The use of retention bonuses – cash payments offered to employees as an incentive to stay on the job by a certain date or to reach a certain milestone – is in “all the time high,” with almost 60% of the organizations making the investment , according to a recent study through World at Work.
But is money wisely spent?
Tom McMullen, rewards skills leader at Korn Ferry, says retention bonuses are typically offered to employees who play a key role and show outstanding performance. This can be useful in some cases, for example, to encourage employees to stay through a merger or acquisition or through the completion of an important business project.
Retention bonuses can also be a useful tool to retain employees during a hot talent market. “The standard is tied to the macroeconomic environment,” said Jacqueline Welch, executive vice president and chief human resources officer of The New York Times Company. McMullen agreed, noting that companies use retention bonuses when they receive a market signal that they may be losing talent, such as high turnover in a specific job function.
Remote work may be another factor that may be driving the increased use of retention bonuses. Amidst the Covid pandemic, corporate culture and professional camaraderie have weakened. McMullen said this may make such payments seem more necessary.
However, there are some risks to be aware of when offering retention bonuses. There is no evidence that they increase engagement or long-term loyalty. This is why Tracy Winton, senior vice president of human resources at Iovance Biotherapeutics, uses it sparingly. “It moves the employee/employer relationship from the ideal state of partnership and toward transactional,” he explains, noting that when he offers retention bonuses, 90% of employees still leave.
“Employers need to understand the employee’s perspective,” says Randi May, an employment consultant in New York City. “When the salary comes, they are not there. They will start their job search on the last date. ” Retention bonuses make employees think, “These are the only dates they want me on.”
Some organizations use retention or sign-on bonuses to buy talent and match job offers. But this short-term strategy risks alienating current employees and could harm paying equity.
And another argument against retention bonuses: “You’re paying people to do what you’re already paying them to do,” says Erika Duncan, a New Jersey-based human resources consultant.
A More Effective Way to Use Retention Bonuses
In most organizations, retention bonuses are left to management discretion. Less than a third of companies have formal eligibility guidelines and criteria, according to the World of Work study. Used primarily for senior and hard-to-replace roles (such as sales, IT, and technical staff), bonuses are paid in cash, in a lump sum. About a quarter of organizations use periodic payouts at regular time intervals or to achieve project milestones. Many contracts have clawback provisions, where the employee must pay the bonus (or a pro-rata portion) if they leave before a specified period of time. Length of service is usually not a criterion for eligibility.
To use retention bonuses more effectively, experts recommend the following four steps:
1. Think strategically.
When you offer a retention bonus, you are essentially offering the employee an end date. So you have to ask yourself: What causes the risk of employee leaving? Does paying retention reduce risk? And how do you measure success?
If you’re experiencing turnover due to below-market base pay, for example, retention bonuses aren’t the answer. You should increase the base pay. If you want to recognize exceptional results and efforts, give the employee a one-time bonus on the spot. To retain senior executives, it may make sense for cash flow to check restricted stock grants given over time.
Retention bonuses can be a creative way to slow progress and exit when you need people for a short period of time. “You can design a ramp-down program with a graduated scale, like four months, six months, etc.,” explains Erika Duncan.
2. Spell out the program’s eligibility and offer guidelines to managers on how to use it.
This is valuable for two reasons. First, companies that don’t provide oversight tend to run the risk of an open checkbook. Second, more than 25% of companies that pay retention bonuses rely on management discretion and therefore do not know how to calculate them, according to World at Work.
Having a clear policy also ensures that your company’s approach to retention bonuses is fairer. Full managerial discretion, without any oversight, risks favoritism, fairness, and moral issues.
3. Write your offer.
Include eligibility dates, payment provisions, and the rationale for the bonus. If applicable, define qualifying project milestones. Consider whether to include a clawback provision, disqualification in the case of termination for cause, and payment contingent upon the release of claims. Contractual language should be easy to understand — no legalese.
4. See if it passes the “public printer” test..
Ask yourself: If a copy of the retention bonus program was discovered sitting on an unsuspecting employee’s printer, would it pass the fairness test? “The program should be such that when it is communicated to all employees, they will understand the strategy,” Welch said.
If you use retention bonuses a lot, consider talking to the program. People may not like it, but they will trust and respect you more if they hear about the program from company leaders and are trusted with reason, rather than through employee hearsay.
Welch shared an example of what this looks like in practice. One of his former employers was known as a good developer in a specific job role. Like clockwork, in 12 to 18 months, clients will come poaching this talent.
With turnover for the position jumping from 10% to 25%, his company created a retention and development strategy. They are straightforward with employees in this role, informing them that clients will try to hire them after a year. They educate them on reasons to stay, explain the career ladder and promotion opportunities. If possible, they promote these employees on an abbreviated timeline. When people aren’t ready for promotion, they use retention bonuses as a stop-gap solution to encourage them to acquire the necessary skills to get to the next level.
Final word to the wise: Don’t pay jerks to stay. Open the exit door for top performers who threaten to leave and poison the work environment. Let them go, no matter how great their results are. “Don’t let yourself be held in a barrel,” Welch says. Winton agreed. “I tell managers if you make a compensation decision based on fear, it’s not going to work.”
And if your organization can’t afford a bonus program, you can reward top employees career development opportunities and specific, appreciative feedback. There are many nonmonetary means to retain staff.
When used operationally, retention bonuses are an effective short-term economic tool for organizations. Long-term retention and loyalty are not must be about moneybut relies on precious relationships managers build with their team members.
