he’ll work and how devoted he’ll be to helping the company to pull through, knowing that despite the hard times, you’ve stood by him and rewarded his loyalty and extra effort.

I know a builder who hasn’t taken a paycheck – yes, a paycheck – since 2006. He said that until he can return to profitability (he will), his obligation is to keep his team together and to be sure they’re able to meet their family obligations. Not surprisingly, his employees have an average tenure of something like 20 years with the company. He knows about commitment and shared sacrifice and his actions speak volumes to his employees. Do you think they’re working harder to help him succeed? I’m betting so.

I know that this message will be unpopular with some, and I am fully aware that tough times call for tough measures. And I’m not trying to demonize company leaders as coldhearted beasts. They’re doing everything they can think of to keep their companies afloat, which is a very daunting task. Nor am I suggesting that they are dispassionate about their employees and the effects of stagnant wages. But cutting costs on the backs of your surviving employees (your “A” players) is not the way to make it through. Reward them for their loyalty and extra effort and engage them in finding ways to manage costs more effectively. If they feel valued and appreciated, they will. And your investment in the merit increase will pay off in spades.

Mark Hodges is president of Blueprint Strategic Consulting and a client advisor for Avid Ratings. Prior to Blueprint, Mark served as Senior Vice President of Corporate Operations for Hovnanian Enterprises, the sixth largest home builder in the U.S. With 30 years of experience in home building, Mark’s vast experience in virtually all aspects of home building has brought about fundamental organizational change on a national scale, across dozens of business units affecting thousands of employees. Mark is uniquely qualified to help growing companies chart their course for the future and execute a plan for growth employing the vital mechanisms to support it. He can be reached at mark.hodges@avidratings.com.