PLEASE VISIT OUR SPONSORS

Foundations

Published October 2007

Do Retention Bonuses Work?

Kate DCamp

In certain situations, managers might become very concerned about the retention of certain employees — in a turnaround, there might be a few employees whose experience is critical to the future of the business, or an employee might have a significant client relationship, that is vulnerable if he or she leaves the firm. In these (and other) situations, managers might want to use a retention bonus, simply because they think a top performer is vulnerable to outside offers.

Break Down the Problem

The variety of issues managers try to address with retention bonuses is so diverse, no single solution would work for all of them. The first thing to ask is how — and why — money will address the reasons that someone might leave the company. This simple question can reveal a gap in the requestor's thought process.

It is absolutely critical, however, to know what that person is trying to say to the employee. Managers do not always realize compensation is a communication device. Having a clear message, expressed out loud, is the first step to getting at the root of the problem being solved.

Many Problems, Same Solution?

Compensation has become the "penicillin of motivation," curing all ills. Compensation is frequently the first, or only, solution thought of to solve what is invariably a more complex problem. If an employee is unhappy, this is often a symptom of a deeper problem.

First, make sure the manager has asked, "Are you unhappy? Why?" I have been amazed at how many managers come to HR, seeking a monetary solution to a problem they have not really diagnosed.

Diagnosing the Problem

In HR, one of our roles is to help managers "see" the problem. In the case of an unhappy employee, simple questions will reveal the many layers within a problem. The employee might be preoccupied with an issue unrelated to work or be having a problem with a co-worker (or manager).

Problems with managers are varied, but they often boil down to too few or one-way communications. Having the manager "give" something will not solve the problem. Even if employees feel underpaid, giving them a retention bonus can be perceived as proof that their hunch was right, which can actually provoke someone to look for better opportunities elsewhere.

In What Cases Does a Retention Bonus Work?

The short answer is "almost none" — in 30 years, I have yet to see a retention bonus retain, let alone motivate, anyone. The limited application of this approach is for business shutdowns, for which keeping people to a certain date is important.

In most situations, what works is specific to the problem diagnosed. In a business turnaround, tripling communications and sharing some of the "upside" can be very effective to keep critical talent. An opportunity to have more impact on the business and a chance to earn extra money by achieving business goals sends a clear signal about someone's importance to the company.