“Golden Handcuffs” – Incentivising Star Employees to Stay

Viewed by 5,741 Smart Towkays

Mar 23, 2021

A major problem that businesses are facing these days is talent recruitment and retention. The employee turnover rate in Singapore is the highest in the Asia Pacific region, with 46 per cent of employees likely to leave their jobs within a year.

Companies would obviously like to keep their best workers. But what can persuade a great employee to stay?

Money Talks

Clearly, money talks. But there are complications to this equation. Businesses cannot endlessly engage in price wars with each other where they compete to give the higher base salary to a star employee. As a defensive strategy, some enterprises have taken to offering equity, in the hopes that this makes the employee more vested in the future of the company and would thus be inclined to stay and contribute to the company’s long-term growth.

However, this can backfire. If the employee still does decide to leave eventually, the company will not only lose his or her services, but part of the company’s ownership will be gone too, making it a double whammy. At the very least, this is a move one needs to be very sure of before making, and it cannot be done often. After all, there is only so much of the company you can give away.

Offering bonuses presents similar risks. Once it has been disbursed, the financial incentive to remain loyal stops being active, unless there is a constant stream of bonuses consistently being handed out down the line. Even then, competitors can match or even exceed these bonus pay-outs, making it a price war all over again.

So, what are “golden handcuffs”?

A pair of “golden handcuffs” is a strategy that is aimed at attracting, retaining and rewarding key employees by offering them a benefit that cannot be easily replaced, and which generally only pays out after a certain amount of time.

In other words, it is often some variation of an endowment plan or life insurance bought by the company in the name of the employee. This way, it allows an accumulation of a sizable retirement fund, while at the same time providing additional death protection for your key employees or their family members.

How does "golden handcuffs" work?

Let’s say you wish to retain a certain valued employee who is already making good money and you cannot afford to bump his salary up much higher, and especially not to the level that your competitor cannot match.

Instead, you offer to provide an endowment-insurance policy whereby, if the employee passes on while under your employment, his named beneficiary gets a much higher pay-out than any company could offer in remuneration. In addition, after a number of years the policy will mature, and the employee will receive the substantial amount of accrued cash with interest. If the employee opts to leave the company before the policy matures, the company can reassign the policy, transferring ownership to someone else instead, thus denying the employee said benefit.

By purchasing an endownment-insurance policy in the employee’s name, the business should also get a tax deduction since it provides benefits-in-kind to a staff member.

This is a mutually beneficial arrangement. Employees do not necessarily prioritise money above all else, but providing that pot of gold might still be a source of motivation as it is a target to work towards.

Moreover, if they think that their employer is looking out for them and their family by providing a safeguard, they might be more inclined to stay with the company. This could also be especially so if the employee has developed certain medical conditions that would deny him of getting himself covered if he were to leave the company.

Meanwhile, the employer does not have to fork out an exorbitant amount of money to offer an incentive to a valued employee. It can also be stipulated that the employee must relinquish his rights to the policy in the event that he does not wish to be retained, thus minimising the risk on the employer’s part.

Conclusion

In comparison to a Group Medical Insurance whereby all employees are covered regardless of their performance, “Golden handcuffs” are offered to specific employees who are deemed to have contributed immensely and value-added to the company, hence the “preferential treatment”.

“Golden handcuffs” is a term that may have some rather backhanded connotations, with its use often denoting employees who are really wanting to leave their job but cannot bear to because of financial reasons.

From a practical point of view, there is no denying that such measures are undertaken to tie an employee down, to reduce the risk that they will leave and take away a benefit that other employees cannot match.

However, this hardly involves malice. In fact, it can even be seen as a way to appreciate and thank employees for their service to the company. At the end of the day, it is still down to the employee to decide if they wish to receive the benefits of such financial incentives by staying. If they are amenable, this is an arrangement that brings satisfaction to both parties.

"THEY ALWAYS SAY, WE'LL JUST DO ANOTHER YEAR.

IT'S CALLED THE GOLDEN HANDCUFFS"

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