7 Reasons to Put Golden Handcuffs on Your Best Employees
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- Oct 26, 2019 12:00 am GMTOct 26, 2019 12:00 am GMT
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High-performing employees are often the most valuable asset in most companies. Customers, products, technology, inventory, and many other assets come and go. A company that cannot hold onto its best employees, however, likely cannot grow. Yet ironically, few companies take any formal steps to minimize the risk of losing top employees. Sure, you pay your best employees well, and presumably have a great culture and work environment. But your competitors can offer the same incentives. To truly hold onto your best people, consider tying them to your company with handcuffs made of gold.
“Golden handcuffs” is a generic term describing a wide range of programs that share one core purpose—to incentivize top employees to stay with your company for the long term. There are many types of programs: incentive compensation plans, stock options, phantom stock, stock appreciation rights, synthetic equity programs, share bonus plans, and more. Making things even more confusing, each of these types of programs have variations in their design and operation. This complexity makes it difficult to approach these programs and select a plan design that best fits the situation. However, learning about golden handcuffs programs is worth the effort. They offer a unique combination of advantages and benefits that can help your company reduce risk, propel growth, and maximize value at exit.
Companies that design and implement effective golden handcuff plans can accomplish the following seven important outcomes:
- Reduce risk that top employees leave prematurely or unexpectedly. Golden handcuff plans accomplish this by offering a future compensation payout that is partially or completely forfeit if the employee should terminate employment prior to an agreed-upon date (such as retirement age) or an event (such as the sale of the company). To create the desired impact, the potential compensation amount must be significant—typically several times the employee’s current annual income or more.
- Incent top employees to help create long-term, sustained company growth. The potential for a future compensation payout orients the employee towards achieving the company’s business goals, especially if the payout amount is tied to long-term company growth.
- Create incentives for top job candidates to join your company. A golden handcuffs program offered to a desired recruit—in addition to competitive pay and compelling career opportunities—can be the tipping point that convinces that important hire to join your organization.
- Protect the company against the risk of losing customers, other employees, or trade secrets should an employee who has those relationships and information leave. Golden handcuff plans should include a legal agreement which commonly includes provisions such as non-compete, non-solicitation, and non-disclosure language wherever possible.
- Provide a way for business owners to create alignment with non-owner top employees around creating business value prior to exit. Many business owners are understandably concerned about discussing their future exit plans with their top employees who don’t have an equity stake in the company. In those situations, the owner’s future exit is a potential wealth-building event for him or her, but it presents career uncertainty and risk to the non-owner employee. Golden handcuffs plans build a bridge between owner and non-owner top employees, by including those employees in a wealth creation opportunity at exit and providing for their career stability.
- Enhance business value at company exit, particularly upon sale of the business. Your future business buyer will often see greater value in your company if a golden handcuffs plan has been effectively implemented, particularly when the plan includes “stay bonuses” which incent top employees to stay with the company after a sale, typically for one to two years.
- Thank top employees for their service with the company. Most business owners want to thank high performing employees after they have given years of effective service to the organization. While golden handcuffs plans are primarily intended to incent and reward top employees, they can provide double-duty by also providing lucrative compensation awards in the future to the very same people you likely will want to acknowledge.
Many business owners and advisors assume that a golden handcuffs plan requires sharing actual ownership interest with the employees who will be included in the plan. This not always true. Some programs such as stock options plans include the potential for actual ownership sharing. Other plan types such as phantom stock or executive bonus plans involve compensation and do not share actual equity. Sharing ownership with employees presents significant risks and downsides. Whenever possible, consider a golden handcuffs plan that pays out compensation to the employee rather than shares actual company equity.
Business owners and leaders need effective tools to motivate top employees, retain them for the long term, and drive company growth. Few tools have the potential to address all of these needs simultaneously like a well-designed golden handcuffs program. A little research here can go a long way to securing a bright future for your employees and your company.