Where does the term golden handcuffs come from?

Golden handcuffs are benefits businesses offer to their most promising employees to demotivate them from seeking employment elsewhere. The term was first coined in the 1970s and refers mostly to the negative aspects of these types of agreements. While the term can be misleading, golden handcuffs do have advantages for employees and provide an incentive for meeting performance goals.

If you’ve spent considerable resources recruiting, onboarding and training an employee and don’t want to lose them to another company, you may offer benefits that only apply if the employee remains with your business. In most cases, these arrangements have a set expiration and the employee can move on without penalty. If the employee does take another job offer, however, they’re forced to lose the benefits and even repay any bonuses they’ve already received.

Offering golden handcuffs makes it difficult for another company to steal your employee because the financial implications of leaving are worse for them than if they remain with your business. Many golden handcuffs also come with nondisclosure and noncompete clauses that prohibit the employee from sharing sensitive information about your business and working for a direct competitor once they leave.

Types of golden handcuffs

Golden handcuffs come in many forms. Some of the most common ones include the following:

Stock options

You may offer your employee stock options under the condition that they remain with your company for a set amount of time. If they leave before fulfilling this obligation, they lose the stock. While offering stock options to your employee has immediate financial value, it’s also an incentive to help your business grow and expand. Employees with stock options want to help add value to your stock.

Supplemental Executive Retirement Plans (SERPs)

These special retirement accounts offer additional retirement savings for employees a company wants to retain. They’re usually tied to a cash-value life insurance policy so your business can recoup the plan costs once it pays out. Your employee only receives these retirement benefits if they remain with your business and complete the objectives you specify in the agreement.

Annual bonuses

Offering yearly bonuses that increase over time is another form of golden handcuffs . You can offer these on the contingency that the company meets key performance indicators, and you can increase their value each year. When employees receive regular bonuses, they’re considered additional compensation and factored into their future decision of whether to accept another job offer. The bonuses may be more valuable than any increase in salary your competitor offers.

Company perks

Employees who remain with your business for a set amount of time could receive access to vacation homes, company vehicles and other perks that vanish if they leave your business.

When you may choose to use golden handcuffs

It costs your business more money to recruit and train a new employee than it does to offer benefits that entice your existing employees to stay. However, golden handcuffs aren’t something you should provide to every employee. They’re often reserved for the most promising employees who constantly exceed expectations.

If you notice that you have a stellar employee who would be impossible to replace in a short time, you could offer incentives as a preemptive measure against them taking a different job offer. Golden handcuffs are most common in industries with employee shortages or competitive environments where other businesses may target your top talent. In a job market that favors workers, you can use golden handcuffs as an added incentive for choosing your business over a key competitor.

Common ways businesses use golden handcuffs

One example of using golden handcuffs is if you invested money in onboarding an employee and several training programs throughout their tenure. Your employee has shown great proficiency, and you feel they will quickly move up the ladder within your organization. You can offer them stock options that won’t vest for a set period. They will not leave your company because doing so would cost them a lot of money in lost stock.

Another example is if you have a sales lead with an excellent record of increasing your company’s revenue each year. You could create a bonus structure that includes a company car, a special benefits plan and annual bonuses that increase based on your employee’s time with your company. They prefer to stay with your company because they don’t feel they could make enough money with another company to justify the lost perks and bonus.

The downside to golden handcuffs

You should be aware of some disadvantages to golden handcuffs before you use them as part of an employee retention strategy.

• Other companies may be willing to meet or exceed your offer and still lure your employee away, though you’ve made it more difficult for them to do so.
• Employees who accept these types of incentives may feel trapped within your organization and lose morale over time.
• If you offer golden handcuffs to too many people within your organization, you could see them leave simultaneously once they complete their contracts.
• Investors tend to regard golden handcuffs poorly even though they provide a benefit to employees and businesses when used properly.

The bottom line

Whether you should offer an employee golden handcuffs depends on multiple factors such as how competitive the job market is, their ability to learn and excel within your organization and how difficult it’d be to replace them if they left. Other ways to retain employees include offering a competitive benefits package and job perks that your competitors don’t. If you’re concerned about whether a key employee might leave your organization, you can structure golden handcuffs in such a way that both your employee and business benefit from them staying with your company.