Retention Bonuses Prove Effective for Companies in Transition

Mergers, downsizing and reorganization all can wreak havoc with operations. To make transitions run smoothly, companies increasingly turn to retention bonuses, or "stay pay," to entice employees to remain through the rough patches.

Retention bonuses are becoming more common in the corporate landscape because companies are going through more transitions. They need to give key people an attractive incentive to stay on through the transition to ensure productivity, particularly with a liquid labor market today in which individuals can easily move on.

In contrast, a large international communications firm in the process of completing a merger has offered retention incentives to selected management and sales personnel. The company wants to ensure that those employees remain through the transition.

Retention bonuses have proven to be a useful tool in coaxing employees to stay. In a recent survey, 70 percent of the companies reported that retention bonuses were effective in holding employees through transition periods.

COMPANIES NEED A RETENTION STRATEGY

Incentives for retention are a matter of common sense. Whether a corporation is moving headquarters or merging with another company, the corporation is going to need certain people to carry out the project. In this economy, companies need to offer something, because otherwise employees can and will seek employment elsewhere.

While bonuses are becoming a major factor in employee retention, they may not be enough to hold top employees if used alone. A company can't simply dangle a bonus before employees and expect them to stay. As with any incentive, retention bonuses should be part of a larger strategy.

The company has to know what's desirable to the employee, and that isn't always money. Like any form of compensation, a retention bonus isn't going to work without communication. Companies need to find out what employees want and offer a package. The retention bonus may be part of it, but so is a good working environment, praise, challenges and other things that make it attractive to stay.

Although retention bonuses often are used to retain high-level executives, they are not the exclusive domain of management. Where some business owners tempt front-line hourly workers by offering one month's pay for those who agreed to stay on for three months during a merger.

MANY VARIETIES OF STAY-PAY PLANS

There is no single formula for establishing a retention bonus plan that will work for all companies. The experts agree that a successful retention plan depends on both the amount of the bonus and the time frame of the retention period.

A survey found that non-management employees generally receive about 10 percent of their annual salaries in bonuses, while management and top-level supervisors earn an additional 50 percent of their annual salaries.

While bonuses based on salary percentages are the norm, some companies choose to pay a fiat figure. These flat-rate bonuses range anywhere from $1,000 to $40,000, depending on the employee and the company.

A flat figure is simply a different way of expressing the same thing as a percentage, and each company should implement a plan that makes sense for them.

There's no one way to determine how much to pay, but being competitive is key. First, you have to determine if your base pay level is competitive, and as for what percentage, there's no rule of thumb. It depends on the situation and what it will take to retain the employee.

DETERMINING THE RETENTION PERIOD

Just as there is no set formula for determining the size of the bonus, there's no one retention period that works for all companies. However, a typical retention period runs somewhere between six months and three years.

Determining the retention period shouldn't be difficult if a company has developed specific goals and has done long-range planning. The retention period really depends on the objectives of the particular company and whether it's looking at long- or short-term projects.

Because there's always a risk that employees may bolt before the project is complete, most companies draw up agreements to bind them to the company for a specified time period. There's usually a contract that outlines the agreement, so that if employees don't stay, they don't get to keep the bonuses.

A WIN-WIN PROPOSITION

The growing interest in retention bonuses is testament to their effectiveness. They work because it's a win-win proposition. It's a win for the company, which can retain key employees through crucial transitions, thus saving time and money by keeping operations fluid. And it's a win for employees, who not only benefit from the extra pay but also avoid sudden layoffs, making it easier for them to put together strong resumes and begin searching for future employment.