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How To Keep Top Talent When Existing Incentives No Longer Work
How To Keep Top Talent When Existing Incentives No Longer Work

Forbes

time02-07-2025

  • Business
  • Forbes

How To Keep Top Talent When Existing Incentives No Longer Work

Companies with valued employees exiting amid falling share prices need to restructure their ... More incentives. Even with the major U.S. stock indices hitting new heights over the past two years, many companies have seen their share values plummet. When the share price is under pressure, CEOs need their teams to stay intact and pull together. It's also at times like these that the incentives companies typically offer to maintain stable leadership teams and retain top talent may no longer be adequate. As Meldon Wolfgang, an expert in helping Boards, CEOs and human resources officers make decisions during uncertainty, explains, 'When the value of long-term incentive programs shows signs of eroding, companies must re-examine the entire range of incentives they offer—financial and non-financial alike. This is the ultimate strategic HR question. And it applies not only to senior leadership, and to management, but to your entire employee family.' Traditionally, stock awards and option grants—giving employees the right to buy company stock at a specified price—have been the cornerstone of executive and employee retention. The logic is straightforward: equity incentivizes people to stick around and help the company build long-term value. This works well when the company's share price is rising—and there's an expectation it will continue to rise. But when the price sags, especially when it falls below the price at which an employee can exercise his or her option, incentives lose their attractiveness. That's the situation some companies face today. In many cases, there will be fixes and turnarounds, and earnings and stock prices will rebound. Until then, however, stock options may cease to function as incentives. Employees may feel the option awards are meaningless and could become worthless, or worth much less. This is when executives and employees may start looking elsewhere. While replacing any employee is costly, replacing seasoned, specialized, and executive talent is especially costly, carrying hidden costs in lost productivity, morale, and institutional knowledge. By some estimates, the cost of replacing such workers—both hard costs (recruiting, onboarding, etc.) and soft costs (lost productivity, loss of institutional knowledge, etc.)—can be as high as four times the employee's annual salary. Companies that find themselves in such a bind—with valued employees exiting amid falling share prices—clearly need to restructure their incentives. The key is to be creative; while financial incentives are critically important, cultural and other non-economic benefits may be equally important (and more doable for some). On the financial side, the most direct way to restore the power of incentives is to put real value back in employees' hands. Beyond equity grants, there are multiple effective levers companies can use: Retention bonuses. This is immediate: Commit to stay and we give you money. According to a WorldatWork inventory of corporate rewards programs, 67% of the companies surveyed offered some form of a one-time retention bonus in 2022. Evidence shows they work: a 2023 survey found 86% of employees would commit to staying with their company for a period of time in exchange for an immediate cash bonus. Of course, this depends on the company having sufficient cash on-hand to be able to fund a retention payment. Stock incentives. As a variation on direct equity, employers can shift to stock grants, such as Restricted Stock Units (RSUs) and other awards where employees receive the full value of the shares as soon they qualify. Unlike options, RSUs retain value as long as the stock price remains above zero. By granting more stock or RSUs, instead of options, companies can ensure that employees still have skin in the game, while ensuring the employees that market dips won't wipe out their equity. 'Phantom stock' and SARs. Phantom stock, or 'shadow shares,' mimic the real thing, and typically include Stock Appreciation Rights (SARs) —meaning their value increases in tandem with share-price gains. Shadow shares can be converted into cash or equity at a future date—but not if the employee leaves. Convertible retention bonds. Similar in intent, though not in structure, to shadow shares, convertible retention bonds are employee-owned investment instruments that convert to equity if the company meets certain growth benchmarks–or are paid in cash (or expire) if it doesn't. Option repricing/exchanges. Some companies are replacing underwater stock options with new option grants or RSUs that have intrinsic value equal to or exceeding their original grants. Deferred compensation. Deferred compensation plans, commonly referred to as 'golden handcuffs,' are usually intended to keep key employees until retirement. But they can be structured in other ways as well, such as deferred bonus pools tied to performance benchmarks—where there is no immediate cost to the company, but employees receive a cash bonus if business improves. Compensation, while important, doesn't fully explain why employees choose to stay where they are or seek employment elsewhere. Other frequently expressed concerns include job security, professional growth opportunities, feeling valued at work, having a voice, and family. Employers can best address these concerns culturally and structurally. Here are some suggestions: Job security. There's no better way to tell employees that their jobs are safe than by announcing, 'No layoffs,' a long-standing policy, for example, at Marvin Windows and Doors, Nucor Corporation, Publix Super Markets, and Torani, the syrup and flavorings maker, which has gone 100 years without a layoff. This doesn't mean no changes; changes already are underway due to artificial intelligence (AI), advanced robotics, and other new technologies. What a 'no layoffs' policy does is create stability, since employees are less likely to preemptively look for a new job when their existing job is secure. Advancement opportunities. Most employees gladly will pursue new challenges inside your organization—if you make it possible. If they need upskilling or reskilling, provide it. Also consider creating internal talent, or project, 'marketplaces' and tour-of-duty rotational programs across departments or business units that enable employees to try new things and facilitate career moves. Research shows that workers who make internal moves tend to stay longer. A LinkedIn analysis, for example, found that after three years an employee who had been promoted or moved laterally within a company had a 65% to 70% chance of still being there, versus about 45% for someone who hasn't changed roles. Even in uncertain or troubling times, when a company's stock may be down or flat, senior leaders have many tools available to help keep key employees. But retention requires purposeful, strategic effort. When employees see multiple reasons to stay—a financial upside and a fulfilling work environment—the retention calculus shifts dramatically. Instead of asking, 'Why stick around?', they see staying as the smart choice.

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