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Retaining key employees in times of change

Sabine Cosack, Matthew Guthridge, and Emily Lawson

Many companies throw financial incentives at senior executives

and star performers during times of change. There is a better and less
costly solution.

Too many companies approach the to employee retention—and one that

retention of key employees during will serve companies well as they
disruptive periods of organizational merge, restructure, and reorganize
change by throwing financial incen- to seize strategic opportunities as
tives at senior executives, star per- the economy picks up. It starts with
formers, or other “rainmakers.” identifying all key players, but tar-
The money is rarely well spent. In our geting only those who are most criti-
experience, many of the recipients cal and most at risk of leaving.
would have stayed put anyway; others These people are then offered a mix
have concerns that money alone of financial and nonfinancial incen-
can’t address. Moreover, by focusing tives tailored to their aspirations and
exclusively on high fliers, compa- concerns. A European industrial
nies often overlook those “normal” company applied this approach during
performers who are nonetheless a recent reorganization and found
critical for the success of any that it required only 25 percent of the
change effort. budget that had previously been
spent on a broad, cash-based scheme.
Our work with companies in many What follows are three suggestions
sectors (among them, energy, financial for companies with similar hopes of
services, health care, pharmaceu- keeping their top talent without
ticals, and retailing) suggests there is breaking the bank.
a better and less costly approach
2 August 2010

1. Find the “hidden gems”

HR and line managers need to example, the product-development

work together during times of major manager in an acquired com-
organizational change to identify pany’s R&D function who is nearing
people whose retention is critical. retirement age and no longer on
Yet too often companies simply the company’s list of “high potentials”—
round up the usual suspects—high- yet who is crucial to ensuring a
potential employees and senior healthy product pipeline; or the key
executives in roles that are critical for financial accountant responsible
business success. Few look in for consolidating the acquired com-
Q2 2010 less obvious places for more average pany’s next financial report. Even
performers whose skills or social if the employees’ performance and
Word of mouth
networks may be critical—both in career potential are unexcep-
Exhibit 1 of 1
keeping the lights on during the tional, their institutional knowledge,
Glance: During a reorganization effort, one company found that 44 employees critical to the company’s
change effort itself as well as in deliv- direct relationships, or technical
success were likely toering
and therefore warranted targeted
its longer-term busi- retention
can make their retention
Title: A risk heat mapness objectives. critical. In one merger we recently
observed, certain sales support per-
These “hidden gems” might be found sonnel who filled orders and took
anywhere in the company: for inventory turned out to be just as
important as the star salespeople.

During a reorganization effort, one company found that

44 employees critical to the company’s success were likely to leave.
Risk heat map for European industrial company, figures indicate number
of employees in category (total = 497)

Low risk Medium risk High risk

Unique skills/knowledge;
High a pivotal person in 37 22 9 8 2
the organization

Important resource whose

specific skills/knowledge 69 50 39 15 19
require careful attention
Difficulty in
replacing this Important resource, but
person person’s competencies are 74 28 21 14 14
shared and not at risk

General competencies in 

10 22 6 13 13
own area

No specific competencies;
Low 3 1 2 3 3
easy to find in the market

0 25 50 75 100

Probability of person leaving organization, %

Based on market demand for employee's skills, latest
salary trends, existing competitive offers, family situation,
and known preferences and concerns.
Retaining key employees in times of change 3

Once HR and line managers have When a European industrial com-

generated a thoughtful and more inclu- pany conducted this exercise, it
sive list of key players (usually 30 to mapped the outputs on a risk matrix.
45 percent of all employees), they can The results were sobering. The
begin to prioritize groups and individ- company had been launching a new
uals for targeted retention measures— centralized trading unit—requiring
in our experience, 5 to 10 percent almost all traders and their support
of the workforce. The key is to view staff to relocate, with half of them
each employee through two lenses: heading to another country—and was
first, the impact his or her departure steadily losing people. The risk
would have on the business, given matrix revealed that another 104 peo-
the focus of the change effort and his ple were likely to leave. Among
or her role in it; and second, the them were 44 employees who were
probability that the employee in ques- critical for the success of the trading
tion might leave. unit. To be sure, some were trad-
ers but most were IT, finance, and
administrative staff with unique
knowledge of the unit’s systems.

2. Mind-sets matter

One-size-fits-all retention packages but wondered, as they faced change

are usually unsuccessful in per- in any event, whether staying or
suading a diverse group of key employ- searching for another employer would
ees to stay. Instead, companies best further their careers.
should tailor retention approaches to
the mind-sets and motivations of In one-on-one conversations with the
specific employees (as well as to the people in the family-oriented group,
express nature of the changes involved). managers explored specific concerns
and discussed how the company
When executives at the European could add to the measures already in
industrial company looked beyond place to increase the likelihood
their standard retention package of retaining these individuals. On the
(bonuses plus compensation for the menu of incentives: an increase in
costs of the move) and focused base pay, assistance in finding schools
instead on the needs of individual and kindergartens for their chil-
employees, they found a more dren, career counseling for their
nuanced situation than they had antic- spouses, language training, and
The number of ipated. Among the key people at alternative work arrangements so
groups will vary
risk were two main groups with two employees could work at home
according to a
company’s specific different mind-sets.1 One con- or commute instead of relocating.
situation. We sisted of individuals who were worried
have observed
about relocating because it would Meanwhile, in the conversations with
where employers uproot their families. The people in the the career-driven people, manag-
have identified up to other, more career-driven group ers offered them a cash bonus but
six distinct employee
segments. didn’t mind living and working abroad focused primarily on the organiza-
4 August 2010

tional chart of the new, centralized broad financial incentives plan the
unit, which had been designed from company had previously applied,
scratch. For people who had held succeeded in stabilizing the new unit.
senior roles in their local organization, One year after its launch, some
it was essential, for example, to 80 percent of the staff who received
learn about their new responsibilities special attention had started to
and how many direct reports they work in the new location—a signifi-
would have; for many of the more junior cantly higher share than for the
people a key question was who group that didn’t receive this atten-
their bosses would be. Also high on tion. Since its founding, the unit
the agenda was a dialogue with has increased its sales by more than
each individual about his or her future 30 percent and its earnings before
career and leadership opportunities interest and taxes (EBIT) by more
in the context of the unit’s new strategy. than 90 percent.

This targeted approach, which cost

just one-quarter as much as the

3. Retention is about more than money

As the European industrial company’s Leadership opportunities are a power-

experience suggests, financial ful incentive in any sector. In a
incentives play an important role in pharmaceuticals merger aimed at
retention—but money alone won’t building the North American
do the trick. Praise from one’s mana- acquirer’s presence in Europe, some
ger, attention from leaders, fre- 50 middle managers from the
quent promotions, opportunities to acquired company accepted invita-
lead projects, and chances to join tions to join trans-Atlantic teams
fast-track management programs are with key roles in integrating the two
often more effective than cash. organizations and developing
Indeed, a 2009 McKinsey Quarterly business strategy. The chance
survey found that executives, man- to network with the acquirer’s senior
agers, and employees rate these five people and develop leadership
nonfinancial incentives among the skills during the two-year program
six most effective motivators when the signaled to these high-potential
main objective of the exercise is employees—in many cases, people
retaining people.2 who had been slated for promotion
before the merger was announced—
One financial services firm under- that they had a promising future
See Martin
Dewhurst, Matthew
taking a recent cost-cutting initiative in the new organization. For the acquir-
Guthridge, and elected to use only nonfinancial er’s senior executives, one benefit
Elizabeth Mohr, measures—including leadership- was the opportunity to assess first
people: Getting development programs—to retain hand a potential next wave of top
beyond money,” the pivotal players it had identified as management talent. The program was
.com, November
being at risk of departure. One year one part of a carefully designed
2009. later, none of those players had quit. communication and engagement plan
Retaining key employees in times of change 5

that made it possible to sustain the Still, executives mustn’t view employee
energy of the 50,000-person strong retention as a one-off exercise
workforce during the merger. The where it’s sufficient to get the incen-
company ultimately needed to offer tives packages right. Rather, best-
only 750 targeted employees a practice approaches build on contin-
financial incentive. uous attention and timely commu-
nication every step of the way to help
When financial incentives are required, employees make sense of the
it is important to design them appro- uncertainty inherent in organizational
priately and use them in a targeted change. Ultimately, what many
way. For example, one-third of the employees want most of all is clarity
retention bonus during a merger might about their future with the com-
be paid to pivotal staff even before pany. Creating that clarity requires
the deal is closed, with the remaining significant hands-on effort from
two-thirds to be paid out a year managers, including the ongoing
later—dependent in part on the recip- work of tracking progress so
ients meeting defined perfor- that companies can quickly intervene
mance criteria such as the success- when problems arise.
ful transfer of systems from the
acquired company.

Targeting retention measures at the

right people using a tailored mix of
financial and nonfinancial incentives
is crucial for managing organiza-
tional transitions that achieve long-
term business success; it’s also
likely to save money.

Sabine Cosack is a consultant in McKinsey’s Vienna office; Matt Guthridge is an associate

principal in the London office, where Emily Lawson is a principal. Copyright © 2010 McKinsey
& Company. All rights reserved.