Long-Term Incentives Are a Waste of Time. Here’s What You Need to Do Instead

Instead of trying to get employees to stay, companies need to maximize the output they receive from their employees to compensate for hiring and separation costs. This can be achieved by offering a new variety of employment contracts.

A relative of mine recently retired after working for the same medical institution for 40 years. As part of the hospital’s employee appreciation program, the HR department gave her a brochure listing many high-end consumer items: a leather recliner, an industrial-strength blender, a gold watch, etc. She could choose one item from the brochure as a retirement gift. Needless to say, the present was highly anticlimactic.

The time has come to get rid of such brochures (both the literal and figurative ones). Long-term incentives are no longer effective means for motivating or retaining employees (and they haven’t been for a quite a while). Millennial employees, especially, are looking for challenging, meaningful work and to grow professionally and personally—not so much for job security and a slow climb up the corporate ladder. As a result, to motivate today’s employees, companies need to rethink how they employ people.

Long-Term Incentives for Short-Term Employees?

Millennial employees are looking to come, make a difference, learn some new things, and then move on or be promoted. As a result, they are remaining on average for just three years with any one company (While 58 percent of workers aged 60 to 64 have been with their present employer for more than 10 years, the median tenure in 2014 for employees ages 25 to 34 was just three years. In other words, half of all workers between the ages of 25 and 34 will be with their present employer for less than three years, according to the U.S. Bureau of Labor Statistics, http://www.bls.gov/news.release/pdf/tenure.pdf). In contrast, companies are looking to keep employees for as long as possible to offset hiring, training, and separation costs. What are companies doing to retain and motivate employees in light of this apparent conflict of interests?

In the past, companies used two main motivators to keep employees with them: promotions and monetary incentives. Today, internal promotions are much less ubiquitous as organizations have become flatter, significantly reducing the number of managerial positions (http://www.nber.org/papers/w9633.pdf). And what about monetary incentives? Here’s where things get a bit strange. In a study done in 2003 by the U.S. National Bureau of Economic Research, researchers found that “as organizations are becoming flatter, salary and bonus profiles across the hierarchy are becoming steeper, and long-term incentive pay is spreading through the organization” (http://www.nber.org/papers/w9633.pdf). The vast majority of companies have begun allocating more of their employee compensation spending to variable pay: incentives, bonuses, and cash awards (http://aon.mediaroom.com/2015-08-26-U-S-Organizations-Report-Highest-Compensation-Spend-in-39-Years). In other words, companies are offering lower base salaries with more long-term compensation incentives in an attempt to get employees to stay. And, that just isn’t working.

Building a Company for 2017

Considering the fact that most employees will remain with a company for three years or less, long-term incentives are not good motivational tools (in other words, scrap the retirement gift brochures). You probably wouldn’t want most of your employees staying with you long term anyway. Employee competency is difficult to maintain. New employees bring with them new knowledge bases and fresh ideas. Instead of trying to get employees to stay, companies need to maximize the output they receive from their employees to compensate for hiring and separation costs. This can be achieved by offering a new variety of employment contracts.

When building a workforce, companies need to stop searching for permanent, long-term employees or to outsource. The corporate structure I am offering divides employees into three types (for lack of a better metaphor):

  1. Marathoners
  2. Relay racers
  3. Sprinters

Different functions in a company are filled by one of the three types of employment contracts based on employees’ preferences and the needs of the role.

Marathoners: Long-Haul Employees

Certain functions in an organization demand stability. These are usually the management roles. It is detrimental for an organization to have the “officer” roles turnover too quickly. As organizations have flattened, these roles have become fewer. Compensation packages can be based on long-term incentives because these employees will (hopefully) be sticking around.

Sprinters: Experts

Especially appropriate for young, ambitious Millennial employees, sprinters take on a project, give it their all for a period of time, and then move on. Their contribution comes from pushing projects forward and filling much-needed knowledge or skill gaps. Companies need to prepare for these employees by giving them well-defined goals to channel their energies. Motivation is derived from the challenge and from meaningful work.

Relay Racers: Regular Employees

Most employees today are like relay racers: They take on a role, run with it for a while, and then pass the responsibilities on to the next person in line. These employees are looking for meaningful work that will provide them with something new to write on their resumes. Personal development is important since they will be looking for new employment relatively soon (in the next two years or so). Compensation packages need to reflect the fact that these employees will not be staying long term. Other benefits, such as training and professional development, are more appropriate. Since opportunities for promotions are generally limited, organizations need to look for ways to move relay racers sideways into other areas within an organization so as not to lose important knowledge. Think of a corporate lattice rather than a corporate ladder. This will keep information within an organization and reduce hiring and separation costs while keeping employees interested, challenged, and giving them opportunities to build their skill sets.

The foundation for building competitive, profitable organizations lies in meeting the needs of Millennial workers for meaningful work. This is done by giving some employees full ownership of particular domains or projects (the sprinters), while most of the other employees will have the professional development they want and the recognition that they will be moving onward, sideways, or upward in a couple of years. You won’t be able to keep every employee on board, but at least you were able to maximize the output you receive from them. Only a select few (marathoners) will remain with the company long term. But even for those, the retirement gift brochure still isn’t such a good idea.

Roei Deutsch is the CEO and cofounder of JOLT, a marketplace for live talks given by professionals to teams that wish to keep up to speed with rapid market changes. He founded and sold his first company at the age of 15, and by the age of 18 served as new-media consultant for a number of media corporations, including Fox International Channels. Deutsch also served as the CEO of Veribo and led the rise of one of the most prominent Israeli political party today through digital campaigns in the last two election cycles.

 

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