Golden hello: A payment offered to an employee as an inducement to join, especially if currently working for a competitor.

Golden handcuffs are a system of financial incentives designed to keep an employee from leaving the company. These can include employee stock options that will not vest for several years, but are more often contractual obligations to give back lucrative bonuses or other compensation if the employee leaves for another company.

Golden handcuffs (plural only)

Any arrangement or agreement designed to provide extremely favorable benefits or pay, so as to discourage participant from wanting to leave, especially to retain a choice employee. The stock plan really served as golden handcuffs for the executives. Golden handcuffs are tools that a company uses to keep people loyal or encourage them to stay with the company. They are typically used with key employees when a company is concerned about losing employees or has a specific need to retain particular employees for a set period of time. They can take a number of different forms, depending on the company and the situation. They are usually not explicitly labeled as golden handcuffs and employees may be pressured into accepting them. Classically, golden handcuffs take the form of employee incentive programs. While many companies provide incentives such as paid leave, stock options, and payments into retirement plans, golden handcuffs up these incentives. Employers may offer to pay for extra education, increase stock options, and take other measures to encourage an employee to stay. The incentives are structured in such a way that employees will be rewarded for staying longer and may be penalized for leaving. Sometimes, employees who leave early will be required to pay benefits back, or will not have stock options fully vested. This serves as a disincentive to leave by punishing employees who don't finish terms set out by the company. Likewise, companies can also ask that incentives be repaid if employees leave before a certain date. For example, employers might offer to pay for employees to go back to school after they have been working for at least five years, but require repayment if the employee leaves within five years after finishing school.

Golden Handcuffs
GoldenHandcuffs are some sort of long-term incentive designed to keep you working at a job that you might otherwise leave. The canonical example is giving stock options to a new employee that don't fully vest until some years in the future. There is often an implication that the work itself isn't rewarding enough on its own (intrinsically motivating) without the possibility of large financial gain somewhere down the road. I'd rather have golden handcuffs than invisible ones. Golden handcuffs can be rapidly turned into food via a pawn shop and a grocery store.

Or, the work may be highly interesting and motivating, but the pay (not counting stock options) may be low and/or long term employment may be risky: At a venture capital startup, for example, the work may be challenging -- but being short on cash, they may offer stock options instead of high pay. Stock options in a privately held company are worthless until it goes public or is bought out by another company. But if going public / buyout happens, money rains down on your head with no "investment" on your part (...other than what you could have done or could have earned if you had worked somewhere else).

There's also the more general case: Where you start to get some good money at work and you buy into the whole UpperMiddleClass? myth: big house, the Lexus SUV, the Mercedes, the trapping of the rich and indebted. Soon, you find you have to keep the job you hate in order to fund the stuff you thought you wanted. The stuff owns you. Yes, well, poor planning can bite you any number of ways. I don't think that this is poor planning; it's awfully hard to predict the gradual onset of persistent greed. I think the point is that anything can become a Golden Handcuff, even if it's not explicitly presented as a reward. Many CEOs can get caught in the GoldenHandcuff? of becoming the perfect CEO, to the point where they become obsessed with it.

Sometimes I think that OverlyBroadIntellectualPropertyAgreements are a kind of GoldenHandcuffs. Companies basically say to you, "Give up that stuff; that's what we're paying you for."

Then there's the situation I found myself in over two and a half years ago: the imminent closure of my employer company, with an eighteen month lead time! Picture, if you will---the time: February 2001; the place: Sydney, Australia; the decision from the parent company: Sydney is too remote for project management from London or New York so we'll close that subsidiary, but we still want them to finish their current project so we'll give them eighteen months! The fiscal incentive to stay in an otherwise dead end job made the wait attractive, especially since they'd budgeted to cover that expense in April, 2001, only to summarily dismiss and escort to the door whole battalions of other staff elsewhere come May, 2001, when the dot.com crash became apparent!

Vesting: Handcuffing Key Employees To Your Company

We have previously outlined the four characteristics of a successful Employee Incentive Plan. Namely, such plans should: Be specific, not arbitrary, and be in writing; Be tied to performance standards;

 Make substantial bonuses; and Handcuff the key employee to the business.

In this issue we focus on the last characteristic; handcuffing the key employees to the business. The goal of the handcuff is to keep the employee with the company the day after and even years after the bonus is awarded. To help achieve this goal, owners and their advisors typically incorporate several techniques into a stock purchase or non-qualified deferred compensation plan. Vesting Schedule First, a vesting schedule handcuffs employees to the company for a time period necessary to become entitled to the bonus awarded. I prefer a continual or rolling vesting schedule in which a single vesting schedule is applied separately to each year's contribution. Using this schedule, an employee is handcuffed to the company for a long period of time because the key employee is never fully vested in the most recent contribution. Let's assume that a $30,000 award is assigned to an employee: one-half of which is given immediately and the other half subject to a five-year vesting schedule. If the award is earned in 2003, the effect of vesting is demonstrated in the following graph: As you can see, only in the year 2008 is the employee fully vested in the award earned in 2003. Should the employee leave the company prior to that time, he is only entitled to a percentage of the total award amount. Your key employees are thus "handcuffed" to your business because they receive the full award only by staying with your business. Further, the longer they stay, the more they receive. Each year they stay, a new award is made;

-2 Each year, additional vesting is attributed to the prior four or five years' deferred

account; and Each year the entire deferred amount grows in value as interest is credited to each key employee's deferred account. Vesting truly handcuffs key people financially to your business. Forfeiture Provisions and Payment Schedules Another technique owners use to motivate an employee to stay with the company is forfeiture. A forfeiture provision can be used to reclaim some or all of an employee's vested benefits if he leaves your business and violates his employment agreement. This is an added incentive for your employee to honor any covenant not to compete or trade secret provision contained in his employment agreement. Owners use payment schedules to determine when payments of vested amounts commence and how long they are to be continued after an employee leaves. When payment schedules are combined with forfeiture considerations, they can prevent recently departed employees from using funds from the deferred compensation plan to compete with the former employer. Funding Devices Handcuffing your key employees to your company cannot be effective unless the money to pay the deferred bonus is available when needed. Your key employees must be confident that funding is in place to cover the deferred award. For that reason, owners should seek experienced investment and tax advice. The choice of funding vehicles can influence the timing and amount of income taxes at the company level. Check with your advisors to see how these handcuffing techniques can become part of the design of your employee incentive plan. Remember, a successful bonus plan for your employees ultimately bodes well for the success of your own Exit Plan.
This article is an excerpt from The Exit Planning Review newsletter published by the Business Enterprise Institute, Inc. and provided by OHara & Company, PC DISCLAIMER: The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, you should contact an attorney, tax or financial advisor. This newsletter is believed to provide accurate and authoritative information related to the subject matter. The accuracy of the information is

not guaranteed and is provided with the understanding that OHara & Company, PC and Business Enterprise Institute, Inc. are not rendering legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisors. The example provided is hypothetical and for illustrative purposes only. It included fictitious names and does not represent any particular person or entity. Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purposes of avoiding U.S. tax penalties. 2006-2007 Business Enterprise Institute, Inc. All Rights Reserved. OHara & Company, PC - One Olde North Road, Suite 101, Chelmsford, MA 01824 www.oharaco.com