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Whats Wrong With Retention Bonuses? Pretty Much

Everything
By Dr. John Sullivan[1]September 22, 2014
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
Lets face it: only a few people voluntarily spend any time thinking about the use of employee retention bonuses
(ERBs). I wouldnt 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 theyre
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 dont 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 Dont 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
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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 shouldnt 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 dont 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 wont 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 dont 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 firms overall capability and productivity is likely to be limited. Obviously, they cant have any impact on
retention for the jobs where bonuses are almost never offered (its 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
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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 wont 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[2] 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 negative unintended 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 theres 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 doesnt 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
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that they appear not to be valued by management. Taken together, these factors may even drive the nonbonused to quit because they now have evidence that they are not highly valued.
6. Retention bonuses may damage your firms external image and recruiting its 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 wont 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[3] 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 organizations future needs may be bypassed for bonuses simply because they dont 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 doesnt accurately identify those with a high
probability of leaving (most dont), 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 dont offer bonuses to a broad group of your employees, odds are that you will miss some
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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 welldesigned 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.

Links
1. http://www.eremedia.com/author/dr-john-sullivan/
2. http://www.tlnt.com/2013/02/26/how-google-is-using-people-analytics-to-completely-reinvent-hr/

3. http://www.ere.net/2013/12/02/stay-interviews-an-essential-tool-for-winning-the-war-to-keep-youremployees/?
__hstc=111048026.322a3840531801b4e1d0064d92f2a696.1436947715176.1436947715176.1436947715176.1&__hssc=11104802

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