Key Employee Retention: What About a Restricted Cash Award?

In a recent program held by our local compensation network, an interesting discussion broke out on a topic tangential to the one being formally presented.  One participant shared the difficulties his organization was experiencing around retaining key talent, particularly engineers, and wondered whether others had ideas or solutions to share.

The group mentioned many of the more common approaches to key employee retention, some of which trace their roots back (for those of us with some years in the field) to the pre-2000 rush for COBOL programmers to fix our Y2K problems.  These included the use of "temporary" base pay premiums, the creation of separate technical employee salary ranges, project completion incentives and, of course, the classic retention bonus.

Our program facilitator, Towers Watson's Brian Blackwood, throw out another thought -- one I hadn't (at least by name) heard before.  What about the cash equivalent of a restricted stock award -- a restricted cash award?

For those who might benefit from a quick primer, restricted stock is a grant of company stock in which the recipent's rights in the stock are restricted until the shares "vest" or the restrictions placed upon them lapse.  Restrictions often include length of service requirements -- typically 3 to 5 years -- but may also  include performance goals.

A restricted mega award of cash might be worth considering for those employees whose skill sets are currently in high demand and who might be attracting base salary offers $20,000, $30,000 or more beyond what you can deliver and sustain within the constraints of your pay program. (Giving you the benefit of the doubt here and assuming your program is reasonably up-to-date and competitive.)  Why not give them that $30,000 cash right now, with a 3 year length of service restriction?  The restriction could lapse cliff-vesting style at the end of the 3 years or in 1 year increments, perhaps with some back-end loading?  If the employee leaves before the end of the three years, the part of that cash award for which the service restrictions haven't lapsed must be paid back. No reason, though, that another cash award grant (with its own 3 year length of service restriction) couldn't be considered on the 1 year anniversary of the first one, if circumstances warrant it.

Is this fundamentally different from a traditional retention bonus (I hear some of you asking)?  To my mind: yes and no.  It's essentially a retention bonus on steriods -- bigger, more powerful and with real teeth.

The solution to all your key employee retention issues?  Of course not.  But it might be another idea to to toss into your bag of tricks.  Or at least food for thought.

In closing, I would urge you to keep in mind that while additional compensation may be necessary and smart for the retention of critical people, it is rarely sufficient.  Make sure you're taking all the steps necessary to truly make your organization hard to leave for your top talent.

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations.  Ann and fellow Compensation Café writers, Margaret O’Hanlon and Dan Walter will soon be releasing a new book on communicating compensation - stay posted! Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Image "Hand Giving Money Isolated on White Background" courtesy of David Castillo Domenici / FreeDigitalPhotos.net 

Comments

[E. James (Jim) Brennan]

Excellent point, Ann, that many of the "tricks" played with stock can also be done with cash. Such Long-Term Incentive-Retention Plans (LTIRPs) are frequently feathered as you proposed: either front-loaded or back-loaded, according to situational needs.

[Tony Bergmann-Porter]

Ann, your last point about the insufficiency of cash really is (or ought to be) the key takeaway from this piece. If Critical Employee Doe is of sufficient value to your competitor, they will be quite willing to put down a signing bonus equal to or greater than whatever immediate or deferred retention bonus Doe will be forced to pay back or leave on the table.

And, if you do one of these awards, you'd better have the recipient execute an absolutely ironclad NDA about it.

[Paul Hebert]

I recognize the focus of this site is compensation - and this is a compensation solution. When I was in sales a few years back we had a similar type of "retention" bonus that held back 25% of all commissions in the year they were earned and then doled out over the next three years in an increasing amount. The first year (year 12 months after the sale) you'd get 25% of the holdback - second year (24 months) you get something like another 35% and the third year you'd get the remaining 50%. Over time this became a significant source of income in that if you staid say 5 or 6 years you'd have a sizable amount coming in from hold back in the prior three years.

But the fact was we hated it and hated the company for it. We felt trapped and used. Bought and paid for. It decreased our engagement while it increased our retention.

Would it not make more sense to create a company that employees WANT to stay at versus a company employees CAN'T AFFORD to leave.

Sort of creating a desire to stay instead of a penalty for leaving.

What is the impact for a company on their long-term engagement efforts with this type of compensation (mercenary) structure?

[E. James (Jim) Brennan]

Such programs are called "golden handcuffs" for a reason. The phrase does not elicit images of happy campers, does it? Retaining vital people may deny their services to competitors, but that doesn't guarantee productive engagement.

"Holdbacks" that are simply deferred payments of earned commissions seem to begrudge payment of what they were promised. If the amount of the holdback stipend doubled each year you stayed, THAT might offer some incentive to offset delayed receipt; but holdbacks generate resentment.

But this is Ann's post and her answer should rule...

[Ann Bares]

Jim,

True that - to a point - we can create cash equivalents of many equity approaches ... with phantom stock being just one example and this (perhaps) representing another.

Tony and Paul,

You both raise the same excellent point via different angles - the one I tried to close with - that effective retention efforts are never built on cash alone. Although the focus of this site is indeed compensation, hopefully we are smart enough to realize that pay is only one lever in a complex relationship. And, to paraphrase one of my favorite Hebert quotes, cash is typically your worst first solution - and one that will eventually backfire.

Having said all of that, though, I still think there is a place for a cash award in situations where the organization has done all the other "right things" that create an environment and opportunities where people WANT to stay. I'm reminded of a conversation I had recently with a critical, "high potential" employee at a client organization. This individual loved the work he was doing, had great respect for his superior and his colleagues, and appreciated the sizeable investment that was being made in his development. The circumstances surrounding his particular work made him very visible to competitors, so that he was frequently being approached about opportunities. Although the organization was working to fast-track his compensation, they were also cognizant of internal equity considerations surrounding his also-valuable, but less visible colleagues. He was emphatic about wanting very much to stay with the organization, but also wanting to ensure that he wasn't giving up too much "opportunity cost" in doing so, as he had a family to support and college savings accounts to fill. To me, this is an example of an employer who is doing all the right things, but also have to consider whether the situation demands some type of short term cash solution. What I've outlined here may or may not be the right thing - but it may be among the options to consider.

My point, I think, aligns with Paul's and Tony's ... that we want to create organizations that are and work that is hard to leave - but to realize that there are situations where cash (while not the best first) may need to be part of the retention solution.

Thoughts back anyone? Does this make sense - or am I just another delusional cash-focused compensation consultant?

Thanks for the debate.

[Ann Bares]

Jim,

Good point also, that there is a difference between an "unearned" award with strings attached and the decision to hold back variable pay that an employee has already earned via his/her performance ... although either one could put the individual on "resentment road"....

[Dan Walter]

I just found time to get into this conversation. I do a ton of work in the long-term incentive / equity compensation space and cash programs can be effective. The real issue is that most companies simply do not have the cash to make this happen. Equity compensation allows companies to preserve cash far more easily. Add to this the accounting treatment and most companies, given the same set of circumstances are better using equity.

All of that being said, very few people will choose stock over cash when give the choice, especially at a mature publicly traded company. For high growth companies equity is often the desired solution.

If a company is sitting on a cache of cash (gotta love homonyms) then providing a deferred or long-term cash program can be a fantastic differentiator. Cash should never be taken off the table if a company can afford to pay it.

[Ann Bares]

Dan,

Thanks for joining the conversation and sharing your perspective. Great points about equity compensation. The group that started this conversation were beginning from a point of not having equity available - either because they were a larger public company and equity was only available to a more select, higher level set of jobs OR because they were private and equity was simply not on the table (for various reasons).

Agree that cash should always be an option on the table - but also agree with Paul and Tony that we need to be aware of the dynamic we're creating when we use cash indiscriminately without consideration of the other issues in the mix.

Cache of cash - love it!

[Bob Bennett]

Giving out cash rewards is certainly going to be appreciated by your staff, but you want to make sure the dollar value is an accurate representation of the work being done. If someone busts their butt for a month to get a project done (stays late, comes in early, works weekends, etc) and they get a $50 dollar giftcard, while the sales guy who landed the big account because he pulled it from the pipeline gets a $10,000 bonus you're telling employee A their extra hours mean nothing to you.