Stay Bonuses are the Worst Kind of Retention Tool

This is a wayback – almost two years ago to the day I offered this perspective and eerily it’s still spot on. I must be Nostradamus’ long lost great grandson.

It’s been a rough year in the market. Mortgage crises. Bad corporate behavior. Bankruptcies. M&A. Hideous. Lloyd Bridges said it best: “Looks like I picked the wrong year to quit sniffing glue.” But undoubtedly the most bizarre behavior I’ve seen this year comes in the form of the “stay bonus.”

Let’s hit rewind and explore some underlying axioms about business. Sure, many of these are cliche (probably because so many folks have abused and perverted them that they often ring hollow) but they’ll set a context to explore this issue.

1. People are our most important resource
2. It costs much more to hire someone new than it does to keep the associates you’ve already got
3. People are always searching for growth opportunities

Here’s the issue: those three axioms set many organizations up for a colossal form of organizational stupidity.

Imagine this situation if you will: you have a positive bull market going on and the economy is chugging along at a solid clip. Life is good. Earnings reports are full of butterflies and rainbows and puppy dogs and smiley faces (I love Frank Caliendo’s impression of Pacino) and no matter how hard management tries, they can’t seem to do anything other than turn a wonderful profit. Everyone’s as cozy as Fonzie on a motorcycle. In this scenario, it seems like every manager and executive in the organization is the next Jack Welch given the performance they’re turning in.

Then it happens – everything goes south. The economy craters. Spending tightens. Margins are pressured. But most important of all, leaders in the organization start making bad decisions (or no decisions at all which is even worse). Some of them demonstrate gross negligence or incompetence. Earnings reports are full of more “Biff!”s and “Pow!”s than an old Adam West era Batman episode.

Looking at things objectively, management and leadership has failed. They’ve failed to anticipate and prepare for problems. They’ve failed to steer the organization through choppy waters. And all too often, they’ve failed to take responsibility for their failures (once again invoking the Krusty the Clown defense of “Don’t blame me! I didn’t do it!”).

Here’s where it gets stooooopid (with FIVE O’s). The same management that drove the business into the ground opens their handy “Successful Executive’s Handbook” (warning: if you see this book on the bookshelf of a prospective boss, run like the wind my child!). They frantically look for the chapter on the Titanic but to no avail.

At that point, they remember the three axioms above and grow concerned that the problems in the business will lead to a “brain drain” of their talent. They read those axioms over and over wondering what to do. They worry their “key talent” will seek “growth opportunities” elsewhere now that the company has melted down. It hits them hard when they think they can’t afford to lose their talent because it will cost more and make things worse. And of course, they need to do something (anything) to demonstrate their commitment to people since they are the most important resource they have. The stroke of genius strikes at that moment – the best way to prevent that brain drain from happening lies at their fingertips: stay bonuses all around!

Yes. Stay bonuses. Wonderfully (and occasionally obscenely) large amounts of cash or stock to induce leaders in the organization to stay are handed out. And guess what happens? Of course those leaders stay around. The incentive is too large not to.

I hope by now you’ve figured out the monolithic act of stupidity here… please tell me you have. For the benefit of one of those leaders who happened to just give out a stay bonus, I’ll elaborate because I’m sure you’re confused: YOU JUST PAID BIG BUCKS TO HANG ONTO MANAGERS WHO RAN THE BUSINESS INTO THE GROUND! Why on God’s green Earth would you do that? That’s simply throwing good money after bad.

The bigger problem is this phenomenon occurs at all levels from Directors to the Board of Directors. These “leaders” mistakenly interpret the above axioms as a mandate to pay even more money to the folks who got them in trouble in the first place.

My suggestion: look at the collapse of the business as a failure of leadership and, as I recommend doing when you make a hiring mistake, belly up to the bar and clean up your mess. Sure it’s the harder road to travel but don’t your associates, customers, and shareholders deserve better than management (note I did not say leadership) who has cratered a previously solid business? This is one case where instead of stay bonuses, you should be investing in severance packages and hiring bonuses…

– Mike Figliuolo at thoughtLEADERS, LLC