Retention bonuses: risk or reward?

In a recent article by Jim Heskett in Harvard Business Journal’s Working Knowledge, he weighs in on value of performance bonuses; he says “they provide an incentive to do nothing”. Is $742,000 too much to pay one executive at AIG?

These bonuses gained popularity during the merger frenzy of the 80s to encourage employees of the acquired organization to stay. Often, there are no physical assets, just (what Peter Drucker called) “knowledge workers” and if losing their institutional knowledge is a root cause for a risk, then a retention bonus may be considered. Only how much is that knowledge worth?

One of the canned HR risks which usually appears on the risk registers I have developed deals with “retaining” senior management. What is the risk of losing them where your strategic objectives are concerned?

If some of the key contributors (root causes) to the execution of your organization’s strategic plan are certain key individuals, and losing them would put your organization at risk, then I would say you have a high inherent “retention risk”. The way one treats any high inherent risk, is to implement controls, one of which could be a retention bonus.

(I once worked for an institutional equity dealer and one year the global parent decided no bonuses would be paid. What followed was a mass exodus and within two months, everyone from trading, sales and research had left. The firm was a shell of its former self. Clearly, retention bonuses would have saved this organization, although one may speculate that perhaps closing the desk was the strategy and not paying the bonuses was an attrition mechanism!)

So from a risk perspective, retention bonuses are okay, so long as you can justify their cost as risk treatments and don’t overpay for the control.