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When Are Pay-to-Stay Bonuses a Good Idea?

Cisco Systems, Inc. announced today that it is purchasing Columbia, Md.-based cybersecurity company Sourcefire, Inc. for $2.7 billion. The deal includes retention-based incentives for Sourcefire execs. And this isn't the only recent deal announcement that included pot-sweeteners to keep key employees onboard: In April, Dell's board approved $91.1 million in retention bonuses for key players while it pursued a buyout deal.

Retention bonuses can be useful tools in specific situations, says business consultant Andy Birol, who heads Pittsburgh-based Birol Growth Consulting, an international management consulting firm specializing in growth strategies, including mergers and acquisitions.

Designed to keep key people during periods of transition, retention bonuses usually come with a contract, and sometimes the bonus that accrues over time--the longer they stay, the more the employee will get paid up until the expiration of the bonus period. These incentives help ensure that expertise and institutional knowledge isn't lost during acquisition, merger or other times when it's most critical.

He says there are three times when they're most appropriate. 

1. Talent preservation.
Jittery employees may jump ship, fearing their jobs are in jeopardy during times of transition. When you have personnel who are essential to your business, such as product designers, key managers, and rain-making salespeople, you want to be sure that loss of talent doesn't add to the considerable challenges of merger or company sale. Loss of key employees could cause problems, especially if the deal depends on certain performance measures and assets.

"You can't have the keeper of the keys leave before the keys are turned over," Birol says. "Retention bonuses can help you keep your best people by offering them some security in exchange for staying."

Related: How to Keep Employees Engaged

2. Key function continuity.
Whether it's keeping your customer service department running smoothly to retain customers or ensuring that accounting processes remain uninterrupted to ensure healthy cash flow and expense management, retention bonuses can be a valuable tool, Birol says. Companies may pay retention bonuses to top employees who run essential functions that directly affect overall operations.

3. Relationship management.
If your number-one salesperson has a strong relationship with your top customers, losing the employee could mean losing the customers, too. Key employees may hold relationships with customers, vendors, or others who are essential to keep your business operating well. Paying retention bonuses to procurement officers, salespeople or others who hold those relationships and the institutional knowledge that goes with them can help you keep those aspects of your business constant as it completes its transition.

"Retention bonuses are not about loyalty. They're about triage during transitional events. It’s about stabilizing the patient who's bleeding profusely. They help keep your key people from leaving during a specific period of time and affecting your company in a negative way," Birol says.

Related: What Really Motivates Employees? (Infographic)

Gwen Moran is a freelance writer and co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010).

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