‘Golden hellos’ under scrutiny as employment market cools
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Competition for workers with key skills has intensified in many industries since the onset of the pandemic. And, in response, some employers have turned to a contentious practice: “golden hellos” for new starters.
These bonuses are awarded immediately, or soon after, joining — but opinion is split over whether they are an effective tool for employers looking to attract, motivate and retain staff.
Recruiters and companies say competition for talent is easing in the face of economic constraints, but strong demand remains for expertise in certain areas, such as technology and sustainability consultancy.
“For the kinds of skills we need, it is still hard to bring people in,” says Lisa Fernihough, chief UK people officer for professional services firm KPMG. It uses signing bonuses in limited circumstances as “a bit of a sweetener”, she says, but the payments are skewed towards senior individuals, who are typically giving up a cash bonus or stock at their previous employer. “It’s a ‘hygiene factor’,” Fernihough explains.
For Keith Bevans, global head of consultant recruiting at Bain & Company, these payments, while common in his sector, are base-level “table stakes”. Non-financial rewards, including career development and learning opportunities, are still key in hiring and keeping staff. “Most candidates understand that compensation is only one part of the value proposition,” he says.
Upfront payouts in the legal sector hit a peak in 2021, when law firm Kirkland & Ellis was offering new recruits sign-on bonuses of up to $250,000, amid high levels of merger and acquisition activity. Chris Clark, director at recruiter Definitum Search in London, says if one firm raises bonuses then all the others follow suit, creating an inflation spiral.
But, now, he says, signing bonuses have all but dried up in the sector as the M&A boom went into reverse and law firms cut jobs. “It got wildly out of control; people were offered a crazy amount of money,” Clark adds. “But lawyers who were joining with these sign-on bonuses were billing clients more than enough to cover the cost, so it didn’t matter. But the market has changed.”
Likewise, investment banks have had “a pretty horrible bonus round” this year after record payouts in 2022, says Lee Thacker, owner of Silvermine Partners, the headhunting firm. Then, banks were flush with cash from the dealmaking boom and paid big bonuses to attract and retain employees. Investment banking revenues have since plunged, though. “Generally speaking, most firms avoid sign-on bonuses like the plague, unless there is a very solid reason to award them,” says Thacker.
Stéphane Rambosson, co-founder and chief executive of Vici Advisory, an executive search firm, adds that “we’ve seen less and less” of signing bonuses at financial institutions in London, for fear of falling foul of regulators.
The UK has restrictions on bonuses for senior bankers, capped at two times their annual salaries, with shareholder approval. The cap can include golden hellos, which can be clawed back if there is misconduct. Britain intends to scrap the bonus limit, however, which Thacker says could shift the conversation on pay from salary back to bonuses.
Golden hellos are mostly used by companies to enlist outside hires who, having less knowledge of their operations, face the greatest uncertainty over their prospects.
Between 1992 and 2011, the proportion of externally hired chief executives at S&P 1500 companies who received a signing bonus increased from 10 to 42 per cent, according to a study by Jin Xu at the Pamplin College of Business in Virginia and Jun Yang at Indiana University’s Kelley School of Business. The payouts were worth, on average, $7.1mn in cash and equity over that period — similar in value to annual CEO pay.
The research found that companies that had previously fired their CEO or had lower stock returns, among other factors, were more likely to award golden hellos, because the new chief’s fate was less predictable. The signing bonus eased fears of being pushed out due to a bad fit, and motivated executives to greater effort. This improved company performance and lowered the likelihood of management turnover.
And the reverse was also true. Companies that paid golden hellos to chief executives who faced lower termination risk suffered a rise in executive attrition and a decrease in stock returns. Yang says this could be because CEOs with the wrong skill set were attracted by large signing bonuses, or there were governance issues at companies willing to award unwarranted payouts.
Paul Lee, head of stewardship at the investment consultancy Redington, says if companies want to keep and motivate executives with in-demand skills, they should consider shifting from upfront payouts to restricted share awards over a longer period. “Remuneration committees tend to think about remuneration but, just because you have a hammer, not everything is a nail,” Lee notes.
Most golden hellos will come with a clause for employers to reclaim the bonus if the executive leaves shortly after joining. But these payments are “pretty quickly forgotten” by staff, says Alan Johnson, managing director of compensation consultancy Johnson Associates in New York. “I don’t think it helps retain people in the long term,” he adds. “The idea is to get you on board, not buy you forever.”