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Retention Compensation Plans—Please Stay!

A successful retention pay strategy isn’t merely a giveaway for tenure
By Rob Rogers

What is Retention Compensation? One component of executive and senior leadership compensation that has seen significant growth over the last several years is the implementation of retention compensation. On its face, retention compensation strategies are another form of long-term deferred compensation; but it is different in that retention rewards are typically in place because of a specific event or set of circumstances triggering the need.

The concept is simple—the organization provides a payment to a key person which is tied to continued employment for a specific period of time. The need for retention incentives typically result from:

The most common use is where there is an anticipated transaction that requires leadership and key talent continuity in order to maintain the ongoing value of the enterprise. It can be critical to ensure that key talent is retained, operating functions are held intact and that relationships are maintained during these times of transition. We have seen growth in the use of retention arrangements within the health care industry as a result of the recent and expected future consolidation of hospitals and health systems.

Do Retention Plans Work?

If the goal is to merely retain someone without regard to performance or engagement, they can be successful. However, if it is the only vehicle in place, such plans can be merely giveaways for tenure. One key question—does the bonus payment really keep them in place? By itself, our view is that the retention bonus is typically not large enough for key talent to stay in place—if the opportunity is great enough, the loss of bonus will not be an issue.

We have to remember that the key to the employment relationship is engagement so that the financial reward alone will usually not be enough. A recent study by Hay points out that 20 percent of employees plan to look for a new job in two years and another 20 percent plan on definitely leaving their current positions in at least five years. As a result of the more tenuous nature of the employment relationship, turnover has become a more prominent aspect of organizational life. We would suggest that as with all components of rewards, pure dollars are never the ultimate driver.

Both Towers Watson and WorldatWork have surveyed large numbers of domestic and international organizations to understand what makes a retention strategy successful when tied to a transaction. Some findings include:

Estimates of normal turnover range from 50 percent to 200 percent of salary depending upon the type and level of position. Where key talent leaves during a period of business and/or leadership transition, these costs multiply. Putting together a strategy that addresses real engagement with the organization will include a thoughtful mix of financial and non-financial incentives.