Why Long-Term Incentives Are Key to Employee Retention

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One of the many consequences of the COVID-19 pandemic is the enormous strain it is putting on an organization’s ability to hire talent. Many businesses are now implementing a return-to-office mandate, which is causing a large reshuffle of talent in multiple industries. To avoid the costly endeavor of continuously hiring new employees, it’s key to focus on retaining and developing talent internally rather than relying solely on talent acquisition to fill holes.

This is why employee retention is vital to prevent losses in training and onboarding costs and company knowledge. A survey by Founders Circle found that 25% of startup employees leave within a year, which is double the average rate of attrition in the U.S. of 13%. Losing these employers means that all that built-up knowledge is walking out the door and possibly straight into the hands of competitors.

When onboarding team members, having a clear long-term incentive plan as a component of salary can help drive the traction and growth of your startup. Long-term incentives form a critical lever to stop your employees from looking for work elsewhere. Let’s examine how small businesses and startups can halt the talent crunch problem.

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Retaining employees

While a sense of purpose, flexible working arrangements and recognition are all important factors to employee satisfaction, more thab half of employees still state that additional bonuses or financial incentives would be sufficient motivators to keep them with their current employer.

Long-term incentives revolve around a bonus program paid out over many years, making changing jobs a potentially costly endeavor, as the employee could miss out on a big reward. To put it bluntly, these incentives provide a financial carrot that keeps employees engaged and, importantly, still at the company.

Startups are well-placed to make use of long-term incentives, such as deferred compensation, equity, restricted stock units and performance share units. Equity, in particular, speaks to the dreamer attitude of those involved with startups – the gamble of accepting salary in the form of potentially rising or falling company stock is an intriguing one.

The problem that many organizations face is that long-term incentives are isolated in bonuses and merit, which impacts the ability to communicate total rewards. By communicating long-term incentives to employees as part of a holistic total rewards experience, a manager can feel confident that the value of current and future awards is clearly understood.

Advanced analytics

If long-term incentives are the arrows to retaining employees, advanced analytics are the bows. An innovative compensation management system, with everything in one place, helps you identify your high performers and key talent so you can make sure they are adequately remunerated with an adequate portion allotted to long-term incentives.

A system capable of using advanced analysis can help identify high-performing employees before it’s too late – they need to be tied down with long-term incentives in place. Having established rewards for employees stored in a compensation system, companies could also integrate workers into the process by showing the potential movements of future stock prices and how it would affect the value of their investments. This process should be both achievable and challenging – it’s crucial that long-term incentives feel within reach for employees, particularly if they are being sold on the promise of a burgeoning startup.

Most HRIS (Human Resource Information Systems) that manage salary reviews and bonuses can’t encompass individual metrics such as performance and commission. Harnessing employee data points gives businesses a more comprehensive picture and allows them to influence long-term incentives more fairly.

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 Talent acquisition

Not only will employee retention improve with long-term incentives in place, but also a company’s ability to attract fresh talent. For example, within an offer letter, an organization could outline the rewards of a base salary and how they could potentially grow over time.

For startups with high-potential growth, equity or long-term incentives can turn out to be the largest component of someone’s compensation. An interviewer hiring a candidate could say: “Here’s what your base might look like in five years, here’s what bonuses you’re entitled to based on potential performance, and here’s a tool to model out what those options might be worth in five years.” This lets the future employee know that they are wanted and that the company will have their development and compensation taken care of.

Long-term incentives are an essential part of a compensation package, delivering rewards to employees and enhancing their focus on the company for the future. It is a crucial tool in terms of retention, encouraging employees to engage up to and beyond the point at which their rewards are realized.

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