Everything you need to know about retention agreements
If you’ve noticed a recent jump in staff resignations, your instinct may be to offer your team members retention agreements with attractive bonuses to convince them to stay.
But uncertainty can play a more significant role in employee departures than money. MIT Sloan says job insecurity and reorganization contribute to turnover 3.5 times* as much as compensation. And if your retention agreement offers extra benefits, but they’re not what people want, you won’t reduce turnover. You may even push more employees to resign.
Here’s our guide to creating effective retention agreements that complement your other turnover strategies and help you build a positive work environment for your people. Discover:
- When to use retention agreements
- What to consider before you create a retention agreement
- How to tailor the retention agreement to each employee
- Further resources on retention strategies
*MIT Sloan Management Review, 2022
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What is an employee retention agreement?
An employee retention agreement is a contract that encourages staff to commit to staying with an organization for a specific time frame. Employers use them as retention tools to stop essential team members from leaving at critical moments for the business. They can include incentives like:
- A retention bonus (either as a lump sum payment of 10 to 15% of the employee’s base pay or in smaller installments)
- Stock options
- Extra benefits
- A promotion or title change
Under the US National Labor Relations Act, employees have the right to find new employment. But if staff resigns before the date stipulated in their retention contract, they may be obligated to return any benefits they received in relation to the agreement. However, the contract should allow exceptions depending on the circumstances — especially if the individual left for reasons outside their control, such as sickness or injury.
When is a retention agreement beneficial?
Generally speaking, retention agreements work best when your business is going through a transitional period or the job market is especially competitive. Here are some situations in which you might consider implementing a retention agreement:
- Internal changes — Common examples include mergers, acquisitions, and boardroom reorganizations. In these situations, you may need to retain specific team members to fulfill the conditions of a transaction or facilitate a smooth handover process.
- Critical business milestones — Some employees may be vital to the success of major business developments, like securing funding or launching a new project. Without their expertise, you may miss opportunities, delay important work, and lose your competitive edge. Consider using a retention agreement to solidify staff loyalty during those pivotal moments.
- Major disruptions — Sometimes technological innovations and new popular practices can disrupt businesses while everyone adjusts to the change. One example is how the rise of online lodging forced many hospitality companies to move their operations onto websites and apps. Although these shifts can be positive in the long run, the stress and uncertainty that accompany them can prompt resignations. This is where retention agreement incentives can help compensate people for the temporary extra challenges in their jobs and convince them to stay.
- Rewards and recognition — Top performers typically maintain a high-quality standard and regularly exceed their targets. Aside from delivering great results, they often empower the rest of the team by acting as leaders and raising morale. Acknowledge their good work and show them how indispensable they are to your company by offering them a retention agreement.
- Getting ahead of the competition — Some employees have highly desirable skills, privileged knowledge, and close customer relationships. Losing them to a competitor can be incredibly damaging to your business: Not only would you no longer have those assets, but your competition would gain them. Retention agreements can preemptively boost employee job satisfaction and reaffirm their loyalty to your company.
- Closures — When businesses announce their closing, most staff members will search for new opportunities before the official end date, given the company can no longer provide long-term job security. One way to sidestep that situation and ensure you have colleagues to help you tie up loose ends is by offering strategic retention agreements with ‘shut down bonuses.’ Doing so might encourage employees to stay until the business has officially closed.
When is a retention agreement NOT beneficial?
Despite their advantages, retention agreements have the potential to cause problems for your company. They can drive away the top performers you’re trying to keep and increase turnover when not implemented well or at the right time. Here are some situations when you should try other retention strategies first:
- In response to high turnover rates — If you have a turnover problem, retention agreements can make it worse. Kearney says spending your budget on small retention bonuses for many employees can result in higher attrition rates. In that case, your staff probably already noticed signs that your company was struggling and might see retention agreements as an act of desperation.
- When you offer uncompetitive salaries — Giving out retention bonuses and benefits won’t compensate for below-average salaries. Ensure your wages meet your industry standard before you consider adding other incentives. This can be done through regular benchmarking and salary increments.
- As part of a one-sided retention strategy — Retention agreements should be part of a holistic approach to reducing employee turnover. If you prioritize retention bonuses and neglect your people’s development and well-being, they may feel like you’re trying to pay them off. Some employees may stay if your offer is attractive enough, but their morale will suffer if they think their company doesn’t care about them.
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What to consider before creating your retention agreement
Once you’ve decided an employee retention agreement would benefit your organization, it’s time to create the contract. But there are some important points to consider before you begin.
The company perspective
Retention agreements come with many advantages when implemented correctly. They can help strengthen team relationships and complement whatever strategic planning model you’re using to help you surpass your competitors.
To create successful retention agreements and see how they can positively impact your company, ask yourself these questions:
- What are the underlying reasons staff might leave? Pinpoint the factors that may cause employees to resign because they’ll provide you with a starting point for your agreement. For instance, if you’re concerned a competitor might poach a team member with desirable skills, you know your retention bonus should be more attractive than any offers they might make.
- Which team members should we offer the retention agreement to? Retention bonuses and other incentives are more effective when companies offer higher amounts to a select group of employees. So, identify staff who are at a high risk of leaving and whose departures would significantly impact your business. Let’s say you need a developer to finish a tool on schedule, and competitors have taken an interest in them — they’d be an excellent candidate for a retention agreement.
- Do we have a thorough understanding of how the retention agreement will work? Get deeply familiar with your contract, especially its legal and financial ramifications. If it isn’t airtight, you risk staff leaving or the involvement of a court or government agency. And before you offer the agreement, perform a cost-benefit analysis to check whether the expense of losing the employee would be higher than the bonus or benefits you plan to offer. Consider getting independent legal counsel if your company doesn’t have experience crafting and interpreting these kinds of contracts.
- Are all terms of the retention agreement clear and unambiguous? To build trust with staff and prevent conflicts from arising in the future, make your agreement as detailed as possible. Employees need to understand what they’re agreeing to before they sign. Define everything, especially important points like the retention period, bonus payment date, and staff rights if they break the contract.
The employee perspective
Effective retention agreements prioritize employee needs and benefits. They recognize top performers for their work and make them feel valued. Such contracts also show staff members that their employer envisions a future with them, so they feel more secure about their jobs.
But the initial retention agreement might not be satisfactory to both parties. Employees may need to suggest some modifications or reject it outright. Here are some points you should consider before asking an employee to sign a retention agreement:
What would motivate them to stay at the company? — If someone considers resigning, the retention agreement should address the biggest underlying causes. For example, if a team member is hoping for an internal promotion but doesn’t qualify for any open positions, the agreement could include a new job title.
🤝 If you can’t meet an employee’s needs, whether through the agreement or other retention initiatives, perhaps your priorities no longer align.
It’s better to let people move on rather than encourage them to stay in a position that doesn’t fulfill them or restricts their growth. You don’t want to retain people if it negatively affects their happiness and, consequently, their motivation to perform at their best.
- Would this person prefer to receive a retention bonus, pay raise, or other benefits? If an employee is unhappy with their current salary and doesn’t feel they’re being paid fairly, it’s often better to negotiate a pay raise or introduce additional benefits rather than offer a retention bonus.
- What is our reason for offering this employee a retention agreement? Staff will be curious about why you’re offering retention agreements and wonder if there are problems behind the scenes. It’s best to be transparent so they can make an informed decision. If you’re not upfront about your motivations, they may leave anyway when they realize the full impact of a situation on their job. For example, if someone discovers many of their colleagues are leaving due to a merger, they may not want to keep working with a new team.
- Can staff negotiate the terms of the employee retention agreement? Retention agreements can be the start of a discussion between you and your staff. If they’re unhappy with some of the terms, you may have to adjust the agreement to suit both parties. You can even reassess the retention bonus agreement and offer a higher amount.
- How might tax affect the retention bonus? To spare your employees from disappointment, it’s worth checking how much of their retention bonus they can expect to receive after tax. As supplemental pay, bonuses are subject to withholding taxes, so what seems like a reasonable amount during the agreement may seem less worthwhile after deductions. It’s best to present people with the net amount up-front, so they can negotiate if it’s too low.
💡 Supplementary pay is also subject to different rates depending on whether it’s combined with regular salaries or paid as a separate sum. Check how that affects the total of your retention bonuses before you offer and pay them out.
- Does the contract clarify how the employee retention agreement will work? It’s essential for staff to understand all terms of the agreement and how it’ll affect them. Otherwise, they may commit and later regret their decision. The continued frustration over their job situation and the added stress of breaking an employee retention agreement may even lead them to quit. So, encourage staff to read through the entire contract and ask questions if they’re unsure about anything.
Aside from these points, there are no strict rules governing retention agreements or bonuses. You can tailor them to your company and each individual employee.
Further resources on retention
An effective retention agreement can incentivize your team to stay at your company for longer. But the ultimate goal of retention is creating a place where people want to work. To achieve this, you need retention strategies that target all aspects of the employee experience.
Leapsome has resources and tools that cover retention from every angle. Our article on employee retention incentives explores what benefits people need to be satisfied in their jobs. Or you can discover what questions to ask staff in employee retention surveys to uncover key turnover drivers at your organization. There’s also a more in-depth look at retention bonuses and how they can benefit your company and staff. And for a comprehensive overview of the most effective initiatives to combat high turnover, explore our top 15 strategies to retain employees and reduce churn.
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