Retention Bonuses: Talent Management Tool for Businesses in Transition

February 1, 2008

Microsoft Corp. tendered an unsolicited takeover offer of $44.6 billion for Yahoo, Inc. As with any acquisition/merger, both businesses need to calm the troops by making assurance of job security. In today’s world, every employee knows that the buzz words like “business synergies” and “market overlap” mean layoffs for employees whose jobs are “redundant”. As reported by MSNBC,  Microsoft said” it sees at least $1 billion in cost savings generated by the combination, and intends to offer significant retention packages to Yahoo engineers, key leaders and employees.”

Retention Bonuses are an important talent management tool for all size companies when the organization faces uncertainty due to merger, bankruptcy or other business transition that creates uncertainty for employees. I have seen retention bonuses used successfully by businesses in financial hardship because of the loss of a large contract, exiting form bankruptcy protection, or to counter a competitors raiding of its talent. However, the communications and documentation of a bonus program must be carefully managed to avoid unintended consequences.

Kate DCamp takes the contrary view in her posting “Do Retention Bonuses Work? She believes that the money motivator almost never works:

In most situations, what works is specific to the problem diagnosed. In a business turnaround, tripling communications and sharing some of the "upside" can be very effective to keep critical talent. An opportunity to have more impact on the business and a chance to earn extra money by achieving business goals sends a clear signal about someone’s importance to the company.

Dr. John Sullivan posting on “Retention Bonuses – Are they a good idea?” has a great laundry list of “unintended consequences” including:

  • Creating uncertainty in those who are not offered the bonus
  • Exacerbating a we verses them mentality in the case of a merger of two companies
  • Having those employees who will depart anyway conduct their job search on your time
  • Denigrating the principle that performance matters
  • Creating job security for those who may not deserve it

From a legal point of view, any bonus plan should be in writing with specific eligibility and trigger requirements. Careful consideration must be given to selection criteria to defend against discrimination claims. Bonus payments are treated as wages and subject to payroll taxes.