Rethinking Signing Bonuses

Billboards offering health care professionals $20,000 signing bonuses, two years of car payments or mortgage loans now dot the highways of Southern California, where Debra Ortega is vice president of human resources at Pas­a­dena’s Huntington Hospital. She recognizes the staffing-crisis mentality that feeds ever-larger offers for job candidates in the hospital industry, but she has pulled her organization out of the escalating bonus war.

   “We are destroying our own industry with signing bonuses,” Ortega says. “At Huntington, we’re trying to move away from them completely.” She believes that signing bonuses generate job hopping, damage morale among existing employees and exacerbate the financial pressures that eventually lead to hospital closings.

   The health care industry has a consistent decade-long history with signing bonuses. Other sectors used signing bonuses during the tight labor markets of the late 1990s, but dropped them during the 2001-2003 downturn. Now signing bonuses are back in a wide range of industries. As labor markets tighten for specific skills, employers are handing out $500 to $100,000 cash upfront to cement deals with new hires for hard-to-fill positions.

   Sixty-five percent of employers are offering signing bonuses for IT positions, according to a Mercer Human Resource Consulting survey of 1,350 employers. Almost half are using signing bonuses for sales and marketing and accounting and finance positions. Thirty-six percent of employers are offering them for engineering jobs.

   “The use of signing bonuses ebbs and flows with market demand,” says Rick Beal, managing consultant at Watson Wyatt Worldwide in San Francisco. But he advises workforce management executives to carefully consider the purpose of the program, which positions will be included and which tools will be used to ensure that the new hires stay on the job. Otherwise, signing bonuses may simply push up labor costs without any return.

Backfires
   Signing bonuses help avoid the base-salary bidding wars that drive up costs in tight markets and leave employers with bloated salary budgets in a downturn. But signing bonuses can backfire when they become so uniform among a group of employers that they lose their ability to make one offer stand out from the others, or when they encourage job hopping. “Labor markets in the health care industry are so tight that everyone is fundamentally just handing out more money,” Beal notes.

   After watching new hires leave as soon as they received their last bonus payment and the decline in morale among existing staff, Huntington froze its signing bonuses more than three years ago and eliminated them for new nursing graduates. “Although sign-on bonuses are common in our industry because of the labor shortages, we find that the practice can almost encourage job hopping from bonus to bonus,” Ortega says.

   Huntington is pulling money out of signing bonuses and open-position advertising and pouring it into a hefty referral bonus program and benefit enhancements that boost both recruitment and retention for its 3,000 employees. Ortega reports that the hospital is spending millions for benefit improvements that include lower insurance premiums and a concierge service. The hospital’s rich benefits package and extensive training programs are aimed at attracting employees who take a long-term approach to career development.

   Huntington’s most recent 90-day referral campaign netted 60 nursing candidates and 19 new hires. Ortega says that the change in recruiting and retention strategies has produced solid results, with improvements in the quality of hires and turnover and a substantial reduction in the use of expensive temporary and premium-payment labor. The hospital hired 570 new employees in 2005.

   Recruiting and HR staff members at Huntington carefully explain to candidates that the hospital’s superior benefits package and commitment to training are more valuable than the signing bonuses offered elsewhere. They also advise candidates to drill down into the details of competitors’ signing bonuses, which may require working undesirable shifts or other difficult stipulations.

   To solve the job hopping problem that signing bonuses can create, more employers are adopting staggered payments or a “clawback” provision that requires new hires to return part of the bonus if they leave within a certain period. Beal believes that more companies are adopting staggered payments. “Clawbacks are awkward,” he notes. Some employers have encountered difficulties in recovering the bonus.

   Employers who stagger the bonus commonly pay half at signing and half at the end of six months or one year. In the health care industry, staggering is more finely tuned. For example, an employer may pay out large signing bonuses in four equal payments over two years, or smaller bonuses in three payments over 18 months.

Effective functions
   Although the health care industry’s experience with signing bonuses offers a cautionary tale, signing bonuses can serve a number of functions beyond their broad objective of distinguishing a company from its competitors. “Employers use signing bonuses for candidates who need an added incentive to move because they are already fully qualified and paid at market rates,” Beal says.

   Signing bonuses can help mitigate internal equity issues because they replace the need for higher base-pay offers. They may also be necessary when an employee is leaving an established large company for a smaller one. “Candidates run a risk assessment and may want a signing bonus as a financial guarantee,” Beal says.

   “For experienced candidates, the purpose of the signing bonus is to cover leave-behinds, such as annual bonuses, and to provide an added incentive,” says Carey Ibrahimbegovic, director at Houston search firm Magellan International. “But some companies use a signing bonus when they want to bring in a candidate who is already working at a salary above the company’s salary band range. Others may use a signing bonus as a guarantee that the performance-based part of the package will pay out at acceptable levels.”

   If, for example, a candidate is hired into a position where the performance-based bonus ranges from 30 percent to 70 percent, the company may offer a signing bonus that guarantees a 50 percent payout for the first year. This takes some of the sting out of changing jobs when a high percentage of pay is at risk and employees may not hit high performance levels in the first year.

   “The point is to keep the new employee ‘cash whole’ for the first year on the job until the employee can push up base pay through promotions and get up to speed on performance-based bonuses,” Ibrahimbegovic says.

   Employers are less concerned about clawback provisions for signing bonuses in upper management and executive positions, but Ibrahimbegovic has seen a growing trend toward deferred signing bonuses for candidates who require a higher bonus than company policy allows. “If the company needs $100,000 to sign on a candidate but policy caps signing bonuses at $50,000, the company may offer $50,000 at the signing, with another $50,000 after six or 12 months,” she says.

   Aflac, based in Columbus, Georgia, is in a high-growth phase and rapidly expanding its workforce of 4,100, with 900 new hires in 2005 alone. The company taps national markets for critical IT talent and uses signing bonuses for almost 80 percent of its IT hires and for some investment, finance, sales support and midlevel manager positions.

   Aflac sets the size of the signing bonus on an individual basis depending on the candidate’s specific skill sets, with no clawback provision. “We offer sign-on bonuses as an effective recruiting tool for key professional and leadership positions,” says Casey Graves, Aflac’s second vice president of human resources. “They are a valuable means to enhance our competitiveness in the marketplace.”

   On a more consistent basis, Aflac offers a generous relocation package that includes a bonus payment with a clawback provision to recover part of the relocation costs, including the bonus, if the new hire leaves before the end of the second year. The company also offers stock options with three-year vesting for new hires at the managerial level and above as part of the company’s extensive retention program.

   Aflac has experienced some problems with job hopping despite the relocation clawback, but Graves believes that the company’s new stock option program for managerial hires and its highly competitive benefits package can be leveraged to minimize new-hire turnover.

   Signing bonuses are a short-term response to temporary labor market conditions. As organizations in the health care industry have learned the hard way, when virtually all of the employers in a sector offer similar signing bonuses, the bonuses simply cancel each other out and encourage high turnover among new hires. Raising the amount of the bonus simply sets off a new round of competition, with no guarantee of cost-effective results.

   Beal reports that the most successful companies are attempting to minimize the downside of signing bonuses by taking a broader approach to overall retention. A more long-term approach that includes a strong total rewards program, a focus on internal career development and ongoing workforce planning can reduce the need to whip out more cash when markets tighten.

Workforce Management, March 27, 2006, p. 1, 39-41 — Subscribe Now!