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July 14, 2008
Tying Executive Bonuses to Turnover: Emerging Trend
Nearly all organizations desire a low turnover rate, since high turnover can be costly--both in hard dollars and in lost productivity. Now, some companies are taking greater measures to ensure low turnover by tying employee retention to executive bonuses, the Wall Street Journal reports.

The article explained that a "small but growing" number of companies are incentivizing their CEOs and other top managers by promising bonus pay if specific goals regarding turnover rates are met. For example, Penske Automotive group rewarded CEO Roger S. Penske 8 percent of his 2007 bonus--or $240,000--for keeping turnover below 31 percent. Meanwhile, the CEO of Pep Boys had 10 percent of his bonus tied to turnover, while Extreme Networks Inc. had 20 percent of his bonus riding on the company's retention rate.

As explained by the Journal, a 2007 study by Hay Group, 8.2 percent of 182 organizations indicated that they use turnover as a performance measure in executive incentive plans, more than tripling the percentage of those that did so in 2005 (2.3 percent). The same survey found that most (55 percent) organizations incorporated "employee performance" criteria--turnover, workplace diversity, and employee satisfaction--into executive bonus plans.

The article notes that many other companies place the responsibility of keeping turnover low on middle--rather than top--management, reasoning that middle managers have more direct interaction with frontline employees and a greater influence on whether they stay or leave.

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