03 Sep 2009  What Do YOU Think?

Are Retention Bonuses Worth the Investment?

There is a time and place for retention bonuses but they should be used sparingly, wrote many respondents to this month's column, says Professor Jim Heskett. Others challenged the value of bonuses, and suggested compelling alternatives. (Online forum now closed; next forum begins October 2.)

 

Summing Up

What is the time and place for retention bonuses? Retention bonuses have their time and place but have to be used sparingly, according to many respondents to this month's column. Others were not so sure.

Gerald Nanninga perhaps explained the ambivalence best: "The retention bonus is a tool…. The problem is not the tool, but the user … if the company were better run, you wouldn't need to bribe people to stay … (but) there are … times when the retention bonus is appropriate, such as when a company is for sale …." Rajat Gupta pointed out that the retention bonus "makes sense if an employer provides some special training/skill to an employee that increases his market value substantially …." Naseem Khan suggested that "… a retention bonus may be doled out in lieu of base pay increases." Steve Hobart said that retention bonuses work to the extent that they encourage employees in an acquired company to "preserve and internally disseminate the knowledge that made the smaller (acquired) company attractive to the larger one." Vladimir Pavelko expressed his support for such a bonus, saying that "It helps to save money for preparing the new staff … after a merger." Tony Eckel said, "Properly applied, they are investments in the continuity and stability of the organization."

Some were vehement in their opposition. "I view a retention bonus as a sort of blackmail by an otherwise 'disgruntled' staff …," said Kapil Kumar Sopory. Nisar Moosa called them "bribes." Imelda Bickham commented that "Time and again, I've seen people get the bonuses, only to leave the organization shortly afterwards." As R. Jennings put it, "Without a doubt they are worth every penny, IF you are on the RECEIVING end." Christoph Vaagt had an interesting view: "If the value of a firm being sold depends on the people who work for it … A retention bonus is … a sure sign of a bad deal."

Others questioned the effectiveness of retention bonuses and in some cases suggested alternatives. Tom Weston reminded us that "most high value employee(s), if they decide to leave an organization, will negotiate an equivalent sign-on bonus." JA said, "I have found the best investment to be a solid severance program." Frank Fabela pointed out "When the mission is compelling… there is no need to provide monetary incentives" … (as opposed to) when something like uncertainty amidst a pending sale threatens the employees' motivation …."

One irony here is that if the argument for retention bonuses is that the organization may have enhanced the value of its employees, there appears to be a penalty to the company for doing so. Shouldn't we expect some recognition on the part of the employee, perhaps expressed in terms of greater loyalty, about the company's role in doing this? Should an organization impose a quid pro quo for funding such development? Or is this the cost that organizations known for their prowess in developing their employees have to bear? What do you think?

Original Article

Last March 25, Jake DeSantis, then an executive vice president with American International Group, published his resignation letter in The New York Times. He announced that he was donating the after-tax returns from his twelve-month retention bonus, $742,006.40, to "organizations that are helping people who are suffering from the global downturn." He did this instead of returning the money to AIG, as its CEO, Edward Liddy, had publicly requested him and other senior executives to do in light of the perception by many in the public that the money was being paid out of funds provided by a Government bail-out. DeSantis' action sparked a debate regarding pay for performance in general, and retention bonuses in particular, a debate of special interest to directors who chair compensation committees for large corporations, sign lengthy public proxy statements, and are already under intense public scrutiny.

Pay for performance, in theory, should be a win-win proposition for investors and managers alike. It is generally condoned by shareholders and supported by tax policy. This has led to a much greater reliance on pay for performance.

On the other hand, pay for performance produces large payouts that periodically capture the attention of the public, not all of it positive. They helped raise the ratio of CEO compensation to that of the average employee in large U.S. firms to 400 to 1 just prior to the current economic meltdown, because pay for performance most often applies only to a small cadre of managers in many organizations. Further, pay for performance, when structured poorly, is believed to provide an incentive for distorted behaviors to maximize short-run performance of the kinds that led to the implosion of organizations like Enron and WorldCom.

Retention bonuses are a special kind of performance pay. They provide an incentive to do nothing. That is, they encourage key people to remain in place in an organization. They gained popularity in the merger activity of the 1980s when it made sense to encourage key employees to remain in place for some time after an organization, whose value was based in part on their presence, was sold. Recently, though, they have become more common as a form of compensation to key employees. Moreover, questions have been raised, as in the AIG case, whether they are necessary when times are bad and alternative jobs are scarce, regardless of whether recipients at AIG should have been asked to return bonuses already paid.

Few have argued that retention bonuses help preserve the value of organizations that are for sale. But as a more regular form of compensation are they worth the investment? Or do they do more harm than good? To what extent, for example, are they a substitute for good management? Do they, along with other forms of pay for performance, deserve favorable treatment under corporate tax laws? Should organizations receiving government aid be allowed to use resources to pay them? What do you think?

To read more:

Jake DeSantis, "Dear A.I.G., I Quit!," The New York Times, March 25, 2008, p. A25.

Comments

    • CJ Cullinane

    Retention bonuses are a waste of money and most likely do more harm than good. If an executive stays at an organization just for the retention bonus will they be truely motivated to do their best effort or know they are secure in their position. We tend to give bonuses without real performance improvement and no long term retribution for failed risk.

    The poor results of our failed financial system attest to this 'bonus' system's flaws. Are these supposed superstar employees even worth a paycheck? They failed, and who rewards failure. I do not consider short term gains with long term losses a real profit, why should it be rewarded.

    A retention bonus equals business as usual and this is not the way to sustained growth.

    Charlie

     
     
     
    • Moreen Carvan
    • Evaluation Consultant

    My work focuses on how to structure and evaluate learning. Performance-based assessment that leads to learning, that is based on valid and reliable performance measures, and that provides opportunities for organizations to learn how to do their work better is a benefit to all.

    Systems that automatically identify performance on only one distal and proxy measure (stock value) of a complex performance (doing the work of the organization) are not performance-based systems.

    They only reward one or two groups within the organization and do nothing to promote real value. They lead, instead, to bubbles and busts.

    Chris Argyris has been pointing this out for decades. This whole sorry mess was predictable - it WAS predicted by many.

    The best retention bonus is having evidence that you are growing as a person and that your growth is helping others to grow, too.

     
     
     
    • Chris
    • Chief Architect, MITRE

    Retention bonuses assume that the majority component of an employee's incentive/decision to remain with a company is a financial one. This is fallacious at best--there are many psychological components related to the decision that I believe far outweigh the financial one.

    I think an individual's perception of success and their future earnings (both somewhat related) is a far greater influence. The psychology of sunk cost should also apply, because I believe that once the retention bonus is received, I suspect it no longer plays much part in influencing the individual.

     
     
     
    • Piyush
    • Business Analyst, Mu Sigma Inc.

    Retention Bonus, as Chris mentioned above, is a majority component of the employee's decision to NOT quit the organization. An employee, who no longer wishes to work with his organization but is sticking around just to collect the lump sum at the year-end will do no good for the company. More than an incentive to stay back, it is an incentive for the employee to leave the organization at the end of the year!

    Let's face it; this question - 'Whether retention bonuses are worth the investment' does not have a fixed answer. For people who hold pivotal positions and are required to bring about a major turnaround the incentive should never be financial, like a retention bonus! Junior members/freshers who are supposed to learn & start delivering immediately after they join should be provided a financial incentive so as to return the investment in their year of stay.

     
     
     
    • Steve Thomas
    • Head Trader, Hedge Fund

    If corporate cultures are based on Team performance, as is often stated at the behemoth corporations, how then does the concept of one individual receiving an outsized bonus mesh with the corporate culture? I never understood that...

     
     
     
    • Phil Clark
    • Clark & Associates

    Pay for performance (at the higher levels) and retention bonuses are reflections of a company's failed ability to relate to a healthy working environment. These serve only to distort the operations of a company to stroke egos. That may seem cold, but over the years when I see creative compensation it usually means little to the benefit of the organization. What really disturbs me is such behavior demonstrates the mental models that a corporate board works under. It sets up a destructive performance model. The people at the lower level of the organization works hard for the company and they see a disproportionate part of the profits go out at the top. Are people who are willing to take so much profit out of a company really keeping the company's interests at heart.

    I am all for fair compensation and rewarding those who improve the conditions and profits of companies. I truly worry when they reach the level so disporportionate to the rest of the employees like we witnessed over the past few years. It is success or ego that is being fed?

    As for retention bonuses, I want people working for a company that wants to be there, not wants its money. You cannot buy loyalty. As Piyush mentions above, it almost guarantees that they will leave.

    If you want to create profitable healthy companies, don't buy mercenaries.

     
     
     
    • Anonymous

    Let face it... the retention bonuses were given just to bypass the traditional incentives these employees would have otherwise received had the good times continued to roll. I am not sure if retention bonuses are altogether a bad thing. In the Wall Street world, bonuses are a large part of the compensation package. My only objection to this entire scheme is when the companies using this payout psychology receive public rescue funds. I wonder if a bankruptcy judge would have approved these types of compensation methods had these businesses become insolvent?

     
     
     
    • Anonymous

    On the one hand, performance and growth are (causally) correlated while on the other hand; bonuses and risk taking are also (causally) correlated. Unfortunately the combination of the two (causal correlations) has provided a false feeling of a correlation between the all four; when in fact, it indirectly allows the operation of an undesirable negative correlation on the two above stated causal correlations (i.e. between performance and growth and between bonuses and risk taking), raising the probability of catastrophic organisational failure under the condition when excessive risk taking for higher bonuses does not correlate to high performance in real terms. While the reverse is also true, that is, a company can grow with high performance, but with lower risks and sensible payoffs.

    In nutshell, the whole bonus system is flawed and must be dumped for good immediately and replaced with something more sensible e.g. annual payoffs.

     
     
     
    • Rajat Gupta
    • Student, HBS MBA 2010

    I hail from the Manufacturing industry and have serious issues understanding the motivation behind a retention bonus. In general one's salary is supposed to be sufficient for retaining him and his bonus responsible for incenting higher performance. The only way I can understand this is by assuming that a huge chunk of his salary is being paid at the end of the year so that he sticks around for that long.

    I think that this makes sense if an employer provides some special training / skill to an employee that increases his market value substantially and hence needs to secure his investment through a binding contract or a retention bonus. Otherwise, these bonuses are misleading and would not eventually (positively) affect the productivity of an employee in the firm.

    In the finance industry, I believe that the issue has moved away from rationale problem to a culture problem. It is like someone starts doing something that is justifiable in short term and others copy it and soon it becomes an industry norm. I think that the industry needs to re-look into its practices and examine what makes sense. Well, anyways all this is much easier said than done !!

     
     
     
    • Dr Smorfitt

    I believe it increases agency and reduces effectiveness, or at least that is my experience to date.

     
     
     
    • Jessica
    • Mang, Self Employed

    The Government already condones retention bonuses and pays them out regularly to military personnel to keep them in positions they would otherwise leave at their earliest convenience. For example, pilots cost a bundle to train and qualify, including certain weapons specialists, and inflight refueling techs too. All of these people get a bonus to stay. Why should private citizens be denied?

    Certain corporate training makes an individual indispensable to a business and even more desirable to its competitors. These individuals are usually the first casualties of a downturn and when the economy is good bear the weight of keeping their fellow employees employed! Apparently NONE of the previous commenters here have ever held a sales position. Well, just go into business for yourself and paying retention bonuses to key employees will become a painfully clear reality. 90% of the profit in any company comes from 10% of the workforce... the sales department. A highly under-appreciated department!

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.

    The retention bonus is a tool, like an axe. In the hands of the lumberjack, the axe is very productive. In the hands of an axe murderer, the axe is very destructive. The problem is not the tool, but the user.

    There are many times when the retention bonus is appropriate, such as when a company is for sale, or replacement cost is high (do to extensive training), or key individuals are extremely critical to success.

    There are many times, however, when it is inappropriately used. As many have implied, if the company were better run, you wouldn't need to bribe people to stay. Bribery is rarely the best first option, but there are times when it makes perfect sense. The retention bonus should be in the toolbox, but not be one's favorite tool.

     
     
     
    • Tom
    • President, Thomas L Weston Consulting Group

    Retention bonus(s) are usually endowed on those that someone in an organization (usually CEO and/or direct reports) believe that are indispensable. It would be an interesting follow-up to this survey/respondents to answer if they ever used the process, either as a manager or as a recipient and if they believed the cost of the process was truly worth the activity. I have found that the monies spent (once public) is detremental to an overall healthy organization understanding of employee(s) net worth. Most high value employee(s), if they decide to leave an organization, will negotiate an equivalent sign-on bonus. This in theory disputes the value of "over paying" for keeping the talent.

     
     
     
    • Jay Somasundaram
    • Systems Analyst

    Why are we theorising instead of looking for empirical evidence?

    Though not an expert, my understanding is that the evidence regarding performance pay motivates improved performance is mixed, and the evidence that higher performing managers get higher salaries is, if anything, slightly negative.

     
     
     
    • Ajay Kumar Gupta
    • Management Professional, Management teaching

    Bonuses for retention are productive and encourage loyalty when it is given to deserving and dedicated employee. It helps the organization to improve its image by encouraging its really dedicated and trusted employee. However on the other hand, when the organization gives retention bonuses only for remaining in the organization and does not take into account the output, it really promotes cultural difference in the organization. The employee who do not deserve and remain in the organization only to receive retention bonuses can not be guaranteed that they will remain in the organization for ever.

    In fact these schemes will promote cultural imbalances and there are possibilities that deserving and dedicated employees do not feel comfortable and seek the way to leave the organization. Retention bonuses are special kind of performance pay, but there should be clarity about the performance; what kind of performance. There are organizations which encourage its employees for reporting distorting news about certain employees and make issue out of that, after that they victimize the employees. The organization rewards such type of people who make issues out of nothing or victimize the honest and hardworking employees. In such type of organization, retention bonuses are definitely harmful and can not promote sustainable development either for employees or organizations. Organization culture plays an important role in promoting loyalty and retention.

    Responsible and transparent culture and corporate governance value the trusted, honest and dedicated employees and retention bonuses for these people have multiplier effect on the organization. On the other hand, when organization pays employees for their dysfunctional and distorted behaviors to defame the honest and deserving employees, because their superiors like it, in fact creates negative multiplier effect on the organization.

    Retention bonuses can substitute for good management when it rewards its productive, honest and dedicated employees because they are capable of handling the organization and in case of global downturn or economic meltdown, quality and productive workforce can bail out the organization from recession. The people who do nothing and stick to organization for longer period in order to get retention bonuses push the organization into ditches and they can neither save the organization nor can save themselves.

    Therefore, in my opinion, organization culture plays deciding factor whether retention bonuses will be effective or destructive. Promoting deserving and talented employees will be definitely productive and promoting other category will be counter productive. Promoting former category can surely be substitute of good management and will be sustainable.

    Student, AIM,MM 2009

     
     
     
    • Naseem Khan

    Guys,

    With so much written against the retention bonus, it is important to highlight some of their positive aspects also. A number of times, a retention bonus may be doled out in lieu of base pay increases. As these are non-recurring, it helps the companies in controlling compensation costs.

    In some other specfic situations, retention bonuses may be tied to some performance outcome - making sure that you don't just pay for people to hang around.

    Thanks. Naseem

     
     
     
    • Ras
    • Self Employed

    I agree with Jessica. Sales Department is a highly underappreciated department, and management tends to like the ones who brown nose. I brought in the biggest deals ever for a very large Danish Company, but times got tough in this recession, they didn't think twice about kicking me out.

    I think retention bonus or not, there is still no loyalty from either party. If someone wants to work for someone (not me ever again), then that person should stay in the company because they really want to work for that company, and not for any other reason. If retention bonus is the only (or even part of) incentive to stay, you will never have a really dedicated worker.

    Of course we all want money, but job security, and other motivational factors should play in. I don't care if I get a million $ in salary, if I never know whether I have my job tomorrow or not! If the company pays me 20000$ every month just to keep me, there is absolutely NO loyalty from my side anyway.

    But anyway, that's why I will never ever work for a company ever again (the recession has shown the true color of many companies...). My company, for example, fired some 4000 people, but the people who remained in the company, still traveled business class, went on expensive training in EU, took MBAs, etc....

     
     
     
    • Steve Hobart
    • Technical Expert

    I was offered a modest, limited retention bonus when my small company was acquired by a much larger one. It was less than 10% of my annual salary and would be payable on the first and second year anniversaries of the merger.

    The reason for offering the retention bonus was that the industry in which I work has a shortage of highly experienced technical personnel such as myself. In order to ensure the success of the acquisition, some personnel such as myself were offered these bonuses to preserve and internally disseminate the knowledge that made the smaller company attractive to the larger one.

    The larger company is definitely a meritocracy. I have little doubt that were I to simply do nothing but sit around collecting a salary and waiting for my retention bonus each year that I would be terminated for lack of performance.

    The offer of the retention bonus served in my case to provide reassurance that I would be valued at my new, large technology company, that my job would not be a casualty of the merger. It also served to provide a disincentive for me to consider jumping ship without having allowed time to see if I would adapt to this particular new corporate environment.

    No doubt retention bonuses can be poorly structured such that they are not worth the investment. Also, the identical bonus make make more sense in one economic environment than in another. Consequently, the question obviously cannot be answered with an overarching generalization.

     
     
     
    • JA
    • HR Consultant

    It is difficult to generalize and say that retention bonuses are always evil since I believe they can be beneficial in certain situations. However, in the event of a merger and using bonuses as a tool to retain key personnel, I have found the best investment to be a solid severance program. Those loyal to the company can be assured that once they get laid off they will have the financial cushion and the outplacement support they need in their search for a new position. This frees them to focus not on searching for a new opportunity but on performing their roles. Those who aren't as invested in the organization are better gone anyway.

     
     
     
    • Harsh
    • student, SIBM, Pune, INDIA

    As a student of Human Resources, I am often flummoxed by the rationale behind the retention bonus. Is it to show appreciation for the person's presence "as a contributor" to the organization's progress or just a practice for most of compensation experts to convey a message to the workforce that "we care about your presence for such a long time"?

    Human Resources professionals are there to develop our workforce to meet future challenges to the organization. For that we can't appreciate a person just for hanging out with the company for long or just for being there.

     
     
     
    • Sergio J. Castro
    • Grad Student, Cetys Universidad

    Private companies are free to use their resources as they please. If they have a key employee/executive that will help them achieve profitable goals, then it is obvious they will do whatever it takes to keep that key person as an asset of the company.

     
     
     
    • RvR
    • Business Analyst

    At my former organisation (South African Retailer) I was offered a retention bonus. I started on a major ERP rewrite project for them, and because of my knowledge of their systems and the importance of the project I was offered a retention bonus. Being a young, motivated BA I actually felt flattered about "them realising my importance". Little did I know what I got myself into.

    The bonus was structured like this: I would receive 50% of my annual salary, paid out in 4 equal payments over a period of 3 years. I had to stay with the organisation for 4 years to avoid having to pay the money back.

    I knew that I needed to be responsible with the money I receive, but unfortunately I was in an accident and had to spend a substantial portion of the money received over the first 2 years.

    The problem with the organisation though was that as soon as we signed the retention contract and received our first payment, they seemed to adopt the attitude that they now "own" us. Over the next 2 years life at the organisation became a nightmare and myself and others just had to get out for the sake of sanity and our careers.

    When I left the organisation, the money became immediately payable back to the organisation. Not only did I have to return the money I received, but I also had to pay back the full tax portion (35%) and compound interest calculated from Day 1 at prime rate - in South Africa the prime rate was about 13%.

    To cut a long story short, I had to pay the organisation more than double what I received in the 1st place. We did a lot of good work for them and came very close to finishing the project.

    Being slightly older and wiser now I will never make such a silly mistake again. Unfortunately, it cost me all my savings and pension fund to learn that lesson.

     
     
     
    • Fernando das Neves Gomes
    • Consultant, independent

    I think i can thought loud, speak freely...at the end I'm talking to intellectual people. Like everything, the most positive intentions can be lost to the most dark ends.

    I believe top managers to work well in this powerful and political world have to be part of the company ADN. And this commitment don't end in one day, don't end with one paper. Perhaps, if a truly commitment to the best company interest never end.

    So, money, power, influence, engagement,...its all part of what we are talking about. If we misunderstood that with cases like aeron...and many others, probably the all lost in your good best behavior to the worst behaviors.

    But many questions have to be argued... But I'm so far way of a truly study and commitment to give the right solutions, just simple opinions to thought about. If Share holders, the 51% more influence in your share won less than the CEO, something it's wrong, if otherwise, and if the CEO gain in the road of his influence to be part of that little universe, i think it's right. So, just in this simple point to many questions have to be evaluated, are the road a true commitment...probably we have to back to rewards in shares, giving value to long term ones instead of immediate ones, easy to do...

    More...if the problem its the influence gained in all organic structure, when a new CEO began if not with delegation, the impact it's like a fusion or acquisition, if not we have a clear involvement and influence of former CEO...

    So, I think rewards it's a natural part of this economic world, what ever kind... But have to be evaluated the result we want from that...Long term best interests for the company, or just a immediate impact in organization, at this point end immediately with the job done like other service. ...

    Problems to be solve, probably more involvement in the information systems that serve share holders, evaluating just not financial information, but truly evaluating strategy, long terms impact, culture, ethics, values,...the BSC to share holders different and totally independent from the CEO. One independent company, Public institution (or serve), that are able to evaluate and distinguish the best CEO's, classifying the competitiveness of organizations, putting red, yellow and green flags on companies with economic impact...thought to be developed.

    I'm not against what ever one CEO make, present and future interests, if totally engaged with the economic grow perspective, internal and social impact, and your responsibility on that.

     
     
     
    • Frank Fabela
    • Drucker EMBA

    Sure we have all seen where (retention) bonuses have been applied inappropriately in the recent past. But there are cases where they are appropriate and called for. All organizations should strive to capture the motivation of their employees by putting forth a compelling reason for them to contribute their talents.

    When the mission is compelling, the likelihood of achieving success toward it is high and financial security is not threatened, there is no need to provide monetary incentives for the employees to stay on. However when something like uncertainty amidst a pending sale threatens the employees' motivation, it may be most appropriate to counter the tendency toward seeking greener pastures by offering retention bonuses.

    Alternatively, solid severance agreements which would do more than just take the bottom out of a worst-case scenario can have the same effect. When retention bonuses are used, they should be for short term conditions only.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC (India) Private Limited

    Bonus is an unsought or unexpected extra ( normally pecuniary) benefit beyond the recipient's normal remuneration. The benefit has a direct/indirect relation to the individual/collective performance leading to improved income of the entity. The moot point is relationship to performance through and through.

    I view a retention bonus as a sort of a blackmail by an otherwise ' disgruntled ' staff at any level of the heirarchy who is able to extract such an unreasonable benefit merely by creating a halo of being indispensable. He cannot be loyal to the entity in the long run and will play such tactics to grind his axe; he could even abruptly part company and create embarrassments.

    Organisations must thwart such attempts to the maximum extent possible.

     
     
     
    • Anonymous

    How the value of an organization, whose sale value is based on the presence of some employees kept on retention bonuses, can be preserved without continuing or even raising their normal bonuses after the organization is sold?

    Doesn't this lead to the same, business as usual, scenario that led us into this terrible mess in the first place?

    Jay has rightly pointed out that, more often than not, it is the low performers (often succumbed to greed) and not the high performers that are paid high, which indicates, if anything, the self-defeating nature of the whole bonus saga.

     
     
     
    • Sachin Sawant
    • Business Analyst

    Retention Bonus is a good component of Performance bonus. Undoubtedly it has to be given to people who hold back at their positions or show loyalty towards the organization, but an important thing to be understood is that the organization should make earnings/ benefit from the employees holding back or showing loyalty. If retention of a person does not earn any value, how is it worth retaining him/her? In such case retention bonus is a waste of money, and if paid when the organization is in bad times, it is a crime.

     
     
     
    • Vladimir Pavelko
    • Head of Staff, Bank in Ukraine

    I'm 100% sure that the retention bomus should be used as a tool. And every tool should be used appropriately during particular periods of time. For example, during 2007-2008 in Ukraine, as an emerging market there was the merge swing in the banking area. The average personnel turnover was 30-40%. The transparency of the Ukrainian banking system is still at a low level. In order to be on a track during the merger process and shortly after it, new investors should use this instrument. It helps to save money for preparing the new staff and to help understand the real situation inside the organization after a merger.

     
     
     
    • Christoph H. Vaagt
    • Partner, Vaagt & Partner

    If the value of a firm being sold depends on the people working for it (as is mostly the case particularly in knowledge intensive industries), it is a clear sign of a bad deal if people are thought to leave. As Itami has shown, the firm does not possess the resources it is selling but the individuals. So a deal ignoring the basic assumptions and desires of the people working for a firm will go bust.

    A retention bonus is therefore a sure sign of a bad deal. It is a recognition, on the other hand, of the fact that it is the people, not the "firm", which is being sold. It is surprising, however, that in the current situation, retention payments are offered. It is more than obvious that the same people who dealt with junk bonds and junk papers should be shown the door instead of trying to keep them. If these people do not feel the consequences of their incorrect behaviour, how then can we ever aspire to overcome the moral hazard these people are speculating on?

     
     
     
    • Leonard Pfeiffer
    • Mng Dir, Leonard Pfeiffer & Comp

    The retention bonus, as with compensation, benefits, performance bonuses, and other perks is a tool to be used to 'keep' your critical performers working hard on the business at hand in times of upheaval and transition. Employees are motivated by many things including sense of accomplishment, security, and financial reward for work done. That is how the system works.

    In times of transition, there is great nervousness about "what happens next", and during that time one's sense of security is lost [i.e. if I lose my job in this transition, how will I care for my family? How will I pay my bills? etc., etc.]

    As has been stated above, use this tool -- a retention bonus -- the same as any other tool to build and grow your company. Retention bonuses should be given to the executives you know you need to keep the business viable, particularly during the upheaval of transition times. It is a reward for previous hard work and success on behalf of the company, but is more than a reward -- it is the Board's message to key employees that they are important, that "we want you to focus on running the business and to not worry about your security (family, bills, etc.) during this transition period". It is a useful tool to be used the same as we use pay parameters to reward employees for their work.

     
     
     
    • Imelda Bickham

    Retention bonuses and their first cousin (matching a competing salary offer) are a waste of money when they are used as the only tool to keep an employee on board. Time and again, I've seen people get the bonuses, only to leave the organization shortly afterwards.

    People leave companies because of multiple reasons; money is seldom the only motivation to look for another job.

    If companies find that they must offer a retention bonus to an employee that is ready to leave, an in-depth discussion about other conditions of employment would be extremely useful. The company needs to find out why the employee started looking for other opportunities in the first place. Then address those issues, and offer the employee a complete retention package, not just the bonus.

     
     
     
    • Nisar Moosa
    • A.M, HBFCL Pakistan

    Bonuses are bribes to key people as they do nothing to the company's overall strategies to achieve targeted goals. it is being paid to key players in financial institution particularly because of a lobby graduated from world top business schools. it create a culture of have and have not in organization. pay for performance is a good stretegy but only for real players and should be based on honestly evaluated performance. those who get these bonuses are treated them as the real champion in organization and craete a culture of greed and arrogrance. in the presense of bonuses pay structure will be meaningless exercise. look at those institution whose values are equality and team work, but in real they treated their employees from the eyes of bonus. some people get very much and some get normal pays doing the same job. corporate america should be first to abolished this culture and be a role model to save business and finance environment from greed and disaster.

     
     
     
    • Kumara Uluwatta
    • Senior lecturer, Wayamba University of Sri Lanka

    If the organisation can follow the policy of a performance based pay system, the additional income received by each employee compared another is really a retention bonus. No one can guarantee the relationship between a special retention bonus and wealth to the organisation.

     
     
     
    • Anonymous

    Let's face the reality.

    The retention bonuses won't prevent those employees from leaving who have really decided to leave the organisation for other than financial reasons, and not wanting to stay with the organisation constitutes one of the upshots of those non-financial reasons. In such situations, retention bonuses will be hopelessly ineffective and useless.

    The retention bonuses will prevent only those employees from leaving who want to leave the organisation for the reasons that can be effectively nullified by financial incentives. In such situations, can the retention bonuses be as effective and useful as intended? I think an affirmative answer to this question will barely translate into an equivalent affirmative answer to the question "Are Retention Bonuses Worth the Investment?"

     
     
     
    • Richard A. "Tony" Eckel
    • President, Systems Synergy, Inc.

    Key questions here are whether application of retention bonuses are prudent and whether a succeeding owner entity has a legal ability to suspend valid internal agreements post-acquisition.

    The first is simple: Yes. Retention bonuses are one of many responsible tools that management uses to mitigate risks of employee turnover. Properly applied, they are investments in continuity and stability of the organization.

    The second is almost as simple: In the absence of collusion, due diligence exposes compensation liabilities to the successor entity prior to consummation. Lack of due diligence is accountable to the successor. Upon succession, it may be prudent to review and amend some retention bonuses on a pro-rata basis, but the succeeding management will then appropriately bear the risk-cost of losing key employees.

    Retention bonuses are a misnomer at the Senior Management level; if they can't see a future with the company, the board members shouldn't see a future with them. Independence of the board is key factor in enforcing responsible compensation.

    And there is the key - When Retention Bonuses are applied, the receiver is not the culpable party in any excessive compensation agreement. It is the financial approving authority who is accountable.

     
     
     
    • Peter Lee
    • Remuneration Consultant, RDS

    Just like other forms of special payments/incentives, retention bonuses can work only under certain circumstances and with certain people.

    The reality is that most company situations are far from ideal thus depending on what are the most compelling needs, they can work for limited periods and under special circumstances. For example, just as "forced ranking" may be necessary if managers are not willing to rank their subordinates objectively and the Company has to downsize for survival. Of course, forced ranking can only work once or twice and never on a sustainable basis. Case of extreme measures due to extreme circumstances.

    So, all associated costs must be balanced against possible gains or benefits before awarding such bonuses.

     
     
     
    • Tom Dolembo
    • consultant

    Retention bonuses were generally paid by hostage boards and IB's who are trying to peddle a deal. The leverage on the deal (now largely vapor) usually included a layer of operationally ignorant investment types, lawyers and bankers who would make a fortune on the sale commissions regardless of the outcome (no protest apparently there). The board would have their momentary bump in acquired stock price. I have never heard anyone defend the practice as useful, in fact the deal participants generally regard it as highway robbery. But then, the recipients of the bonuses generally are the only people in the deal knowing a lick about the company, they will most certainly be fired after the close, and since most of the really bright folks have left for brighter prospects these few are the grim remainders.

    In the history of the modern deal, the retention bonuses have to be included in the odd and vast cultural accumulation of wealth in the non-productive sectors that typified the last ten years of US financial history. I'd guess that the bonus recipients are, after the all, the people who actually make the deal work during deal chaos and who in fact are productive. The rest of the claque are symbiotic, locally accepted and profoundly unproductive remnants of a culture that, like the Mayan priests, find value in holding up the heart of their targets before they kick the bloody remainder down the temple steps.

     
     
     
    • R. Jennings
    • Consultant, Independent

    Retention bonuses worth the investment? Without a doubt they are worth every penny, IF you are on the RECEIVING end. Let's look at Lehman Bros., in failure, they awarded numerous bonuses in rewarding incompetence and malevolence and look what happened to the company. As long as retention bonuses are not tied to positive performance, any lackey can bankrupt a company for a great deal less in spending.

     
     
     
    • Kamal Gupta
    • Director, Delta Petro Additives (P) Ltd

    Retention bonuses became popular during the flurry of M&A activitiy, and was further popularized by the Finance companies. Retention bonuses presume that an employee can be bought with money alone. This is a fallacy. Employees work for an organization that at least satisfies their monetary, social, and prestige needs, provides them a proper ambience, and provides work hygiene.

    Employees are labeled as "key" based on their immediate past short term performance, which itself is a fallacy.

    If I look back at the last 10-20 years, when family owned business houses in India "de-merged" (split between various heirs), one of the key asset divisions used to be which business or SBU head will remain or get shifted to which SBU. This was almost always based on that employees knowledge of the business and his delivery over the last many years.

    Employees who had "recently" joined, say less than three years, were not considered for this.

    And those employees that were considered such assets, got more in terms of intangibles like prestige in the company, closeness to owners, getting treated as family etc than in terms of monetary rewards.

    I have not come across one instance of such employees switching jobs - their loyalty owed more to emotions than money.

     
     
     
    • Kent Plunkett
    • CEO, Salary.com

    Retention bonuses are a tactical tool used to overcome short term volatility in the workplace. They can be misused, just like any othe compensation program. In general, the best practice is that they should be meaningful but moderate in size and one time events. It is obvious that Wall Street did not use them in moderation even though the situation was appropriate to consider them as a tool. We far prefer the use of moderate retention bonuses with rank and file employees. Retention bonuses to executives tend to be opportunities for pursuing mixed agenda's or bad behavior rather than a bridge over troubled waters.

    Interesting blog, Jim. Thx.

     
     
     
    • Ashok Nayak
    • Asst Mgr

    Retention bonus per se is a wrong precedent to continue in any organization. It is a short term tool just to be rightfully evaluated while being implemented and used judiciously. It is rather case to case basis and offered only after doing a CBA (Cost Benefit Analysis) which MUST be in favour of the organization.

    Precautions are to be taken as to a) not to send any wrong/ illogical reasoning in the employees as a whole, b) can be a proven case where other employees do not feel neglected, c) the employee has the standing as a perenial contributor.

    It MUST not be that the employee is being retained only to leave after the tenured period or can be stamped as a bad performer at the end of the tenure.

     
     
     
    • Suresh Maganti
    • Senior Manager

    While retention bonuses were an accepted method towards retaining productive and key resources, they could be grossly misused and could only add or introduce wasteful redundancy within an organization. What is the point in holding on to resources who remained in an organization - just to collect this bonus?!

    My two cents.