What’s Wrong With Retention Bonuses? Pretty Much Everything

In 30 years, I have yet to see a retention bonus retain, let alone motivate, anyone. – Kate D’ Camp, former VP of HR at Cisco

Let’s face it: only a few people voluntarily spend any time thinking about the use of employee retention bonuses (ERBs). I wouldn’t either, except for the fact that a majority of major firms use them instead of much more effective retention approaches. The use of retention bonuses is at an all-time high but I wonder why, because they’re expensive and only occasionally do  work. In my over 20 years of work as a thought leader and practitioner in retention, I have been unable to find any credible corporate data that even comes close to demonstrating the effectiveness of retention bonuses.

The major flaws of employee retention bonuses fall into three categories, which include:

  • ERBs are evil because they are a form of “paid servitude,” where you buy rather than earn employee loyalty.
  • ERBs don’t actually work in a time when turnover rates have gone up 45 percent.
  • ERBs have many negative unintended consequences that unintentionally create damage.

Maybe the lack of data proving the effectiveness of retention bonuses is not such a big surprise, because almost nothing in corporate retention is data-driven. There is also no data to prove the effectiveness of most other common “retention resource wasters” like improving benefits for all, engagement efforts to improve retention, or offering a coach/mentor or profit-sharing. Despite their lack of supporting evidence, the use of retention bonuses has doubled since 2010 (according to a recent WorldatWork survey). If you are a corporate manager or a talent management professional who is considering offering retention bonuses, review the following 25 ugly reasons thoroughly before you act. In my book, they rank at the very bottom as the least effective commonly used retention tool.

The Top 25 Reasons Why Retention Bonuses Don’t Work

The reasons and their associated negative impacts are broken into seven different categories.

Category 1 – Retention bonuses may not actually increase retention

  1. There is no evidence that retention bonuses work – even though I have advised dozens of firms on retention, I have been unable to find any corporate data that proves that retention bonuses actually work to retain people. In practice, their effectiveness is reduced because in bad situations like a troubled merger, fewer than half will actually accept the bonus. In my experience, most others who get them will leave in frustration within six months after receiving it. ERBs are the least effective when you are dealing with top performers and innovators. This is because if these highly desirable individuals decide to look for a new job, the sign-on bonus that they will get in their new job will likely exceed any retention bonus that you offer (thus negating your monetary incentive).
  2. Some “bonused” employees might keep the money … and still leave – most retention bonuses are provided in such a way that they appear to the employee to be a “gracious gesture” designed to get you to stay. Because it is a “bonus,” there is generally no written agreement asserting a “quid pro quo,” (an agreement to stay in return for the money). Reasonably, it is questionable ethically, but you could technically take the bonus and quit your job within a month. However, it is possible to include safeguards that prevent an employee from leaving soon after they get a bonus (i.e. space out the payments or make a “forgivable loan” that diminishes over time). If you fail to institute safeguards, your target employee may walk away anyway from the firm shortly after cashing out the bonus check.
  3. ERBs may retain the individual, but only for brief time until it “wears off” – despite the fact that there is seldom a formal agreement to stay, the mere title “retention bonus” (when it is actually used) provides an inference between the parties that if you take the money you should stay. Almost everyone that I have found agrees that ethically you shouldn’t take the money and immediately run. However, there is no consensus among employees or HR on how long a time period needs to pass before a person would say that they are released from their obligation to stay at the firm.
  4. Money may not be effective in getting them to stay because it is not one of the primary factors that are forcing them to leave – research into the actual reasons why most employees leave often ranks a bad manager, a lack of challenge, feeling underused, no career path, and several other factors before compensation. Many individuals, especially those at higher pay grades, simply don’t find money to be a primary motivator and it may not be a good idea to retain people who are primarily motivated by money. Not being motivated by money may cause the targeted employees to reject the retention bonus outright. Obviously, if money is not a key reason for leaving, giving an employee more of it won’t cause them to stay. In contrast, I have found that effective retention strategies are personalized and focus on the key identified reasons why this individual employee wants to leave.
  5. Their job will still be crummy after you give them the check – if your goals extend beyond retaining employees into areas like engagement and productivity, you may be disappointed in the limited results that these bonuses produce. Although paying money may get a targeted employees attention, the odds are that the bonus will not be powerful enough to cause them to forget why they don’t like their job. In a short period of time, they will forget about the money, but every day they will continue to experience the negative factors that made them want to leave in the first place. And after a while, despite the gesture, they will quit. Instead, you need to “fix the job” prior to offering any retention bonuses or they will have only a limited impact on turnover.
  6. Retention bonuses will not fix retention issues in the majority of your jobs – normally retention bonuses are only considered for a less than 25 percent of corporate jobs (they are offered primarily to executives, managers, and key technical staff). Because they only cover a small percentage of jobs, their overall impact on the firm’s overall capability and productivity is likely to be limited. Obviously, they can’t have any impact on retention for the jobs where bonuses are almost never offered (it’s hard to find examples of when retention bonuses are offered to hourly employees, union employees, recent college grads, and contract employees). Remember, if you only offer bonuses to say 5 percent of your employees, you still must identify alternative effective retention approaches to cover the remaining large portion of your employees who you would also like to keep. If you work at a small company, a not-for-profit, or a government agency, a combination of finances and external pressure may prevent you from ever offering bonuses.
  7. Undesirable employees who were going to quit may stay around in the hope of getting a retention bonus – employees who are poor performers, those with out-of-date skills, those with a poor attitude, or those who are in redundant positions may not be aware that they are not highly valued. And as a result, some in this group that where going to voluntarily quit on their own will instead, consciously decide to stay in the hopes of getting a retention bonus.

Category 2 – Retention bonuses may unintentionally cause an increase in turnover

  1. Offering the bonus may actually drive employees to leave – offering retention bonuses may appear to some to be an act of desperation by management. And as a result, it may unintentionally immediately reduce the level of confidence that your employees have in your firm. The offering may unfortunately drive employees to think that they work on a sinking ship and that everyone smart will be leaving, unless they are paid to stay. As a result, employee turnover may actually increase when formerly satisfied employees now become uncomfortable about the firm and their future. Incidentally, being offered a large retention bonus only makes an individual employee more desirable to hiring managers and recruiters at other firms. This is because offering an individual employee a retention bonus may actually serve as a signal that encourages recruiters to increase their efforts to recruit this employee. This signal may also cause competitive firms to raise their offers, further increasing the likelihood that this employee will leave.
  2. They will use their “retention time” to search for a new job – a retention bonus may keep your target employee around, but they may have already mentally checked out. As a result they may use their “retention time” exclusively to prepare for and to look for a new job. The employee certainly won’t be productive during this time, and you will have to live with the fact that you have essentially paid them to kick back and to search for (and probably take) a new job within a few months after receiving the retention bonus.
  3. Offering bonuses may encourage employees to seek external offers … merely to get managers to give them their own retention bonus – even the amazingly smart Google HR team found that serious problems arise when you offer and publicize large retention bonuses. The hope of a windfall payoff may cause some employees who have no intention of leaving to begin looking for a new job, with the sole goal of qualifying for retention bonus. Most will just go through the motions in this attempt to “whipsaw” management into granting them a retention bonus, a raise, or both. Unfortunately, others may unexpectedly accept a new job once they are exposed to it.

Category 3 – Retention bonuses will have numerous negativeunintended consequences

  1. The retained employees may develop an entitlement attitude – unfortunately, getting the money may convince your target that they are irreplaceable and that they essentially have a job for life. This sense of security or entitlement may cause them to be cocky and to behave badly because they think that there’s no way that they can be fired or laid off because your investment in them proves that they are indispensable. As the bonus amount becomes larger, this sense of entitlement may grow proportionately.
  2. The bonused employee will stay but they will be disruptive – since they will still be unhappy, they may take the money and still be bitter. This may result in unintentional or intentional disruption and even sabotage.
  3. The bonused employee will stay but continue to talk badly of you or the company – a retention bonus might get them to stay, but it doesn’t buy silence. You may in fact be paying someone to walk around and complain about the company. As an example, consider a couple that is about to get a divorce and one of the spouses wins the lottery. The other spouse will likely want to cancel the divorce, but the future married life of the couple is still likely to be full of conflict.
  4. Coworkers will be resentful of those that got the bonus – one of the things that I have noticed about retention bonuses is that when they are offered, they create a lot of questioning, complaining, and whining. Since other employees will surely find out about the bonus, they may be resentful and even jealous because this employee is now essentially paid more, without having to produce better performance. This may create an “us versus them” division and conflict and unfortunately it will almost certainly also cause other employees to demand a pay raise.
  5. The morale and outlook of your non-bonused employees will be damaged because they were not selected for a bonus – retention bonuses are generally only given to “essential employees.” As a result, some of your employees who consider themselves as essential and valuable will be upset because they were not selected for a retention bonus. Not being bonused will definitely hurt their morale, their productivity, and any optimism that they had about their future with the firm. Other employees may even tease them about the fact that they appear not to be valued by management. Taken together, these factors may even drive the non-bonused to quit because they now have evidence that they are not highly valued.
  6. Retention bonuses may damage your firm’s external image and recruiting – it’s nearly impossible to keep the fact that you are offering large retention bonuses a secret. When the word spreads through the firm and social media, some may interpret the bonuses as an indication that your firm is in trouble as a result of high turnover. This negative image will definitely hurt recruiting, but it may also have a negative impact on customers, vendors, and shareholders. There is also a small possibility that some will take it as a positive indication that your management is strong, because it is proactively taking action. 

Category 4 – Retention bonuses will not improve employee performance

  1. Their productivity won’t improve because the money is “for staying” – retention bonuses are essentially “pay for staying, but doing nothing.” This is because the employee got the money for “staying” and not for being more productive, and as a result, there is no real incentive for them to do more than a minimum level of work and to produce. If the bonus is large enough, this sudden wealth will likely further reduce any motivation to be more productive.
  2. The retained employee will probably still be poorly managed, so their performance will not improve – if one of the reasons that the employee wanted to leave was a bad manager or the poor way that they were managed. After the bonus, they will still be poorly managed, which will mean that even though they have been retained, the continued mismanagement will assure that they continue to produce lower than optimal results. 

Category 5 – Other retention tools are more effective

  1. Consider using non-monetary retention tools instead, because they may be more effective and they are certainly cheaper – retention bonuses are only occasionally effective, and in addition, they are expensive. But fortunately there are a variety of alternative retention tools available to managers that are much more effective, cheaper, and easier to implement. Some of the most effective alternatives to retention bonuses are post-exit interviews and stay interviews to find out why people leave. To make their job more desirable, there are retention tools like re-recruiting, more of/less of lists, dream job sheets, and personalized retention plans. No special retention tools of any kind are needed if you manage and communicate effectively in the first place.
  2. Other economic rewards are more effective in retaining employees– some refer to stock options that vest over several years as “golden handcuffs” because they are an extremely powerful retention tool. They have an added value of getting the retained employee to focus on adding economic value to the firm so that their stock value increases.

Category 6 – Administrative reasons why retention bonuses are problematic

  1. The process for selecting the right employees who should get a bonus is often flawed – only 30 percent of firms use specific eligibility criteria for determining who gets a retention bonus. Every firm uses its own selection criteria, but common ones include their performance track record, their seniority, their job level, their prominence in the organization, and their likelihood of leaving. Unfortunately, the right people who you really need to keep for the organization’s future needs may be bypassed for bonuses simply because they don’t fit those limited criteria. Offering bonuses without explaining the criteria for selecting the employees who qualify may confuse and frustrate both those who get them and those who do not. The fact is, 70 percent of retention bonus decisions are emotional, rather than being data-driven.
  2. If you offer retention bonuses to many employees, you will inevitably waste a bonus on some employees who have no intention of leaving – if your selection process doesn’t accurately identify those with a high probability of leaving (most don’t), you will end up wasting a lot of bonuses on employees who would have stayed anyway. For example, it may be a waste of resources to offer these bonuses to those within a few years of retirement. If you don’t offer bonuses to a broad group of your employees, odds are that you will miss some highly desirable employees that are at risk of leaving.
  3. The bonus amount that you offer may be incorrect – unless the bonus amount offered is based on employee research and benchmarking, the amount that you offer may be too low and ineffectual. If the amount is too high, you will “overpay” and waste money. No matter how much you offer, retention bonuses are expensive compared to many more effective retention tools.
  4. The timing of when you offer these bonuses makes a difference – the economic climate impacts whether retention bonuses are effective. For example, they work best when unemployment is low and they may have little impact when individuals are seeking job security. In a similar light, when your firm is struggling or when there are possibilities of mergers, these bonuses will have a higher impact than when growth and success seems assured.
  5. Taxes will reduce the excitement created by any bonus – depending on what state you live in, up to 40 percent of your retention bonus may be withheld for taxes. When the employees see this reduced amount, it may lower their motivation. Offering employees other added economic value that is not taxed (company car, more vacation, and expense account etc.) may avoid this issue.

Category 7 – Retention bonus variations that actually do work

  • Offer project completion and performance bonuses – if you tie any bonus directly to reaching a business goal, the employee and the team are much more likely to be motivated and focused on completing their assigned work. Offering rewards that are tied directly to achieving levels of performance and timely project completion are almost always effective.
  • Shut down bonuses – offering a bonus that is only paid if the individual is still working on the final day that the facility closes can be quite effective in keeping key talent until the very last day. They can also be mildly effective in keeping the presence (but not the productivity) of key employees for a specified time period after a merger.

Final Thoughts

If you shift to a data-driven retention approach, you will quickly learn that retention bonuses are expensive and not particularly effective in actually reducing turnover. Unfortunately, you must also realize that poorly designed retention bonus programs can actually increase employee turnover. Finally, you should note that even well-designed retention bonus programs have some nasty and undesirable impacts on productivity, recruiting, and morale. Given these 25+ reasons why you should avoid them, it makes me wonder why they are used at all.

Author’s Note: If this article stimulated your thinking and provided you with actionable tips, please take a minute to follow and/or connect with Dr. Sullivan on LinkedIn.

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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