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Despite a Weak Economy, Stay Bonuses are More Popular Than Ever

Despite a sluggish economy, stay bonuses are more popular than ever. But if they're not used right, they can pay off in low morale and additional turnover.

October 3, 2003
Related Topics: Variable Pay, Compensation Design and Communication, Benefits

The AmeritasAcacia Companies, a multimillion-dollar financial services firm, laid off a dozen employees in August to consolidate a division that sells financial products. At the same time, it offered some of those employees bonuses worth 10 percent of their salaries to entice them to stay until the end of the consolidation.

    Paying employees bonuses to stay in their jobs? In this sluggish economy?

    It may seem unnecessary, but consider the alternative: Lay off everyone at once, fail to service hundreds of customers and watch the firm’s bottom line erode. Like a growing number of companies, AmeritasAcacia, headquartered in Lincoln, Nebraska, and Bethesda, Maryland, decided that offering retention or "stay" bonuses to retain key talent was the right decision, a trend that’s surprisingly common in a weak economy.

    "If we say, ‘Bye, you’re gone tomorrow,’ the reality is we would lose a lot of business," says Dennis Luchey, vice president of human resources at AmeritasAcacia. "Customer service is vital in this business." In fact, more companies are paying stay bonuses now than when the economy was booming. Stay bonuses are used not only at companies that are downsizing or merging but also at high-growth companies that want to hold on to top performers. But these bonuses don’t guarantee that employees will stay, and consultants warn that if they’re not used correctly, they can lead to low morale, additional turnover and other problems.

    "The last thing you would think you’d need in this economy are stay bonuses, but it’s exactly what you need," says John Bremen, a compensation consultant for Watson Wyatt Worldwide, based in Washington, D.C. "I actually think stay bonuses are more important for top performers in a rough economy than in a strong economy."

   Top performers can always find work, and they are the people who can help turn around a company during tough times, compensation experts say. At AmeritasAcacia, even though positions are being cut, customers still need information about their accounts or want to buy new products. "They’re eliminating these people, but they still need people to do this transactional paperwork every day," says David Annunziata, vice president of client services at Manchester, a Boston-based outplacement and career-services firm that’s working with AmeritasAcacia. While stay bonuses are used in many industries, they’re more common among businesses that deal with customers on a daily basis, such as finance and health-care companies, Annunziata says.

    Last year, 34 percent of 772 companies surveyed by WorldatWork used stay bonuses, compared to 24 percent two years earlier, when the economy was much healthier--a 42 percent increase. Another survey, in which 925 firms participated--including many Fortune 1000 companies--showed that in 2001, half offered retention bonuses to employees who would eventually be laid off, up from just over one-third three years ago, according to outplacement firm Lee Hecht Harrison. Stay bonuses are usually offered to 5 to 10 percent of an organization or division. Those eligible for stay bonuses, which are paid as a percentage of salary or a lump sum, typically include executives, managers and IT and professional staff. Several Fortune 500 companies that use stay bonuses declined to be interviewed for this story because the bonuses are typically kept confidential when offered to select employees.

    One of the reasons for the increase in stay bonuses is that companies are more vulnerable during a weak economy, says John Challenger, a Chicago-based workplace consultant. Organizations are thinly staffed and each department has a key employee or two. "You figure out who you can’t do without and put in place a bonus," Challenger says.

    The use of stay bonuses also relates to a shift in retention strategies, Bremen says. When the economy was booming, companies had lots of perks to offer employees--spot bonuses, hefty raises, stock options--and retention efforts focused on keeping large numbers of workers from leaving for better offers. With companies having fewer resources, retention is now about identifying key people and making sure they stay.

    While it’s more unusual, retention bonuses occasionally are offered to lower-level employees, like factory workers, to persuade them to stay while product lines are discontinued or factories shut down, says Bob Freiburger, a senior vice president in Charlotte, North Carolina, for New Jersey-based Lee Hecht Harrison. Take the case of Brush Ceramic Products, a small manufacturer of metal ceramic parts in Tucson, Arizona. Employees handle hazardous materials and must undergo intensive training and wear special safety equipment, including a respirator. The company first offered bonuses to all 100 workers during a two-year hiring freeze a few years ago, says Rob Napoles, interim site manager. Each employee was paid an additional $50 a week and a $1,000 year-end bonus. With the hiring freeze lifted, the company continues to pay $1,500 annual retention bonuses. "It’s a unique and hazardous work environment. We want to keep them," Napoles says. Voluntary turnover at the plant is almost nonexistent.

    But if employees are considering quitting, throwing money at them is just a temporary fix, says Kevin Herring, president of Ascent Management Consulting in Tucson, Arizona. "Anytime you pay an employee more money to stay, you haven’t done anything to change their level of commitment," Herring says. "You’re just physically keeping them there."

Workforce Management, October 2003, p. 82-83 -- Subscribe Now!

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