Employee retention bonuses — good or bad?

In reviewing the trends I observed as a management side employment attorney over the past year or so, I can identify one key reason clients call me, even more than COVID-19-related issues — employee retention bonuses, or ERBs.

The use of ERB’s must be at an all time high. Why?

In the past, ERBs were mostly used in mergers and acquisitions to retain the key talent in place at the acquired organization. Now, a national labor shortage resulting in a tight labor market has employers reconsidering the use ERBs for their entire workforce.

Many HR professionals are anti-ERB, largely because they are expensive and the HR experts believe they are not particularly effective in actually reducing turnover. In addition, some HR professionals claim poorly designed retention bonus programs actually increase employee turnover.

Other HR professionals worry about undesirable effects on productivity, recruiting and morale.

If you decide to consider ERBs for your workplace, think about these issues and follow these two tips:

1. Get it in writing — Most retention bonuses are provided in such a way that they appear to be a generous gesture designed to keep an employee. However, without certain conditions, an employee could accept the bonus and quit his or her job without repercussions.

Accordingly, a written retention bonus agreement between the company and the key employee is recommended. Such a contract typically states that the employee will not leave the company for a specified period of time after a certain triggering event.

In some ways, the ERB is the opposite of a severance agreement, which provides a payout to an employee who agrees to leave the company on good terms.

2. Add conditions for obtaining an ERB — Include safeguards in the written retention agreement that prevent an employee from leaving soon after they get a bonus, by spacing out the payments, making it a forgivable loan that diminishes over time, or stating that the employee must remain employed for a certain period of time or reimburse the bonus.

The document should contain the job title, duties, compensation, and terms and conditions precedent of the retention bonus. If an employer fails to institute set safeguards, your target employee may walk away after signing the bonus check.

What are the negative unintended consequences of an employee retention bonus?

Your undesirable employees who were going to quit may stay around in the hope of getting a retention bonus. This includes employees who are poor performers, have poor attitudes or have out of date or redundant skills.

Similarly, if certain groups of employees do not qualify, when they find out about the ERB — and you know they will — co-workers likely will become resentful of those who received it. This may impact team collaboration and morale.

Also, offering ERBs may unfortunately lead some 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.

In fact, offering a large retention bonus may only make an individual employee more desirable to a hiring manager or recruiters at other organizations because it sends a signal that this particular employee may be a high performer and should be aggressively recruited.

You may get into a bidding war, and that could be a lose-lose proposition.

The key takeaway: Carefully explain the rationale for the written ERB to your employees and tailor your messaging to the problem you are addressing.

Wilford H. Stone is a lawyer with Lynch Dallas in Cedar Rapids.