Please don’t go girl: Retention bonuses

Please don't go girl

You would ruin my whole world

Tell me you'll stay

Never ever go away

Please don’t go girl by New Kids on the Block

What is a retention payment?

Retention payments or bonuses can be a useful way for employers to retain key talent, particularly during critical periods for the business or key transition periods.  These could be due to major organisational changes such as a merger, acquisition or restructure, where certain employees are indispensable to ensure smooth operations during this period but may no longer be required in the longer term.  Another reason is due to succession planning, where, for example, you may ask an exiting CEO to stay on for a period of time to mentor, train or support the incoming CEO.  During organisational restructures, there may be key imperatives to reduce headcount and costs, but certain employees are required to stay on for a short period to ensure that a project is completed before the restructure takes effect.

Selection of employees for a retention payment

Retention payments should only be offered to employees whose departure would significantly impact operations.  This may be because the employee has certain specialised skills that are difficult to replace, institutional knowledge of your organisation, or key client relationships that require transfer to a new person.  Similarly, due to the highly specialised nature and key sensitive information that those employees are likely to hold, you should also ensure that there are clear provisions in employment contracts regarding restraints, intellectual property and confidential information to ensure that doesn’t walk out that door: see our blog These Boots are Made for Walking.

A clear strategy outlining why certain staff are able to access retention payments will assist an employer to justify and defend why certain employees receive it while others may not.

Structure of retention payments

First, how long do you want that employee to remain with your organisation? Is there a set date or set event that will trigger its payment? Will it be a staggered payment e.g. 50% at 3 months, the other 50% at 6 months? Or the whole amount at the end date? While longer periods provide more security for employers, they are likely to be less attractive to employees.

In terms of the calculation of the amount of the retention payment, this would take into account the cost of replacement of the employee, productivity loss, training costs and potential business disruption.  This may be a set amount or a percentage of annual salary or a market rate.  The amount would need to be a meaningful amount to entice an employee to stay.

Clawback provisions

What happens if an employee leaves prior to the end of the retention payment period? Do they receive nothing? If they have already received a graduated amount, is there a requirement to pay it back? If so, how much? What happens if something else intervenes during the retention period e.g. the employee is guilty of serious misconduct, they become ill or injured or there is a directive from head office to make their role redundant? It is important to be clear in any document the exact terms that trigger a payment, clawback and the scenarios that will mean that the retention payment is not payable.

Employers should also consider how the retention payment interacts with other payments the employee already receives and whether this creates any inequity with other employees.  Further, if there are other incentives, such as performance bonuses, does the retention payment affect these or are they separate?

Alternatives to retention payments

Retention payments may be considered a costly way to retain key employee talent.  Consider other potential ways to retain staff such as flexible work arrangements, other enhanced benefits (such as a performance bonus scheme), equity or shares in the business, role expansions or other professional development opportunities such as training or study support.  Employers should also consider the market in which the business operates – in some areas a retention bonus is the norm and expected, in others it would be unusual.  Given that the risk is losing employees to competitors, it is important to consider what incentives competitors offer to the same key personnel.

Evaluating the effectiveness of retention payments

It is useful to establish metrics to measure the effectiveness of retention payments including whether staff remained during the retention period, productivity levels both for exiting staff as well as training new hires, and overall costs vs benefits.  Did the transition happen cleanly between key leaders? Were operations stable over the time period of the retention period? Or did one person leaving without a retention payment result in a spike in turnover, unhappy customers and poor customer service?

Ending the retention payment

When the time period for the retention period ends, what will you do? Will you still be screaming please …. don’t go girl? Will there be ongoing retention efforts? An uplift in salary? Or a clear exit strategy?  It will be useful to ensure that there is clear communication and documentation outlining what happens at the end of the retention period.  It is important to remember that a retention payment is intended to achieve a specific purpose, to keep key employees for a specific reason.  Balancing the achievement of that intended purpose with ongoing sustainability of operations will be critical.

Remotely Legal can assist employers and boards on all aspects of employment law, including advising on difficult people issues, reviewing policies and assisting with enterprise bargaining.  Remotely Legal can train your boards and management teams on how to deal with incidents and investigations.  Remotely Legal can also be your fully outsourced HR and people legal team.

RL Investigations, part of Remotely Legal, are a team of highly experienced and qualified lawyers and investigators, who can function as your independent, external investigation team providing fast, comprehensive and reliable investigation reports, workplace culture reviews and suggestions for organisational improvement. RL Investigations can also help your internal HR or investigation team to improve their investigations and assist decision makers in considering the right factors when making key decisions.

This blog is general advice only.  Please obtain legal advice in relation to your specific circumstances.  This blog was written by a human so please seek permission if you wish to copy any of it.