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Compensation Programs to Motivate Employee Retention

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By Phil Cohen

What Are Retention Compensation Plans?

Some employers are pursuing specific compensation programs designed to increase employee retention. Compensation plans tend to be expensive, but the expense is often viewed as an investment that pays off by improving productivity and increasing worker motivation.

What Is Retention Compensation?

According to Kronos, 87% of HR professionals consider employee retention a significant problem and see it as a major priority. Thus the need for retention compensation is growing.

In short, retention compensation is a program in which employees are offered financial incentives to ensure they remain with the company for a set period of time. When there are major changes in an organization that affect employee retention, companies may offer incentives to employees to encourage them to remain with the company.

Retention incentives are usually given as a result of:

  • The sale of a firm or organization.
  • The company is undergoing a huge restructuring or reorganization.
  • The succession of new executives into the organization.

The most typical example is one in which the company’s long-term value depends on certain leadership and key talent. 

Retention plans can vary widely in scope and terms. Generally, the amount of money involved in these types of programs tends to be relatively significant, but there are no rules regarding who can participate or how much each person receives.

For instance, there are short-term compensation programs for employees who are recruited to fill a specific position. These programs are designed to compensate these employees if they leave before completing their tenure.

Common examples of short-term retention compensation packages include:

  • Annual incentive: Promotes and recognizes achievements for specific goals. The benefits are typically linked to project outcomes that have been set at the outset of a performance cycle.
  • Profit-sharing: Employees get a share of the profits. Shareholders contribute to the profits through this approach, as employees do. The plan usually contains a set, defined formula for allocating profit shares and devising methods for returning capital accumulated over time.
  • Gain-sharing: Shares the productivity gains with employees as a group.
  • Team and small-group: These programs focus on group success and are frequently employed when a group’s performance is measured by the quantity produced, and it isn’t easy to allocate individual contributions.
  • Retention bonus: This payment is outside of a regular wage and an incentive to keep a highly essential employee on the job during a critical period in business.

There are also long-term incentive plans that offer incentives for executive retention. These plans are often structured as deferred compensation, but they can also be designed to act like an annuity.

Retention compensation plans typically fall into one of three categories, either providing incentives to employees for retaining their positions with a firm, compensating employees recruited to fill specific roles, or offering incentives for executive retention.

The most common types of long-term incentives include:

  • Employee stock options (ESOs): These give employees the right to purchase shares in the company at a certain price. While this sort of compensation plan is complex, it can serve as an effective retention tool when implemented correctly.
  • Stock appreciation rights (SARs): These reward employees with cash or shares of company stock when the price of the company’s stock rises. Unlike ESOs, employees do not have to purchase SARs.  
  • Performance shares: These incentive programs reward employees with a set number of stock units if they meet certain performance goals.
  • Cash incentives: This is a popular choice for businesses that don’t offer stock options. Employees who meet predetermined performance goals over a long period of time may be entitled to cash rewards.

Additional incentives may include extra vacation days, paid sabbaticals, and other substantial perks. Moreover, there are other options, such as permanent pay increases, which are often tied to improvements in an employee’s performance or changes that help the company run more effectively.

There are several reasons for the necessity of retention compensation. Especially in the last couple of years, staffing shortages have hit hard. The impact of nursing shortages on patient care has been felt throughout the COVID-19 pandemic, especially at its height. Thus, the need for emergency nurse staffing is on the rise throughout the country. In fact, registered nurses are expected to see a 9% increase in employment over the next decade.

So, how can you attract and keep these jobs in a business with so many unpredictable variables? Medical billing factoring services may help meet the payroll demands of hospitals and their dedicated workers.

Benefits of Retention Compensation

Overall, the potential benefits of retention programs are plentiful for both employer and employee. They include:

Reduced turnover

Employee turnover is a common occurrence in any company, and it can be costly to any HR department. Every person who leaves takes time away from your other responsibilities as well as the time you spend looking for their replacement and carrying out the hiring process.

Focusing on employee retention ahead of time may help to minimize the trouble and wasted time that results from attrition.

Improved morale

Having a solid and dedicated workforce is essential to the success of any company. When employees feel valued, they will be motivated to work harder and may remain more engaged in their position than when they continually feel undervalued. This will result in high morale and continued productivity.

Recruitment and training efficiency

When it comes time to hire new employees, there can be a lot of pressure on HR teams. However, having an effective employee retention system in place may help to streamline the process and allow you to effectively avoid turnover so that you don’t have to replace employees as frequently.

Dedicated professionals

Workers who feel as though they are valued members of a team will be more committed to their work and company success. They will be more willing to put in the effort to ensure that they are doing their best. A professional workforce is also vital for providing quality customer care.

Increased productivity

Employee retention compensation can also help to increase productivity. If workers know that they are appreciated and valued, then they will be more willing to cooperate with their team members in order to get the job done.

Improved customer experience

In today’s competitive marketplace, a company’s success is largely determined by its customer service. Retaining employees could help to motivate them to provide better care and improved services for customers.

Reduced costs and increased revenues

Employee turnover can be a costly affair because it can cost one-half to two times a person’s salary when you factor in recruiting, hiring and training expenses. Not only that, but it can also decrease customer loyalty and profitability. By focusing on retention, you may be able to cut down the cost of replacement and increase your revenues by retaining your customers.

Common Elements of Retention Compensation Plans

The compensation strategy gives a broader context for designing, administering, and discussing reward programs. Furthermore, while you may know why your employee left, you want to make sure it doesn’t happen again. That’s where a well-designed staff retention plan may help. An employee retention strategy that includes the following components helps to retain employees:

Look for someone who is a pivotal contributor to the organization.

Look for employees who have the potential to make an immediate impact on value. However, this may imply restricting the number of new workers. It’s preferable to have specialists in critical areas with a lower turnover rate.

Identify these prospects as soon as possible. 

Find potential employees throughout the selection process and convey clearly the terms of the business to them. This will ensure that when you are ready to make an offer, the candidate will be waiting.

Recognize that the compensation program or payment itself is not enough.

Aside from financial value, establishing a personal connection with your employees from the start helps to smooth employee-business integration.

Ensure that current compensation and perks levels reflect strong performance expectations.

Keep in mind that employees may have other options available to them. Identify the key values and benefits you want to offer them, make it part of your strategy, and highlight these strengths among potential employees.

Link rewards to a specific time period.

This might be beneficial for generating a sense of urgency while also improving short-term results. Understand what your staff wants. Make sure your retention program includes incentives or rewards that are tailored to their interests and preferences within the company.

Strategies for Successful Retention Compensation

Now that you understand some of the common benefits and elements of an employee retention plan, let’s look at strategies for successful retention compensation plans.

Be clear and concise.

If you want to keep high-performing staff, your compensation strategy should be straightforward. Creating a simple pay plan and devoting a larger proportion of your pay budget to individuals who have had outstanding achievements and lengthy tenure are the two keys to making this happen.

Speak to your target employee’s values. 

Millennials are increasingly dominating the job market and workplace. They have high expectations for the companies they work for. Values such as work-life balance, equality, and advancement are critical to keeping these workers satisfied.

Give small, more frequent rewards.

The frequency of rewards is another critical component in any successful retention strategy. A larger reward given every six months may not be as motivating as smaller, more frequent boosts that are seen as a regular part of doing business.

Consider alternatives to assessing performance. 

In the past, compensation has been tied to performance. In today’s market, companies who are looking for alternatives or additional incentives to retain staff may consider connecting bonuses to a more broad scale. For example, include factors such as personal and professional development, teamwork and problem-solving skills, and overall work quality into your assessment of success.

Caring for and keeping top talent is critical, and sharpening your recruitment and hiring methods is an essential step toward achieving this. Moreover, there are ways to support your business if it needs assistance in retaining funding and compensating employees. Many companies employ the use of factoring to help keep cash flow moving.

Types of factoring for businesses and industries include:

All in all, the use of factoring for your business needs can help with managing employee expenses and financial flexibility for compensation packages.

Success Rates of Retention Compensation Strategies

According to Willis Towers Watson, 78% of employees said they would choose to work for an organization with a good benefits program. Here are some key elements that have an influence on plan success rates:

  • Workplace culture –– A strong work ethic is encouraged by leaders and rewarded with opportunities for growth and advancement.
  • Continuous focus on professional development –– Instilling a sense of pride and fostering a culture that allows employees to explore interests outside the workplace.
  • Open lines of communication –– It’s essential for all members of your team to feel heard and cared for by their superiors. Moreover, at times when negative situations arise, open discussion can lead to ease in solving issues and avoiding future mistakes.

Overall, with programs that are tailored to the needs and desires of your employees, you will likely be able to reduce turnover rates and see better results across all aspects of your business.

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Phil Cohen

About the author

Philip Cohen is the founder and President of PRN Funding, LLC. PRN Funding is an extraordinarily focused niche player in healthcare funding. With years of…... Read More

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