What Are Golden Handcuffs
Golden handcuffs refer to any combination of rewards and penalties given to key employees encouraging them to remain with a particular firm.
Golden handcuffs are a collection of financial incentives. They are intended to encourage employees to remain with a company for a stipulated period of time. These incentives are offered by employers to existing key employees. It is a means of holding onto them as well as increasing employee retention rates. Golden handcuffs are common in industries where highly-compensated employees are likely to move from one company to another.
The term Golden Handcuffs does not refer to one specific method of compensation. Rather, it refers to a combination of any of a number of different rewards and penalties. There are given as incentives to key employees to encourage them to remain productive and motivated. Essentially, an employer interested in golden handcuffs would provide a very generous compensation package. However, this compensation comes with strings attached. There are two ways to convince valuable executives to remain with a company. One is to reward them if they stay. The other is to penalize them if they leave. Many employers combine both approaches by mixing generous economic incentives like bonuses and stock grants. However, these incentives are subject to specific vesting schedules and holding periods.
A negative connotation is often associated with golden handcuffs. Employers offer incentives in order to retain individuals that have performed well for the company. Or, they may be offered to those that have exceptional or irreplaceable skills. These incentives are designed to prevent people from leaving jobs they might otherwise vacate. However, they don’t because the financial loss would be large. Incentives that can be considered golden handcuffs include large bonuses, school payments, stock options, and a company car. These incentives come with agreements and stipulations. The employee will receive them only after a certain period of employment. Otherwise, the employee will have to return them if they leave before the specified timeframe.
Golden Handcuffs – Why Companies Use Them
Employers invest significant resources in the hiring, training, and retaining of key employees. Golden handcuffs are intended to help employers hold onto key employees in which they’ve invested. Also, to ensure that their best employees and top performers do not leave the firm. But, sometimes golden handcuffs have a negative connotation. They are often associated with individuals staying at a job with which they are unhappy. But, they are not willing to leave because the financial loss would be significant.
High-performing employees are the most valuable asset in most companies. Customers, products, technology, inventory, and most other assets come and go. But, a company must find ways to attract and hold onto its best employees. Without talented people, a company cannot sustain growth and has a lower chance of survival. Yet, too few companies take any formal steps to minimize the risk of losing top employees. It is not enough to just pay your best employees well and presume you have a great culture and work environment. Competitors can often offer the same salary and environment. Companies that want to find and keep the best people need to consider extra incentives. Benefits that are meaningful and are not easily replaced at another firm.
Golden Handcuffs Benefits
- Reduce risk – No company wants its top employees to leave prematurely or unexpectedly. Golden handcuff plans accomplish this by offering a future compensation payout. However, it is partially or completely forfeited if the employee terminates employment prior to an agreed-upon date. For example, upon reaching 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.
- Incentivize sustained company growth. The potential for a future compensation payout motivates the employee towards achieving the company’s business goals. Especially if the payout amount is tied to long-term company growth.
- Attract top talent – Incentives for top job candidates to join your company are a must in today’s work environment. A golden handcuffs program offered to the desired recruit—in addition to competitive pay and compelling career opportunities—can be the tipping point. One that convinces an important hire to join your organization.
- Protect company assets – When key employees leave, the company is at risk of losing customers, other employees, or trade secrets. An employee who has those relationships and information can do great damage after they leave. Golden handcuff plans should include a legal agreement that commonly includes provisions such as non-compete, non-solicitation, and non-disclosure language wherever possible.
- Thank top employees for their service – Most business owners want to thank high-performing employees. Especially after they have given years of effective service to the organization. Golden handcuffs plans are primarily intended to incentivize and reward top employees. But, they can provide double-duty by also providing lucrative compensation awards in the future. (Source: energycentral.com)
Golden handcuffs can be offered on a prorated basis when employees meet certain milestones. Or, they can be offered all at once with certain stipulations. Golden handcuffs can take many different forms. Some examples include stock options, supplemental executive retirement plans (SERPs), large bonuses, vacation homes, a company car, insurance policies, and so forth.
However, when these incentives are offered, they should come with certain terms. Usually, they state that bonuses or other forms of compensation are only paid out if the employee stays for a specific period of time. Or, if they are paid out first, then they must be returned to the company if the employee leaves earlier. Other forms of golden handcuffs include contractual obligations. They may specify an action that an employee may or may not perform. For example, a non-compete clause prohibiting a network television host from appearing on a competing channel.
Phantom stock may be viewed as one example of a golden handcuffs arrangement. Unlike real stock, the phantom stock does not convey any actual ownership in the business. Rather, executives are rewarded for superior performance with a “phantom” share or credit in an employee account for an amount equal to the value of the company’s real shares of stock. As time goes on, this account is credited with changes in share value and with the value of dividends. Generally, there is no taxable income for the holders of phantom shares until the employee redeems the phantom shares at a later date.
The advantage of this arrangement to the employer is that ownership and control of the corporation will not be diluted. Also, phantom stock works well if the employer is a smaller corporation and can’t exceed the maximum allowable number of shareholders. To employ golden handcuffs, a vesting period is established for the phantom shares. In other words, the phantom shares are granted, but they require a minimum holding period. If the executive leaves the company before the holding period has expired, he or she will forfeit the value of the shares.
Nonqualified stock options
Nonqualified stock options are another effective tool for retaining executives. As an option-holder, the employee has the right to purchase shares in the company at the grant price. This is typically the current share value at the time of hire. As the business grows in value, the value of the stock option rises. Options are generally subject to a vesting period before they can be exercised to purchase shares. This requires employees to remain with the company. To truly encourage executives to stay, the employer might wish to consider using a “stair-step” approach to vesting.
Example: An executive, Jim, has options to purchase 100 shares of his company’s stock at $10 per share. The company can mandate that up to 50 percent of the options may be exercised at the end of Jim’s second year of employment. The remaining 50 percent can be exercised only upon completion of the fourth year.
Incentive stock options
An incentive stock option is a right or option granted by a corporation to key employees to purchase shares of company stock at a certain price.
It may be no less than fair market value at the date of grant, for a specified period of time. Notwithstanding an increase in the value of the stock after the option is granted. These options are sometimes referred to as qualified or statutory stock options (as opposed to the nonqualified stock options mentioned previously) because they must comply with numerous requirements imposed by Internal Revenue Code Section 422. (Source: viridianadvisors.com)
Example of Golden Handcuffs
Charles has been working for company XYZ for five years. In those five years, the company has spent a significant amount of time and money in training and developing Charle’s skill set. Within that same time frame, Charles has demonstrated his exceptional talent and ability to perform well for the company. Not only has the cost in training Charles been returned to the company many times over due to his work ethic, but he will be a remarkable asset to the firm for many years to come. Because Charles is such an exceptional employee, XYZ is worried they may lose him to a competitor that may offer more money or other incentives.
To prevent this from happening, XYZ offers Charles a significant financial incentive through employee stock options. However, the stock options do not vest for five years. This ensures Charles will stay with the company for those five years. Otherwise, he will miss out on a significant cash windfall. (Source: investopedia.com)
Golden Handcuffs Aren’t Always a Bad Thing
The grass is not always greener elsewhere. Many people feel handcuffed to their jobs because they don’t leave their actual work in the office. Instead of enjoying the freedoms and luxuries that come from being employed, they remain focused on their work whether they’re at work or supposedly off work. It’s important to be mindful of the advantages that come with your job, even if it’s not your dream job.
Focusing on your personal life, engaging in pleasant activities, and spending time with family/friends can help. If your schedule and energy permits, perhaps volunteering, mentoring, or hobbies can give meaning and purpose to your life, even if your career is not satisfying. However, if those handcuffs are starting to rust by not giving you enough in return for the time and energy that you put into your work, then it is time to consider a change. Remember, gold has its advantages.
Golden Handcuffs provide a method to help attract, retain, and reward key executives. Companies that design and implement effective golden handcuff plans can accomplish the following important outcomes
- Reduce the risk that top employees leave prematurely or unexpectedly
- Provide a benefit that cannot be matched by competitors or individually
- Create incentives for top job candidates to join your company
- Protect the company against the risk of losing customers, employees, or trade secrets should an employee who has those relationships and information leave
- Thank top employees for their service with the company (Source: exemplarcompanies.com)
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