Considerations in issuing retention grants: As useful as such grants can be in some situations, they should be approached with skepticism.

Author:Kades, Jennifer
Position:COMPENSATION MATTERS
 
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To issue a retention grant or not? And how generously? Have you struggled with these questions recently?

You should have, and for good reasons: the loss of key officers can shake investor confidence, and worse, jeopardize the execution of a company's strategy and ability to perform. Retention grants can offer cheap insurance against executive flight. What might cost a few million in pay can protect hundreds of millions in revenue, or even more in market cap.

Here's the catch: Retention grants are overprescribed. Many either a) mistakenly attempt to address problems that cannot be solved with cash or stock awards, or b) are unnecessary because the retention risk is much smaller than perceived. Indeed, the facts suggest the risk of top executives "jumping ship" is actually quite small. The real risk is issuing grants that don't have any effect at all.

Before considering a retention grant, understand why an executive may be plotting an exit. The risk of flight generally stems from "push" or "pull' factors. Conditions of the job may push an executive towards the door: a new CEO, a lack of will to face financial straits, perceived blockage to advancement. The siren songs of attractive circumstances pull from the outside: a bigger role, more meaningful work, perhaps retirement.

You can't stop an executive from leaving in many push or pull circumstances with just economic incentives. If an executive is unhappy, "golden handcuffs" don't glitter with appeal. While they may convince an apathetic C-suiter to stay on, they can't elicit passion. They may also backfire. Behavioral economic research shows that, in some cases, extrinsic motivation (e.g., higher pay) crowds out intrinsic motivation to work: executives infer the extra pay compensates for negative work.

The overall risk of an executive departure is low. Semler Brossy research finds that from 2013 to 2015, executive attrition rates among the top 50 S&P 500 companies was just 10%. (Calculated as the number of Named Executive Officer (NEO) departures disclosed for each group for calendar years 2013-2015, divided by the total number of NEOs for each group--5 NEOs x 50 companies--for each year. Data is based on the FactSet database of 8-K filings required for all public-company NEO departures.)

Poaching made up just 10% of that; in other words, just 1% of named executive officers left for another company. (Departures were coded as a "poaching" if the executive began working in a similar capacity...

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