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It’s the ‘Stay Card’ - how to retain core skills when employees have the upper hand

With salaries off the Richter scale in Australia, managing the current remuneration environment can feel like there’s no longer a measurement instrument able to detect a red flag in magnitude.

It’s the ‘Stay Card’ - how to retain core skills when employees have the upper hand
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The battle to negotiate competitive starting salaries, benefits and incentives for quality executives and critical skilled senior management has become for most industries an unfair playing ground on an exponential trend. HR departments and remuneration committees are grappling with outdated fixed and performance incentive pay structures that are proving unfit to retain core skills where employees have the upper hand in commanding remuneration and work life balance.

Creating a more balanced approach to attract and sustain core skills in your business

Remuneration structures for executives and senior management traditionally consist of total fixed remuneration and incentives. The problem with this approach is its limitation to only offer reward for performance and an ongoing rate for doing the job. There’s effectively no loyalty motivator, no limit on starting price or salary reviews - and no end to the ‘great resignation’ pandemic. This creates huge risk for retaining IP and remaining profitable.

In this highly reactive environment things are further exacerbated by a lack of planning and a fear of missing out - Boards may even feel forced to offer a share in equity where an individual doesn’t hit an incentive target, or cling onto personnel who may be delivering an average performance through anxiety of not being able to replace them.

Capability retention payments - a ‘Stay Card’ - more than a long-term incentive

Allan Feinberg, Managing Director Remuneration and Reward at BDO Australia says there is an alternative and additional remuneration tool that can be implemented to reduce short term base salary pressures, retain top talent and create loyalty over the mid to long term.

A capability or retention payment which can be delivered as either a cash or equity incentive after 18 months to three years’ service is a new differentiator and unique incentive scheme that motivates good performance and creates shared value.

“Importantly, this initiative should not be seen as a free payment as the incumbent still has to go through performance appraisals and meet KPIs and objectives. And, only if they are viewed as a good employee, the business can reassess during the period as to whether it renews the retention payment on a rolling basis to lock that person in again.”

The capability retention payment is a stay card that creates loyalty - from an employee's perspective they feel valued and from a companies' perspective they are locking IP that you won't find in the open market. This is a service reward for critical skills both core and non-core, that can’t be replaced, and is quite different from long-term incentive pay that is only available to senior executives, excludes other critical roles, and is based on performance.

Put simply, we are going back to manufacturing principles which typically have very long tenure of personnel (especially managerial) who understand the fabric of those companies and retain knowhow - which ultimately ensures better running of the organisation regardless of level.

“What we are seeking to do is reduce a company’s fight or flight response by reducing the fixed remuneration pressure in the short term and replacing that competitive gap with a retention payment over the mid-to-long-term depending on the level of the person in the business. For critical skills, that payment may be equivalent to 3-6 months’ pay at the end of three years. If it’s cash it will be taxable, and if it’s paid as equity the benefit can be deferred for taxation purposes. The key here is that it’s got to be meaningful, and for it to be meaningful it should represent 1.5-2x salary per annum depending on the period.

In Western Australia, we are in a situation where we have a 3.7% unemployment rate, with a CPI of 4.2 and a shortage of critical skills that has been exacerbated by lock-downs and COVID. The issue we need to manage is not a skills shortage, but the allocation of a finite availability of skills - this is what gives business sustainability and continuity of operations,” concluded Feinberg.

Originally from BDO by Allan Feinberg, Managing Director, Remuneration & Reward Services

 

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