You may be familiar with the term ‘golden handcuffs’, a position where significant financial compensation ensures an individual is tied to a role even if they want to leave. In this article, we’ll define golden handcuffs, explain what they mean for individuals and organisations, and provide some examples and tips for HR managers.
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‘Golden Handcuffs’ Definition
Golden handcuffs is the term used to describe financial incentives offered to employees to discourage them from leaving. These incentives pay out over specific time periods, depending on the company’s goals. A start-up may use golden handcuffs for the first six months or year of employment, whereas a more established organisation may look at options that tie employees in for periods as long as five or even ten years.
Golden handcuffs can be a specific contractual agreement between a company and its employees, but the term can also apply to highly paid individuals who simply feel they cannot leave their current role due to the salary they receive. The term generally has negative connotations because it restricts the freedom of the individual employee to move roles or retire early.
The term was first recorded in 1976 when it was identified that companies regularly used financial incentives to keep employees due to a lack of skilled workers following World War Two. Organisations realised they needed to offer more than just an attractive base salary to retain their highly skilled employees.
Types of Golden Handcuffs
There are many different types of golden handcuffs, including:
- stock options
- large bonuses
- pension plan payments or retirement plan
- enhanced insurance packages
- additional annual leave
- personal incentives such as payments towards school fees, company car or even property
These incentives are usually linked to specific periods of service or clearly agreed performance goals.
While golden handcuff payments are often tied to completing a specific period of service, in some cases, they can be paid during an agreed-upon time period. These payments may have to be returned if the employee chooses to leave the company before the agreed-upon timeframe.
Other forms of golden handcuffs can be non-financial. A non-compete agreement where an individual cannot go to work for a competitor for a specific time period can also discourage employees from leaving by enforcing a period of unemployment which they may not be able to afford.
Golden handcuffs can be introduced in different ways. Some companies have graduated schemes, where the longer an employee works for them, the more incentives are offered to encourage them to stay. Others negotiate financial packages with specific individuals as and when those individuals are identified as key talent needing to be retained for the business to meet its objectives.
Are Golden Handcuffs and Golden Parachutes the Same Thing?
No, a golden parachute is different to golden handcuffs. While golden handcuffs are designed to keep an employee within a company, a golden parachute refers to the payments agreed to company executives in the event of a merger or acquisition. A golden parachute provides the executive with a safe and pleasant landing if their role is terminated or changed as a result of changes to the company’s status.
Meaning of Golden Handcuffs
Golden handcuffs are a strategic tool that companies use to ensure their best employees stay committed to the company. They play two significant roles within companies:
- Retention – golden handcuffs increase employee retention rates by helping organisations retain the highly-skilled highly compensated employees they need to ensure the company meets its business goals.
- Productivity – golden handcuffs encourage individuals who have them to work hard in their roles to meet the financial targets they are set because they directly link to their own payments.
Example of Golden Handcuffs
There are many examples of organisations using golden handcuffs. Here’s a fictional example to illustrate how they can work.
Vera has been working for Factorial for five years, during which she has developed an impressive skill set and regularly sets a high benchmark for other employees in terms of her productivity, engagement and overall contribution. Factorial have identified that she is a key talent who has consistently demonstrated her ability to perform well so the company executives agree that they want to retain her for at least the next five years. Vera is such an exceptional asset to the team that Factorial are worried they will lose her to another company. To avoid this happening, they offer Vera stock options which will vest in five years and an additional day of annual leave which increase every year. Factorial know that Vera loves to travel and values her time off so the golden handcuffs reflect what matters to Vera as well as what the company can offer financially.
Golden handcuffs: Tips for HR
Golden handcuffs are often part of a talent management strategy. The following tips can help HR managers working on a golden handcuffs approach for specific employees:
- Ensure documentation and communication around the agreement is clear, accessible and understood by all, to avoid any misunderstandings down the line that could lead to reputational damage or even legal disputes.
- Get feedback on the incentive schemes in place and make changes if they aren’t working to retain the staff you need to keep.
- Be creative: compensation that supports a better work-life balance can be a stronger reason for top executives to remain with a company than increasing financial compensation.
- When an employee leaves, make sure the exit interview covers details of what might have encouraged them to stay.
