Remuneration in today’s corporate environment is a complex beast. Anyone who has delved into the world of compensation knows that it is a difficult, but critical piece of the employment puzzle. It is important to have a strategy that is well considered and transparent, particularly in today’s digital environment where information abounds.

The basic premise of remuneration is quite straight forward. You aim to pay market appropriate rates for the fixed component of the remuneration package, and then ensure that you retain your best employees with performance based incentives. Ideally, the better the performance, the more impressive the reward.

So, what is a retention bonus and how does this factor into remuneration strategy? A retention bonus typically has no performance hurdles. You are simply paid a sizeable sum of money to refrain from resigning – regardless of your performance. If you begin to implement retention bonuses, what message does that send about your organisation? Under what circumstances would an organisation feel the need to offer such a bonus?

Although retention bonuses often smack of desperation, there are occasions when a retention bonus is an appropriate strategy and makes perfect sense. For instance, in the case of integration of two businesses, there may be duplication of roles. In that case, transparency and honesty about the future of both roles is the best approach. In order to ensure that there is fairness and a continued focus on integration, a retention bonus is an appropriate tool and is usually both effective and well received.

But what if the retention bonus is simply paid to stem the flow of staff leaving? Well, it doesn’t take a rocket scientist to figure out that this is often an act of short term desperation. It is also frequently the by-product of lazy leadership – rather than put the effort into building a healthy culture, the company attempts to buy loyalty instead. It is a form of paid servitude.

A healthy culture is one where there is strong leadership and fully engaged staff. There is frequent and clear communication and everyone understands their role in the achievement of the bigger picture. Remuneration is a hygiene factor, not the main event. Rewards are clearly aligned with high performers. There is transparency – not panic.

There are many unintended consequences with retention bonuses. The most obvious snag is that retention bonuses are usually surrounded by secrecy. The “lucky” individual is usually told that they cannot discuss this with anyone else in the organisation, and that it only applies to “key staff”. Inevitably, the walls of silence do fall and human nature prevails.

People will always talk and confide in each other and no veiled threats from an employer will stop that. Before long, comparisons about the varying size of the retention bonuses and who has been deemed “key” will ensue. This is a time bomb, and will ultimately result in greater disharmony.

Retention bonuses also create enormous issues with the employer brand, as word will spread quickly on the outside. It will become increasingly more difficult to attract new staff – particularly those that are savvy and well connected. Bad news travels fast and retention bonuses are usually seen for what they are: a desperate measure taken by an organisation that can’t keep its people.

I know of one organisation that has currently created a complex web of retention bonuses, in the hope that it will stop the constant flow of resignations. Imagine the chaos as several individuals in that organisation have begun to discover the discrepancy in the size of the retention bonuses and the inconsistent selection criteria utilised. What was an undercurrent of dissatisfaction is turning into a looming disaster. In my professional view, it will be interesting to see the mass exodus on the date of payment of those bonuses. Although inevitably, some will decide that a healthy culture is a better option for their career and sanity and make the decision to leave early anyway.

Another unintended consequence is that those who have been provided with a retention bonus often then decide to look for a new job. They become less engaged and less committed to the business than before the bonus was offered – and simply use the time to look for another healthier and engaging organisation. In other words, it has the reverse effect desired – those offered the retention bonus usually become less committed to the organisation, not more.

This is a classic example of intrinsic vs extrinsic motivation. An individual may be happily committed to an organisation, despite its woes and challenges. There is an intrinsic motivation that keeps them there. However, once money is offered to stay, the intrinsic motivation moves to extrinsic motivation – and unfortunately, the intrinsic motivation usually diminishes or vanishes.[1]

Too many companies approach the retention of key employees during disruptive periods of organisational change by throwing financial incentives at senior executives, star performers, or other “rainmakers”. The money is rarely well spent.[2]

Organisations that think a retention bonus means that they have locked in an employee have forgotten a key factor: just because there is money on the table doesn’t mean that they will think any more of you, and become an advocate. In fact, it simply becomes a waiting game – you cannot buy loyalty.

In his article, “What’s wrong with retention bonuses? Pretty much everything”, Dr John Sullivan outlines 25 reasons why retention bonuses don’t work.[3] In his well-researched opinion, Dr Sullivan argues that retention bonuses are rarely created from a data driven perspective, but are reactive, panic driven tactics.

In summary, I would advise any organisation that is considering retention bonuses to explore other options instead. Retention bonuses are expensive and usually an ineffective subsidy for good leadership. They typically create higher staff turnover and have many undesirable impacts on productivity, recruiting and morale.

If you are on the receiving end of a retention bonus, make sure you understand exactly what you are signing up for. There is no substitute for good leadership and a truly engaging culture.

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[1] “Motivation: Intrinsic vs Extrinsic”, Monica A Frank, PhD, Excel at Life, 2010 : https://www.excelatlife.com/articles/intrinsic_motivation.htm

[2] “Retaining key employees in times of change”, Sabine Cosack, Matthew Guthridge and Emily Lawson, McKinsey Quarterly, August 2010 http://www.mckinsey.com/business-functions/organization/our-insights/retaining-key-employees-in-times-of-change

[3] “What’s wrong with retention bonuses? Pretty much everything”, Dr John Sullivan, ERE Media, 2014 https://www.eremedia.com/ere/whats-wrong-with-retention-bonuses-pretty-much-everything/