Updated October 13, 2023
Golden Handcuffs Meaning
Golden handcuffs are a pack of special financial rewards that companies offer to hold or retain employees for a specified period.
These financial rewards include incentives, company stocks, or special bonuses. As employers spend a lot in hiring, training, and retaining their employees, they employ golden handcuffs techniques to ensure their top performers hold on to them and do not leave before completing a certain period in the company. Companies can also change these rewards to fit employees’ liking, making staying even more tempting.
Employees usually have to work at the company for a certain amount of time to get these rewards. This time is called the “vesting period.” Employees who stay for the vesting period get these rewards. If employees think about leaving before the vesting period ends, they might lose these rewards.
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How Do Golden Handcuffs Work?
The process of golden handcuffs is as follows:
- The company offers employees attractive benefits like stock options, bonuses, or other financial rewards.
- Employees have to serve a predetermined period of employment to avail of those benefits.
- After the vesting period is complete, employees receive the promised bonuses or other financial rewards.
- If employees leave before the specified date or period, they must return any benefit availed.
The following are some common types of employee compensation.
- Stock Options: Employers provide stock benefits to employees, i.e., employees gain the right to purchase company stock at a fixed price in the future.
- Restricted Stock Units (RSUs): In RSUs, employees receive a specific number of shares, which they gain full ownership only after completing the vesting period. RSUs grant shares directly to employees, unlike stock options that require them to purchase.
- Phantom Stock: Phantom stock is a cash-equivalent incentive. Here, employees are promised a payout equivalent to the company’s stock value at a future date without actual stock ownership.
- Vested Stock Options: Vested stock options allow employees to buy company stock at a predetermined price but only after a specific vesting period.
- Bonuses and Performance-Based Pay: This includes cash bonuses, profit-sharing, and commissions. These are given to employees when they meet performance goals or targets.
- Retirement Benefits: This includes enhanced retirement packages, pensions, or 401(k) plans offered to long-term serving loyal employees.
- Supplemental Executive Retirement Plan: SERP is a custom retirement plan where the company creates a special retirement fund for high-ranking executives. The company regularly adds money to the fund until the employee retires, and the employee can take the funds out once they retire.
Golden Handcuffs Examples
The following are some golden handcuff examples for better understanding.
Let’s say Wilson is a hard-working employee who brings profits to XYZ company. The company spent a lot on Wilson’s training and development and thus did not want to lose him to competitors. Therefore, the company offers him employee stock benefits if he stays for the next six years.
Here, he can’t access the stock benefits for six years, and if he leaves before this stipulated period, he will lose all financial benefits and rewards. Thus, he will think twice before leaving because he could earn more money after six years. This example illustrates how golden handcuffs hold employees for an extended period.
A smartphone manufacturer aims to develop a new type of screen technology that consumes significantly less battery power than the current one available in the market. They have agreed to offer significant retention bonuses to the researchers who successfully complete the project on time and attain specific breakthroughs.
This approach helps keep the employees engaged and committed to the company’s long-term research objectives. It demonstrates how milestone-based bonuses can serve as golden handcuffs to retain specialized and talented individuals.
Here are the benefits of implementing golden handcuffs:
- Retention of Key Talent: It is an effective tool for retaining top-performing employees by offering them a strong financial incentive.
- Enhanced Employee Loyalty: Employees tend to develop loyalty towards the company, which will result in higher and better rewards, and they can stay in the same company longer.
- Stability and Continuity: It contributes to the organization’s stability by discouraging employees from seeking opportunities elsewhere.
- Motivation for Performance: It motivates employees to excel in their roles toward the company’s success as they know that a significant portion of their compensation is tied to their performance.
- Competitive Advantage in Recruitment: It can attract potential employees, especially in competitive job markets. It can also be a compelling factor for candidates looking for a job with multiple opportunities.
Golden Handcuffs vs. Golden Parachute
|It helps retain important employees for the long term.
|It helps provide financial protection to employees getting laid off during corporate changes.
|It involves equity-based compensation like stock options, RSUs, etc.
|It involves cash payments, accelerated stock vesting, perks, etc.
|The vesting period lasts over an extended period, often years.
|There is no vesting period. Employees get immediate benefits upon completion of specified conditions.
|It encourages loyalty and commitment.
|It provides financial security and encourages everyone to work together during change.
|It encourages executives to stay with the company
|It provides executives with financial security upon departure
Frequently Asked Questions (FAQs)
Q1. How is a golden handshake different from golden handcuffs?
Answer: A golden handshake in an employment contract offers a significant termination package to a long-serving employee or top executive if they lose their job due to retirement, resignation, or layoffs. It provides financial security to employees leaving the organization. In contrast, Golden Handcuffs focuses on retaining employees with financial incentives, like stock options, bonuses, or other financial rewards that will be accessible after the vesting period.
Q2. Which industries offer golden handcuffs?
Answer: Many industries use golden handcuffs, especially the IT tech sector, finance, investment banking, and healthcare/pharmaceuticals. Tech companies in Silicon Valley often hold valuable employees in the competitive tech world. On the other hand, in healthcare and pharmaceuticals, where it takes a long time to R&D new medicines for specific treatments, golden handcuffs are helpful to keep talented professionals for the long term.
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