Golden Handcuffs

Updated on April 11, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Golden Handcuffs Meaning

Golden Handcuffs refer to the attempts employers make  to convince employees to  stay in the company for an extended period. To achieve this objective of retaining employees, employers offer a valuable financial incentive, which the former should be in a position to accept.

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Golden handcuff is a significant measure that companies adopt to not lose their most productive employees. There are instances where an individual might leave a company if offered a better compensation. The golden handcuff strategy is what helps companies to make employees stick to them no matter how luring an offer is.

Golden Handcuffs Explained

Golden handcuffs rule allow employers to ensure they do not lose their best employees for any reason. The most common reasons that make one switch jobs are financial unhappiness or job satisfaction issues. With this strategy implementation, employers try to make their employees feel worth the opportunities they have been trusted with and also learn about their importance in the organization.

The companies offer several means to make their employees feel valued and wanted. To ensure they successfully do so, they include milestone rewards for employees, which recognize their longer stays and also encourages them to be there with them forever. In addition, the companies have stock opportunities to offer to employees, who have completed a minimum specific number of years working with the same employer.

Besides that, there are supplementary executive retirement plans (SERPs). These are schemes under which high-ranking employees ger additional retirement benefits if they meet the eligibility criteria. Bonuses from time to time on special occasions also serve to be one of the means of implementing the golden handcuff strategy.

These measures are mainly adopted by companies who are unable to motivate employees with the type of work they do. The companies, in some cases, do not offer satisfactory growth to their employees. As a result, the employees search for some better options, hunting for companies that offer what their current employer cannot. By adopting this golden handcuff rule, however, most of them convince their employees to stay with them for longer. However, such strategies are like weapons – they can lead someone to a position of power or a disaster. Managers should be careful when using such options to hold on to them.

Reasons

When an employer hires an employee, the company incurs costs even before performing any valuable duty. For example, the Company incurs a cost on hiring, onboarding, orientation, etc., which does not pay back to the company.

Now, to make profits from the employee, the employer must retain the employee for a certain period. To pull out parallels in financial terms, the initial costs on the employee are like fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more over which a monthly cost is a salary (which is the variable cost).

Now, if the employee has to provide services that meet the break-even pointBreak-even PointBreak-even analysis refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost.read more for the company, he has to, first, stay long enough to do that. He offers an incentive, which pays off when he stays long enough – options that vest after a certain period or any other incentive. These incentives help the employer in holding on to the employee. How will an employer, without breaking the regulations, let the employee stay for that period?

Examples

Let us have a look at the following instances to understand and define golden handcuffs better:

Example 1

Let us assume I am an employer and want to hire two people to whom I shall pay 5000$ a month. I will get an income of 7500$ per month from each of them, but that will happen only after three months. Hiring each employee would cost me around 7500$ – essentially, to hire, train, and put them into work.

If the employee leaves in 2 months, my net lossesNet LossesNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more would be 10,000$ paid for the employee as a salary 7500$ invested in training this employee and another 7500$ in training an additional employee. To keep this employee working with me, I would give him options that vest at the end of 2 years – worth 10,000.

In these two years, I would be getting a 21-month profit from the employee of 52,00$. In this, I will pay the 10,000S to the employee as promised. It makes a situation where the effective efficiency has grown such that even if the total amount paid is high, the profits are equally higher.

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Example 2

Let us look at the following words from their investor relations report of Microsoft

“We grant stock-based compensation to directors and employees. On June 30, 2013, an aggregate of 425 million shares was authorized for future grants under our stock plans, covering stock options, stock awards, and leadership stock awards. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy exercises and vesting of awards granted under all of our stock plans.”

This para is an excerpt from the Microsoft investor relations statement. If we go to the above link and read more about the options and vesting period, we can see it in detail. As a company gives more stock optionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more, more people tend to stay back with it. Microsoft, which is, as of July 22, 2019, biggest company in the world via market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more, cannot keep employees to themselves without giving them a bit more pay than they need.

It might not be the company; recently, Elon Musk stated that he would be paid only when Tesla reached a one trillion-dollar company, which boosted the shareholders’ confidence. This statement shows another application of how to use incentives to hold on to people. The higher the cadre, the more the percentage of salary comes from the options – which are the golden handcuffs.

Example 3

The concept pf golden handcuffs does not only find relevance in strengthening the employer-employee bond, but they have been found having significance in the housing sector as well. A report published in June 2024 stated how low fixed-rate mortgage rates offered by lenders trapped many homeowners during the COVID-19 phase.

During the pandemic, i.e., 2020-21, homeowners secured mortgages at 3%-4% when the borrowing costs were low enough for people to conveniently consider obtaining home financing. However, recently the US housing sector seems to not favor homebuyers any more.

As a result, people who secured mortgage financing during the COVID period and thought of selling them when the prices would be suitable, aren’t able to do so, given the unfavorable market conditions for buyers. This pandemic trap shows how housing market golden handcuffs work.

How To Get Out?

Golden handcuffs are strategies that do encourage employees to stay with their employers and be loyal to them in exchange for the rewards and additional benefits they receive. But at the same time, these weave a trap for employees, who then get stuck to one employer and stop even exploring other better options. It is recommended to individuals to not get trapped and be convinced with the employers only until it begins affecting their career negatively.

Listed below are some of the common yet effective ways of getting out of the golden handcuffs trap:

  • It is important that individuals do not give up on growing. They must dream of a better future and a better position.
  • Based on what incentives and additional benefits the current employer offers, the employees should be determined to explore new opportunities and take baby steps towards making a smart move.
  • Decide on a time range until which one should stick to one company.
  • It is always recommended to be ready to experiment as this would lead to exploring better version of themselves.

Advantages

Golden handcuff has sets of benefits for both employees as well as the organizations employing them. Let us have a look at some of the advantages of this process:

  • The employee gets lucrative pay packages and learns their worth in a company.
  • The more the pay structure, the longer they stay in the company and this is what the company wants.
  • For companies, hiring and replacing executives or any other employee might be a difficult task to pull off. There is a lot of risk in hiring a new employee – especially when many other things are involved.
  • The companies can use it as a statement to provide the benefit of the doubt to the shareholders. For example, Elon Musk used this golden handcuff and handcuffed himself to Tesla. Since people believe Musk is the most crucial person in Tesla and he will be there for a long time, the share prices have risen. It is how companies can use golden handcuffs to make an impression.

Disadvantages

Besides the benefits that this strategy has to offer to employees and employers, there are a few limitations that it imposes, which one must know of. Let us have a look at the list below, which briefly mentions the disadvantages of the golden handcuff measure:

  • The higher the pay packages, the more the employees will work for the money, not the job. The employees might not have the morality to work. It decreases the overall morality of the company and creates a tough situation for the management to handle.
  • Someone can always offer better. The underlying assumption of golden handcuffs is that the company offers people a package that keeps the person out of moonlighting. However, if a company doesn’t realize a person’s real worth, the market will eventually determine the true value and offer to the person. In such cases, even golden handcuffs are not useful. Someone else can provide a better package deal.
  • The probability analysis of having such employees in the organization will be complicated. If we have 100,000 employees (like Microsoft) who all have options assigned to them, one fine day, all the options will vest, creating a sudden hike in people resigning

Golden Handcuffs vs Golden Parachute

Both these strategies have been designed to keep employer-employee relationship going, thereby making their bond stronger in every instance. Despite being similar in their objective from a broader perspective, there are certain dissimilarities that must be known as well:

  • While golden handcuffs revolve around retaining existing employees at any cost, golden parachute involves making onboarding of employees easier in certain circumstances.
  • The former is an attempt to ensure employees do not leave the company for any reason, hence the employers offer financial incentives to make them stay. On the other hand, golden parachute, as the name implies, becomes a shield for employees when they are at the verge of losing jobs in the event of acquisition.
  • The introduction of incentive schemes only aims to retain employees, who are most productive and are difficult to be replaced by anyone. On the contrary, the golden parachute helps prevent any conflict of interest from arising in the event of mergers.

Recommended Articles

This article has been a guide to Golden Handcuffs and its meaning. We explain its examples, differences with golden parachute, how to get out of it, and advantages. You can learn more about financing from the following articles –

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