Annual business planning, employee reviews, and changes to compensation and bonus programs--it's all part of New Year's business tradition. Face it, home builders should rethink their compensation and bonus programs now. Building company management has been enjoying an upper hand over their employees on pay for a couple of years now, but the tables could begin to turn in 2010.

In home building, the relationship between employers and employees parallels other industries. We've seen an 8.2 percent increase in annual productivity growth over the last two quarters. Employees are stretched painfully thin because of big headcount cuts without a decrease in workload. Growth cannot continue to be fueled by increases in productivity, but will be a result of job growth.

It's no surprise that the Bureau of Labor Statistics reports that the "quit rate" is way down: Only 1.3 percent of employees voluntarily left their jobs in August. Business Week notes that Watson Wyatt, a benefit consulting firm, finds "the loyalty of top performing employees has dropped 25 percent over the past year." Laurie Bienstock, Watson Wyatt's national practice director for strategic rewards was quoted as saying, "Employers are really nervous that the minute the job market picks up, all of these people that are disengaged are going to take off."

Home builders should prepare now to retain their top performers. They're precisely the ones you can't afford to lose--poorer performers will remain with you for as long as you will have them.

Still, a critical disconnect divides what employers and employees regard as important to employee retention. Employers prioritize "management climate" and "supervisor relations," according to a Business Week analysis of Spherion Staffing Solutions' 2009 biannual survey. In contrast, employees cite "benefits and compensation" as most important. Big difference there.

What's more, it's problematic that traditional compensation programs center on annual net income. Compensation should reward employees for value created, which is the objective in any market, strong or weak. Net income and metrics derived from it--such as return on investment and return on assets--overstate value created in strong markets and understate it when the market weakens. So, employees tend to get over-compensated in good times but under-compensated through the rough stretches. Under-compensated, top performers get disenchanted.

If the value of a home builder is greater at the end of the year than it was at the start, a management team created value. One caveat is that the increase or decrease in value should not derive from value created or lost as a result of changes in overall market valuations. The increase in value may be a result of earnings, as earnings increase stockholder equity, or a result of new land opportunities that generate cash flow in the future, or entrance into a new geographic or demographic market, or a reduction in the risk profile of the company.

Some companies will create more value than their peers. Clearly, the bigger the pie created, the more one will receive by comparison to others. Essentially, no one should share in the value created if the result of his actions did not add value. Rewarding poor performers negatively impacts top performers. 

In my Big Money column in December 2005, I recommended aligning Economic Value Added (EVA) methodology and bonus compensation. While I remain a proponent, this methodology hasn't gained widespread use in our industry. So, I would also recommend the Capital Asset Pricing Model (CAPM), requiring changes in builder market valuations to be held constant. CAPM is a widely used business methodology and takes into account future cash flows of assets owned or optioned, the balance sheet of a company, and risk profile of the company and its impact on the company's cost of capital.

Don't wait. It's no time to have your best talent thinking of bolting for greener pastures.

Jamie M. Pirrello is CEO of Berkeley-Columbia Partners and acts as CFO and San Antonio division president of Michael Sivage Homes & Communities.  He can be reached at jpirrello@jamiepirrello.com.