What Is a Golden Handcuff? (Definition, Types, and Benefits)
By Indeed Editorial Team
Published May 13, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Most employers want to keep their best-performing employees for as long as possible. While many employers use incentives such as holidays and paid sick leave to encourage their employees to stay with the company, some use the golden handcuff method to discourage them from leaving. Understanding this model and how it works can help you improve your negotiating skills and identify the most desirable benefits when looking for employment. In this article, we discuss the golden handcuffs model, explore the different types, review the benefits, and examine examples of their application.
What is the meaning of a golden handcuff?
Golden handcuffs are a financial incentive an employer uses to keep employees for a specified duration. These are standard techniques used when the company wants to keep an outstanding employee for a long time. The model is crucial in highly compensated fields such as tech and finance, where the risk of lost progress, decline in team cohesion, and informing competitors is common. Examples of the incentives included in this model are salary bonuses, stock options, company houses, and company cars.
These policies protect a company from losing its best-trained employees to competitors and reduce the costs of hiring and training. In this arrangement, the financial incentive usually comes with the requirement that the employee stays for a specific period with the company . These techniques discourage employees from leaving the company before the stipulated period as doing so means they risk losing financial benefits accrued.
Types of financial incentives
Employers may use different financial incentive methods to encourage their employees to stay with the company. Here are some of the primary encouraging techniques they may use:
A company may offer a milestone incentive to employees when they reach specific targets in a certain period. Some milestones include reaching a certain level of performance, achieving sale targets, customer satisfaction, and project completion. When employees meet these milestones, the employer may provide incentives like free lunch, free gym memberships, and cash bonuses.
Completion of a stipulated period
These are benefits a company offers employees if they agree to stay for a certain period. If they remain for the stipulated period, they keep the benefit permanently. If they leave before the agreed period elapses, they return the benefit to the company. For example, management may offer a house to a new employee on the terms that they remain with the company for five years. If the employee stays for five years, they may keep the house. This discourages the employee from accepting other offers with better salaries, as they risk losing the house if they leave.
This strategy's financial incentives depend on the employee performing a task, meeting a goal, or otherwise following a stipulation that's outlined in their contract. This type of technique ensures the employee stays productive in the company to receive such incentives. If they fail to fulfil the stipulations in the contract, the employer may not provide the benefit, or take it away if they already provided it.
Stock investment opportunities
Stock investing opportunities are a common type of financial incentive used to encourage employees to stay with a company. For these incentives, a company provides employees with company stock if they spend a certain duration of time working for them. This arrangement means that the company's stock performance affects the income of the employee significantly.
Supplemental executive retirement plans
A supplemental executive retirement plan (SERP) is another type of financial incentive that companies use to retain their employees. SERPs are a package of benefits often provided to the highest-ranking employees. The company and the employee agree on a specified amount of additional retirement funds if the individual achieves specific eligibility standards while employed. The employee can withdraw the accrued funds from the scheme after they retire.
A salary bonus is among the most well-known types of financial incentives. Bonuses are additional funds employees receive, typically on a quarterly or annual basis. Several companies give these bonus rewards to their employees if they achieve their targets or goals. For instance, a corporation that pays its employees an average salary may keep them for long by promising a substantial bonus. In other cases, companies provide bonuses to high-ranking employees to motivate and encourage them to stay with their company.
Other small benefits
Employers may offer their employees a range of small benefits to keep them satisfied and loyal to the company. For instance, a programmer may prefer working for a company that provides unlimited paid time off and a company laptop, regardless of workload or payment. Other minor rewards examples include extended breaks, free meals, and gift vouchers.
Benefits of financial incentives
The main benefit of using a financial incentive is that it entices employees to stay with their employer for an extended period. Here's a list of some of the other advantages of using the financial incentives model in an organization:
Organizations use incentive models to recognize and appreciate their high-ranking and performing employees. They may provide incentives to employees who go above and beyond the obligations of their jobs, potentially bringing in additional revenue and increasing the company's overall success. Employers use the technique as a reward to demonstrate to employees the value of their work and urge them to stay with a company that recognizes their talents and performance.
Saves the company recruitment costs
The cost of hiring new employees is high, considering the training requirements and payment to recruiting companies and advertisement firms. Most companies also consider the individual's salary even if they may be less productive. This causes unnecessary costs, which are preventable by retaining experienced employees with a financial incentive.
Makes recruiting easier
Financial incentives may also play a vital role when recruiting new employees for a company. While interviewing candidates, companies may use benefits such as company car housing, bonuses, or a SERP plan to encourage leading industry prospects to accept their job offers. These benefits can help a company seem like a better option if a candidate receives multiple job offers.
Examples of financial incentives in the workplace
Here are some examples of financial incentives offered to employees:
Stock investment example
Here's an example of a stock investment option being offered to an employee as a financial incentive:
Mary is a member of the technology team at Jetna Technologies. The company has invested significant money in Mary's recruitment, training, and growth and fears losing her to competitors who may pay her more. The organization provides her with cash benefits as an employee stock option as a precautionary measure. The restriction is that the stock option may not mature for another six years. If Mary leaves before that time, she loses all the bonus gains. If Mary accepts the stock options offer, she may not quit because there is a significant monetary benefit at stake.
Large bonus example
Here's an example where a company provides a bonus after a certain length of employment:
After working at the same company for five years and getting a recognized accreditation, a company offers a computer programmer a onetime bonus of $25,000. The company realizes that the employee is vital to the operations of the business, and that their new credentials make them a competitive candidate for other roles in different companies. The company knows their competitor pays more for the same role and they don't want to risk losing their employee because of the salary difference.
Complete a stipulated period example
Here's an example here a company offers an employee a benefit if they agree to work for a certain duration with the company:
A top corporate executive worked for Vision Heath, a medical products manufacturing company, for the past seven years. A competitor firm, Real Health, offers them a job that pays $50,000 more per year than Vision Health. The executive considers taking this new position, but they signed a contract with their current employer that stipulates that they can only keep the company house worth $500,000 after nine years at Vision Health. They ultimately choose to stay with Vision Health as their house after nine years is worth more than the extra money they may receive from Real Health.
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