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HR Magazine: Staying Power

Steve Bates  5/1/2003
 

HR Magazine, May 2003Vol. 48, No. 5

Retention bonuses can help keep and motivate key people during a company financial crisis as well as ensure a smooth transition.

The retention bonus, once a compensation tool reserved largely for top corporate executives, is increasingly being used to retain essential mid-level and rank-and-file employees, particularly in companies facing a financial crisis.

Though still less common than referral and hiring bonuses, retention bonuses, also called “stay” bonuses, are becoming more popular. Mergers, acquisitions, divestitures and bankruptcies are among the scenarios in which HR professionals are recommending or administering these payments.

The concept is basic: If there is an employee you really need because of his talent or knowledge, you pledge to pay him, for example, a certain amount over a period of time to entice him to stay. However, the reality is more complex. If a company is in dire financial straits, many executives and shareholders argue, it can’t afford to be paying people more.

And once the decision is made to pay retention bonuses, finding the right formula for them can be challenging. Compensation experts generally agree that each organization must tailor its compensation to its business realities in an effort to keep people motivated, not just in their seats.

Still, many HR professionals, consultants and others familiar with retention bonuses say that, when applied prudently, they are often a good way to protect corporate assets and to hold on to the people who can turn around a company, or at least hold it together for an orderly transition.

Even though the retention bonus isn’t the most common compensation tactic, “when you need it, you really need it,” says John Dempsey, a consultant in the Chicago office of Mercer Human Resource Consulting.

Experts say the promise of a large check or a series of checks at key intervals of a company’s lifespan is often effective.

“Cash is king. Senior leadership needs to understand this,” says N. Fredric Crandall, a founding partner of the Center for Workforce Effectiveness, a compensation consulting firm in Northbrook, Ill.

Researchers have come up with a wide range of statistics concerning the use of retention bonuses. The numbers vary in part because of the different timing of the surveys, the nature of the questions asked and the characteristics of the employers surveyed.

A U.S. Department of Labor survey in March 2002 found that only 2 percent of private industry workers had access to retention bonuses. But WorldatWork, a Scottsdale, Ariz.-based compensation association, found in an e-mail survey that 34 percent of responding companies offered cash retention bonuses to retain key talent in 2001, up from 24 percent in 2000.

Right Management Consultants and consulting firm Lee Hecht Harrison recently focused on the use of retention bonuses specifically to retain terminated workers until a certain date. Right Management, based in Philadelphia, surveyed more than 400 firms and reported that 40 percent of companies worldwide and 49 percent in the United States give retention bonuses to employees who will eventually lose their jobs. Lee Hecht Harrison, based in Woodcliff Lake, N.J., contacted U.S. firms and found that 46 percent offer retention bonuses in such situations.

When you consider all the possible uses of retention bonuses—including incentives to keep a key staff member or two from jumping from a healthy firm to the competition—“probably 80 percent of organizations out there have used retention bonuses in one form or another, if only on an ad hoc basis,” estimates Raoul Choos, associate principal of New York-based Buck Consultants.

Retention Bonuses Gain Wide Use

It’s clear that use of such incentives is much more on the minds of HR and other executives than it has been in the past—in part because of media reports of large retention bonuses proposed for executives of failing corporations.

“All of a sudden there’s a lot of publicity about these programs,” says Becky Roof, a principal in the New York corporate turnaround firm Alix Partners. Once you get past the headlines about questionable uses of retention bonuses for executives at companies such as Enron and WorldCom, she says, they take on a different light: “The value of human capital cannot be underestimated.”

At companies filing for Chapter 11 bankruptcy protection with the hope of emerging with a viable future, retention bonuses are clearly on the increase.

“A bankruptcy attorney is required to file a plan to retain employees. The company will be forced to explain what it’s doing,” says Dempsey. “People have become so much more familiar with bankruptcy. People are beginning to expect to receive these kinds of payments,” he says, and “the judges are expecting more incentives.”

In firms going through bankruptcy, “the retention programs tend to be broader in scope than in other situations,” such as mergers, acquisitions and divestitures, where top officials and a modest number of key people might be targeted for retention bonuses, says Dempsey.

Crandall agrees. “A key error companies have made in the past is to focus only on senior leadership. There is a deep-seated belief that the focus should be on key leadership because it is harder to deal with the whole organization. That’s just not adequate,” he says.

The Right Management report on severance policies and retention bonuses notes that “there is a danger of losing people who are not targeted for separation—due to the potential effects on trust and morale if organizational change is not handled effectively,” in addition to the problem of “keeping targeted individuals in place when the separation date is not immediate, especially if they have highly marketable talents.”

“If the organization wants to maintain its morale, it’s got to offer something to everyone,” adds Bernadette Kenny, executive vice president of Lee Hecht Harrison. “Some organizations think that all this stuff is confidential. It’s not.”

In addition to being broad-based, she says, retention programs in troubled companies should have a well-defined purpose. “It’s important that organizations ask themselves: What are we trying to achieve? If you’re trying to smooth a transition, regardless of the underlying business reason, you have to give people an incentive.” (For more information on HR’s role in bankruptcies, see “Holding Back Bankruptcy.”)

Remember, though, retention bonuses aren’t solely used for companies in crisis. Often, particularly in high-tech companies, companies will use stay bonuses to keep key talent from jumping ship. “The key to it is whether the labor market for a particular position is hot or not,” says Rick Beal, corporate practice leader at Washington, D.C.-based consulting firm Watson Wyatt. Offering retention bonuses “won’t make it expensive for somebody to steal one person, but it will make it expensive for a business to steal a lot of people. It protects you against being raided.”

Avoid Cookie-Cutter Approach

 But how do you design a retention bonus program for your firm? There is no one answer, the experts emphasize.

“We still have this cookie-cutter approach” in many companies, says Janet Fuersich, a principal with consulting firm Towers Perrin in New York. “The best practice is really an individualized practice.”

“Some companies are throwing money at people,” says N. Elizabeth Fried, president of consulting firm N.E. Fried and Associates, which has offices in Ohio and California. “Many companies have not done a culture check” before implementing a retention bonus plan. “The lack of planning shocks me.”

Among the questions to consider:

  • Pay one lump sum, or several over time?
  • Pay a percentage of base salary, and if so, what percentage?
  • Pay based on length of service?
  • Pay higher percentages for executives than others?

Fried likes to think of all the options as “a buffet. I can use a little of this and a little of that.”

“They’re mostly governed case by case,” says Geof Boole, executive vice president of Right Management Consultants. The Lee Hecht Harrison survey confirms this, finding more organizations giving out retention bonuses on a case-by-case basis. (See “Pay to Stay,” below)

But Boole finds, overall, “organizations are taking it very seriously and very reasonably.”

Sheryl Witt and Susan Anderson are two HR professionals in the Midwest who did just that when coming up with retention bonus plans in recent years. Witt was working at a pinball and video game manufacturing firm that was closing down, and Anderson was holding the fort at a dot-com company that was going out of business.

Pay to Stay

If your organization offers retention bonuses, how much does it give?

Officers

Senior executives

Executives

Exempts

Non-exempts

Less than 10% of salary

5%

4%

6%

10%

15%

11-20% of salary

13

15

15

20

17

More than 20% of salary

15

14

12

7

6

1-2 months of additional severance

13

13

15

20

19

3 months or more of additional severance

14

15

12

8

4

Other (case-by-case, tied to position/level or length of employment)

43

42

42

37

41

Witt had to consider retention bonuses for part of the workforce when the firm was folding seven years ago. Once the decision was made to close the plant, about 200 of the 250 workers were laid off and given severance pay. But the rest were needed for various lengths of time to complete an orderly shutdown.

“I had it in my toolbox” as a compensation tool, Witt says, recalling that she had become aware of retention bonuses while in a previous HR job. She did some research and discovered no clear pattern or formula for use of retention bonuses. “It was all over the board,” Witt says.

Witt sat down with her CFO and other officials to consider offering extra checks to those who stayed rather than quit and search full-time for their next job. “We just said it was the fair thing to do. It was a team of people we absolutely needed for a period of time.

“We were saying to them: ‘We really value your experience.’ They thought it was extremely generous. It was extremely generous.”

And, says Witt, who is now HR manager of a metal products firm in Wisconsin, “It really helped us. The people who were left wanted to make sure everything was done right” before the plant closed its doors for the last time.

Anderson, HR manager at a Cleveland television news operation, had a positive experience with retention bonuses at the dot-com.

Before the company’s fate was sealed, the firm had paid a retention bonus only to “key people, but it didn’t work so well.” After it became clear that the company was going under, a decision was made to target everyone who was needed during the transition.

“We said: ‘Your job is being eliminated, but we need you to stick around. We’ll give you 50 percent of your base pay at the end of nine months.’” A few key people got a 75 percent bonus.

Anderson says employees understood that it made sense for the company to keep them in place for that period and that it made sense for them to earn extra pay during those difficult months.

“It really worked well,” says Anderson. “We lost very few people. They cared enough about our business and our customers that they did their job.”

That message also was a crucial tool to keep people motivated at America West Airlines a decade ago when the carrier went into bankruptcy. The company didn’t use a classic retention bonus strategy; in fact, it cut salaries across the board but told workers the company would try to make it up to them eventually.

The wage cut “was pretty devastating to hourly, front-line workers who were not covered by a [labor] contract,” recalls Margaret Luciano, senior director of recruitment, selection and staffing at America West. And despite the belt-tightening, “we never knew if we would pull through.”

As the firm started to emerge from bankruptcy, officials started to put together a plan for a bonus to reward those workers who stuck with America West. “It was ‘moving forward’ pay, strictly based on a percentage of base salary” of about 4 percent, for all but top corporate staff.

“They were rewarded for staying,” says Luciano. “We did a huge communication effort. We said: ‘This is not going to make up for what you lost; it’s a way to say thank you.’” And the message was apparently heard. “We kept a core group of people who are really good. We would have lost a lot more front-line people”—in positions such as pilot and mechanic that have a long learning curve and are difficult to fill—without giving employees some hope that they would be rewarded for staying on board.

“It was pretty simplistic,” says Luciano. “Sometimes the most basic solutions are the ones that work.”

The job of administering retention bonuses doesn’t stop once the formulas are chosen and announced. “Companies should be looking at this as a fluid program and revise it at least annually,” says Choos of Buck Consultants. “Keep these people informed, and tell them how much they mean to the organization.”

HR Should Be Proactive

Compensation experts say HR professionals should be ready with recommendations when their company faces a financial crisis and is considering—or should be considering—some form of retention bonus.

“It’s important for HR to be proactive, not just waiting to be asked or told to do something,” says Dempsey. “You’ve got to be ready” with ideas for keeping essential people. “It’s important for HR to think all this through. What’s happening to your incentive plans” under the changed conditions of the financial crisis?

“HR people need to be involved in the pulse of the organization and the marketplace” and determine how they can influence proper use of retention bonuses, says Deb Bilak, an associate principal with Buck Consultants. “Management might not be thinking about these things.”

HR also must remind top executives regularly during major transitions that “there has to be a financial component and a people component” to decisions about the company’s future, says Kenny.

Crandall says that HR “needs to put their oar in the water” during a crisis. “Be on top of the issues: What’s behind these bonuses and incentives? Do we have the skills needed to pull all this off? Are we incenting the right behaviors and the right skills to be successful?” (See sidebar “Retention Bonus Tips.”)

Tom Wilson, president of the Wilson Group consulting firm in Maynard, Mass., says he’s finding “a lot of resistance” among businesses to pay retention bonuses to rank-and-file employees.

In part, says Wilson, that reluctance derives from overuse or misuse of such bonuses in the past in some companies. “Before, it was retention for retention’s sake.” Now, he says, people are learning that a properly conceived retention bonus “is not just a bonus to stay. It’s a bonus to stay with a purpose.”

Steve Bates is senior writer for HR Magazine.

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 Retention Bonus Tips

 

N. Fredric Crandall, co-author of The Headcount Solution: How to Cut Compensation Costs and Keep Your Best People (McGraw-Hill, 2003), offers the following advice for HR professionals and other executives trying to retain talent during a company crisis:


Start with a small number of simple goals designed to stabilize the firm.

Ensure that everyone from top management to the lowest level of operations can agree on the goals.

Make the time period short enough, such as six to 12 months, so you can capture and keep workers attention.

Establish feasible goals that lead to desired results.

Provide substantial rewards for meeting these goals, such as a bonus of 5 percent to 10 percent of salary for meeting the goals and higher compensation for exceptional results.



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