Rentention Compensation: A Stabilizing Force

By Shawn Hamilton, Hay Group Nov 14, 2008

With the prospect of 2008 year-end bonuses fading as share prices plummet and mass layoffs become a serial headline, employees might be forgiven for heeding the siren song of new—and perhaps more promising—job prospects. Unfortunately, those departures can have an impact on a company's operational efficiency, succession planning and overall shareholder interests.

Savvy managers understand that the stabilizing force of retention pay can work wonders in settling staff members. Applied smartly, this form of compensation can keep them focused on business instead of worrying about their future. (For purposes of this discussion, retention compensation refers to the practice of encouraging critical employees to stay for a certain period or through a particular event by offering them phased payouts—whether in cash, stock, other enticements or some combination.)

Who Should Be Considered for Retention Pay?

A common mistake is to spread a retention program like peanut butter, applying it to everybody in the organization. At some organizations, retention payments cover employees who do not need a special incentive to stick around. While that might be easier than evaluating individual performance, the practice uses resources that could be directed to critical employees who might be more likely to leave.

A common mistake is to spread a retention program
like peanut butter, applying it to everybody
in the organizatio

In general, loyalists—employees committed to the organization and particularly to the CEO—do not require an incentive to stay where these aspects of the employer are not changing. The same might be true for staff members who have heavy investments in stock options or restricted stock that would be forfeited upon leaving. Of course, deeply underwater stock options lose their retentive hold and might cause employees to seek to reprice them through grants from a new employer. Also, if salaries are competitive within a close range, companies are less likely to see their people depart for a marginal bump in pay.

Yet even fairly satisfied individuals are at risk of leaving should the hard times last more than a year. Year two is when a retention plan really needs to kick into action. Just about anyone can tolerate doldrums for some period. But when that person starts to see a pattern of inaction on the part of company leadership, or a disruptive event occurs, he or she becomes more drawn to the allure of working for a different organization.

Where Retention Compensation Comes into Play

Establishing an equitable and intelligent retention compensation plan involves a consideration of various design and regulatory issues. A company needs to pinpoint the appropriate targets, the amount of compensation for a given situation, and the terms of the plan while making sure that tax, accounting, legal and other compliance matters are appropriately addressed.

Below are several common scenarios where some form of retention compensation might prove vital for continuing operations.

    What to Consider

    When considering who to compensate as part of a retention plan, a company should focus on individuals or job functions that are critical to running the organization and its businesses, especially those who are most likely to accept headhunters’ calls during times of turmoil. These include:

      Many sales personnel will fall within the "highly marketable" category. Otherwise, apart from trying to make sure they are happy overall, reliance is on their compensation plans, which tend to have built-in incentives. Plus, those who make money directly for the company are rarely in the line of fire to lose their positions during times of uncertainty.

      Smart Practices for Incentives

      In setting the levels of compensation in a retention strategy, decision-makers should consider four key points:

        When structuring the terms of the retention plan, there will be variations depending on context. For instance, an M&A situation might put the emphasis on a staff person helping to get the deal done altogether or wrapped up in a certain amount of time. Achieving a specific result is the goal.

        The payment plan will vary by role as well. Executives will probably be satisfied with payouts spaced further apart. A line employee will want to see more frequent compensation. In general, the nearer the individual's safety net is to each paycheck, the closer those payments need to be.

        High-potential, high-performing people exist throughout an organization. During healthy and slow economic times, a properly structured retention plan can keep them engaged and committed to the work despite distractions.

        Shawn Hamilton is a consultant in Hay Group's executive compensation practice. Originally published in Hay Group’s newsletter, The Executive Edition, 2008, No. 4. Reposted with permission.

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