Generally counteroffers should not be used to respond to the threat of an employee quitting. Organizations that typically resort to counteroffers for employee retention are generally those whose compensation bands are not in order and who have allowed the employee’s salary to fall below his/her market value. But even in such situations, responding with a counteroffer only makes sense if it is part of a general overhaul of the compensation system. Frequent counteroffers as a retention tool are also seen in organizations which do not have a proper replacement (short-term) and succession (long-term) plans in place; they react to an employee leaving by making a counteroffer.
When it comes to voluntary resignations, lower-performing employees are more likely to quit than more successful employees. In such instances the organizational performance is likely to improve when such poor performers are the ones leaving, and are replaced by more suitable candidates. However if a good performer or a key resource is leaving the organization, it is sometimes necessary to make a counteroffer at least to address the immediate business requirement. In such instances organizations need to be very clear about which employees should be retained with a counteroffer. Decisions should be based on performance and not on a simplistic goal of retention.
Impact of counteroffers on the organization
Counteroffers if not used with discretion and only to retain key employees can be counterproductive to the organization. If counteroffers are used as a standard retention policy then an employee wanting an out of turn salary raise will either threaten to quit or become an active job-seeker. Also in cases where an employee wants to quit because of health issues, family commitments, or to pursue educational opportunities, making counteroffers will not be of much use.
In fact employee turnover can be beneficial to the extent that it results in the departure of unproductive employees and replacing them with new recruits who bring in fresh perspectives and innovative approaches. However if used only to retain key employees, making counteroffers might have some benefits to the organization mostly in terms of controlling three major impacts of losing a key resource, which are:
Control of associated costs due to attrition – this includes loss of productivity on the part of the departing employee serving his/her notice period, recruiting costs involved in finding a suitable replacement, and likely reduced productivity of co-workers who need to fill in for the departing individual as well as spend time mentoring his or her replacement.
Prevent the loss of Human Capital - includes general skills, knowledge and abilities that the departing employee possesses as well as specific job-skills, like formal training as well as tacit knowledge that the employee has which is unique to their particular job in the organization.
Reduce Social Capital costs – every organization has a strong social networks, in which who you know is as important as what you know. Hence the departure of key players may have a crippling effect on a wide range of interdependent groups. Also the departing employee might sometimes influence or even pull other employees from their present employer to another.
Some essentials of a good counteroffer
Counteroffers typically focus most on using compensation – direct pay and indirect compensation (equity based, incentives etc.) – and are used as putting a “golden handcuff” on the employee. However a good counteroffer, apart from compensation should also focus on other elements like job content, career development, growth opportunities and specific benefits.
Job content - Job enrichment or change in assignment can be used as part of the counteroffer which should be aligned to the employee’s career management program. If the employee enjoys his/her job, his/her engagement will be higher resulting in increased productivity, quality of work, job satisfaction and commitment to the team and organization.
Career development and growth opportunities – the counteroffer should be ideally linked to formal succession planning programs, wherein the employee is aware of his/her career prospects over the long-term. The talent management programs, through formal and on the job training, coaching and mentoring, should be directly linked to the succession planning programs and show a clear career progression for the employee.
Compensation – a person leaving for better compensation maybe be equating his/her salary to that of their peers in the company (internal equity) or to someone in the industry (external equity), as compensation is often seen as the definition of success. However if the counteroffer focuses only on direct compensation and tries to match that employee’s expectation, it can be counterproductive to the organization, as it will send the unintended message to others that he/she is highly marketable and potentially making that employee a target for competing offers. Hence a counteroffer should also have an element of “deferred” compensation like retention bonus, performance linked incentives and employee share options.
Benefits – this can include a variety of factors that will make the counteroffer address specific issues that the employee values the most apart from compensation. Flexi-timings, sabbatical leaves, concierge services, health/social club memberships, work-from-home etc. can address issues related to work-life balance which can be unique to each employee and will address his/her requirements over the present and future.
The pros and cons of accepting a counteroffer from an employee’s perspective
If an employee is planning to leave only due to unhappiness over his/her compensation then counteroffers could be considered. However the general advice to employees is not to seek counteroffers, or entertain them if offered, as more often than not counteroffers are not likely to resolve the core issue that led the employee to look for an alternative job. Often the fundamental reason for quitting is not pay, but something else about the current employment situation. If so, as attractive as a counter-offer may be in the short-term, it will not resolve the underlying dissatisfaction. And if the fundamental issue really is pay, it will probably resurrect itself in a year or two if the employer’s approach is to respond only to outside offers rather than systematically improving the compensation system.
The pros of accepting a counteroffer is a better compensation over the immediate/short-term. However it might have a negative affect over the long-term if it does not address the employee’s primary reasons for leaving. Even when an employee is retained by a counteroffer, an employer will most likely create a replacement plan for that employee over a relatively short period of time and gradually try to reduce its dependence on him/her. Hence if the employer is not committing to any long term arrangements as part of its counteroffer, an employee needs to be very careful while accepting it.
Excerpts of this article has been published in Times Ascent (print version 26th May 2010) and Economic Times - http://economictimes.indiatimes.com/quickiearticleshow/5976354.cms
When it comes to voluntary resignations, lower-performing employees are more likely to quit than more successful employees. In such instances the organizational performance is likely to improve when such poor performers are the ones leaving, and are replaced by more suitable candidates. However if a good performer or a key resource is leaving the organization, it is sometimes necessary to make a counteroffer at least to address the immediate business requirement. In such instances organizations need to be very clear about which employees should be retained with a counteroffer. Decisions should be based on performance and not on a simplistic goal of retention.
Impact of counteroffers on the organization
Counteroffers if not used with discretion and only to retain key employees can be counterproductive to the organization. If counteroffers are used as a standard retention policy then an employee wanting an out of turn salary raise will either threaten to quit or become an active job-seeker. Also in cases where an employee wants to quit because of health issues, family commitments, or to pursue educational opportunities, making counteroffers will not be of much use.
In fact employee turnover can be beneficial to the extent that it results in the departure of unproductive employees and replacing them with new recruits who bring in fresh perspectives and innovative approaches. However if used only to retain key employees, making counteroffers might have some benefits to the organization mostly in terms of controlling three major impacts of losing a key resource, which are:
Control of associated costs due to attrition – this includes loss of productivity on the part of the departing employee serving his/her notice period, recruiting costs involved in finding a suitable replacement, and likely reduced productivity of co-workers who need to fill in for the departing individual as well as spend time mentoring his or her replacement.
Prevent the loss of Human Capital - includes general skills, knowledge and abilities that the departing employee possesses as well as specific job-skills, like formal training as well as tacit knowledge that the employee has which is unique to their particular job in the organization.
Reduce Social Capital costs – every organization has a strong social networks, in which who you know is as important as what you know. Hence the departure of key players may have a crippling effect on a wide range of interdependent groups. Also the departing employee might sometimes influence or even pull other employees from their present employer to another.
Some essentials of a good counteroffer
Counteroffers typically focus most on using compensation – direct pay and indirect compensation (equity based, incentives etc.) – and are used as putting a “golden handcuff” on the employee. However a good counteroffer, apart from compensation should also focus on other elements like job content, career development, growth opportunities and specific benefits.
Job content - Job enrichment or change in assignment can be used as part of the counteroffer which should be aligned to the employee’s career management program. If the employee enjoys his/her job, his/her engagement will be higher resulting in increased productivity, quality of work, job satisfaction and commitment to the team and organization.
Career development and growth opportunities – the counteroffer should be ideally linked to formal succession planning programs, wherein the employee is aware of his/her career prospects over the long-term. The talent management programs, through formal and on the job training, coaching and mentoring, should be directly linked to the succession planning programs and show a clear career progression for the employee.
Compensation – a person leaving for better compensation maybe be equating his/her salary to that of their peers in the company (internal equity) or to someone in the industry (external equity), as compensation is often seen as the definition of success. However if the counteroffer focuses only on direct compensation and tries to match that employee’s expectation, it can be counterproductive to the organization, as it will send the unintended message to others that he/she is highly marketable and potentially making that employee a target for competing offers. Hence a counteroffer should also have an element of “deferred” compensation like retention bonus, performance linked incentives and employee share options.
Benefits – this can include a variety of factors that will make the counteroffer address specific issues that the employee values the most apart from compensation. Flexi-timings, sabbatical leaves, concierge services, health/social club memberships, work-from-home etc. can address issues related to work-life balance which can be unique to each employee and will address his/her requirements over the present and future.
The pros and cons of accepting a counteroffer from an employee’s perspective
If an employee is planning to leave only due to unhappiness over his/her compensation then counteroffers could be considered. However the general advice to employees is not to seek counteroffers, or entertain them if offered, as more often than not counteroffers are not likely to resolve the core issue that led the employee to look for an alternative job. Often the fundamental reason for quitting is not pay, but something else about the current employment situation. If so, as attractive as a counter-offer may be in the short-term, it will not resolve the underlying dissatisfaction. And if the fundamental issue really is pay, it will probably resurrect itself in a year or two if the employer’s approach is to respond only to outside offers rather than systematically improving the compensation system.
The pros of accepting a counteroffer is a better compensation over the immediate/short-term. However it might have a negative affect over the long-term if it does not address the employee’s primary reasons for leaving. Even when an employee is retained by a counteroffer, an employer will most likely create a replacement plan for that employee over a relatively short period of time and gradually try to reduce its dependence on him/her. Hence if the employer is not committing to any long term arrangements as part of its counteroffer, an employee needs to be very careful while accepting it.
Excerpts of this article has been published in Times Ascent (print version 26th May 2010) and Economic Times - http://economictimes.indiatimes.com/quickiearticleshow/5976354.cms
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