WHAT IS A STAY BONUS AND WHEN/WHY YOUR BUSINESS SHOULD CONSIDER THEM?
If a business is transitioning whether by way of a sale, merger, consolidation, reorganization or otherwise, there is a general low morale and uncertainty in the workforce. If a business has a bad senior executive who has destroyed the morale of the workforce, there is a tendency for many employees, including the top talent, to abandon ship and move onto other employment opportunities. Additionally, if a business has a top manager who is integral to the success of the business and if such manager left, there is a possibility a number of key employees would leave with him/her. In any of these common business scenarios, this can create a talent vacuum and cripple the business in the short run and possibly have long term financial implications. Stay bonuses are a great remedy to help combat the potential talent drain, and keep the business steady during these times of transition, turmoil and uncertainty.
WHAT IS A STAY BONUS?
A stay bonus is what it sounds like, a bonus to encourage an employee to “stay” with the business. Whereas some bonuses are meant to incentivize an employee to meet certain performance goals, a stay bonus provides a bonus amount for staying for a necessary period of time. If the employee stays, he receives a financial reward. If he does not, he forfeits the bonus money.
Stay bonuses can vary from industry to industry, company to company, and from objective to objective. Sometimes they are extremely short term such as incentivizing a temporary tax accountant to stay through the end of April for the tax season, or incentivizing certain key managerial employees to stay employed for a finite period of time before and after a sale of the business to ensure continuity of management and stability, and allowing a buyer the opportunity to negotiate new longer term deals with key management employees.
Sometimes stay bonuses are long term. For example the stay bonus could be an incentive for a senior management employee(s) to remain employed for two, three, or even five years after a sale of the business or death of the senior owner. This is no different than a sports team incentivizing a franchise quarterback, a franchise hockey goalie, a franchise pitcher, or a franchise center to remain under contract so the team can be built around him/her for the next 3, 5 or 8 years. Businesses need to seriously consider doing the same. By keeping the core managers and executives, the business can similarly build a winning, profitable, experienced team around them including, employees and customers/clients to remain profitable or to be sold, merged or consolidated in the finite future. If he/she leaves, other valuable employees and customers/clients may leave with him/her. Some employees remain employed or customers may remain with the business because they enjoy the company of, working with and learning from that manager. An important, but often overlooked, consideration to retain star managers!
There are various ways to define what the stay bonus payout should be. It can be as simple as a flat amount or as complex or variable as the stay bonus is based off of hours worked, hours billed, sales brought in or net profits generated.
A simple flat amount is simple and easy; however, a more complex stay bonus may help to further incentivize other business goals. For example, a sale representative may receive a 15% commission based on net sales, but a stay bonus may give him an additional 10% for remaining employed and payable two calendar years later. This helps incentivize retention, but also incentivize sales because the sale representative knows he can potentially make 25% of net sales vs. 15% if he stays employed for an additional two years.
Another variation to the flat rate is providing a graduating stay bonus over five years so each additional year of employment is more valuable. There could be a stay bonus schedule of $10,000 the first year, $15,000 the second, $20,000 the third, $30,000 the fourth, and $40,000 the fifth year, instead of a stay bonus of $20,000 a year for five consecutive years. This creates an incentive to remain employed to enjoy the larger payments.
In summary, there are a number of ways a stay bonus can be structured, but it is a stay bonus as long as it encourages the employee, manager, officer or executive to stay for the desired period.
WHY USE STAY BONUSES?
As mentioned above, there are a number of times or instances when a stay bonus is appropriate both in a transition/turbulent times and outside of a transition.
Traditionally they are used in turbulent times to ensure continuity of labor so the business does not fall apart during the transition. This can be anything from a sale of a business, a reorganization or consolidation, or addressing the aftermath of a malignant/poisonous manager. In these situations, for example, if a company has 30 sales representatives and three sales managers, one for every 10 sales personnel, one manager may decide to leave and some or all of the sales personnel loyal to him/her may follow the manager. For example, suddenly the business has two-third of the workforce to take care of the same set of customers, and even if the 5 to 8 sale representatives who followed the manager are replaced, a new manager is necessary to guide them to retain or regenerate the goodwill of the departed manager’s customers. In other words, it could take months or even years to replace a quality manager.
More importantly, in a business sale, a sudden exodus and/or cherry picking by a competitor of the sales or manufacturing force could possibly lead to: 1) a discount in the purchase price or last minute re-trade; or, 2) possibly lead to a failed deal. Clearly, short term results will take a hit and make the business less attractive to the buyer. At the very least, a stay bonus is mandatory for the aforementioned three sales managers to stay on board not only during the transition, but possibly for a finite post-closing period such as year or two. This is mandatory to maximize the purchase price.
Another situation that may require a stay bonus is when there is a ruthless, inhuman condescending senior manager who completely kills or destroys the moral of the employees. In this situation, you may lose 5 to 8 of the abovementioned sales representatives because they hate or despise working for this manager. A problem arises in that the remaining sales reps will have the extra stress of picking up the slack of those who left. Instead of risking losing some of the remaining reps and there being chaos due to the sudden turnover of a major part of the sales division, it may be wise to reward the remaining sales force for their extra diligence and loyalty with a stay bonus to stay through the rebuild or transition. This allows a core of veterans who can provide guidance to the new employees as they are replacing the departed employees.
Outside of turbulent times or a transition, stay bonuses may be a virtuous part of a general incentive package. If you merely have incentive bonuses, in a bad year, a good manager may have no reason to finish out a year as he knows incentives will not be met anyway. The stay bonus gives him a reason to stay and rewards him for his/her loyalty. This is especially important as sometimes a bad year has nothing to do with the manager’s decisions, and it is greatly possible that without that manager, the year could have been worse.
Another instance where stay bonuses are useful is when it takes a large investment to find a new hire and/or it takes a year or two to train him/her. Imagine spending $90,000 hiring a new senior executive, and he/she leaves in six months, long before the expenditures reaped any rewards. It may be wise to incentivize a bonus for staying for three to five years where the $90,000 hiring cost will be more than paid off due to rewards attained by the business from the hire. In some fields, it may require a high salary to attract good talent, but it may take a year before that person is pulling his/her weight and understands the business, sales, customers and manufacturing techniques. Rather than allowing the new hire executive to earn the high salary and use the employer for training the first year, and then have a competitor cherry pick the newly trained senior employee, it is worth providing that employee a stay bonus for three to five years or a rolling stay bonus where he/she is incentivized each year for staying longer. This may help encourage the new employee to stay longer, and minimizing the negative effects of spending a large sum to train a senior employee, just for a competitor to take the employee once trained.
One downside to incentive bonuses is if there is no long term plan, it creates a natural break for employees to move on to the next venture. For instance, if there is a three year stay bonus, if there is no bonus beyond that, the employee may naturally wait the three years and expect to leave after three years and one day. Therefore, it is important to keep the overall goal in mind, and tailor it to that goal. If a five year employee is desired, then incentivize five years. But if a twenty year employee is desired, set up a scheme that rewards that type of tenure.
SUMMARY:
In the end, stay bonuses are great tools to be used on their own or used in conjunction with other incentives or for specific purposes. The specifics of the stay bonus all depends on what the specific purpose is, but in the end, if you want an employee to stay for his/her expertise, for his/her impact on the other employees, or for his/her long standing customer relationships, it is wise to consider stay bonuses for key management to ensure his/her expertise and know how does not move onto a competitor.