Chris Russell

3 min read

Human Resources

The Good and Bad of Counteroffers

As the competition for talent grows more intense, companies are focusing – or should — as much effort on retaining their best people as they are on recruiting. One of the tools they’re using is the counteroffer.

When a valued employee announces they’re leaving for a new job, two-thirds of hiring managers admit to making a counteroffer to get them to stay, according to a survey by the job search firm LiveCareer.

They do that recognizing a counteroffer won’t keep the employee long-term – the majority of workers leave within two years anyway.

 “In my experience counteroffers don’t work 95% of the time,” Jenny McCauley says in an article in the Harvard Business Review.

 “And when they do work it’s usually only for the short term — someone who wanted to leave is eventually going to leave anyway, “ adds McCauley who’s worked in HR at JPMorgan Chase and Hilton Hotels and was SVP of administration at  Southwestern Energy when the article was published.

Yet as the article notes, 80% of HR leaders and almost the same percentage of senior business executives say there are times to extend and accept a counteroffer.

The question is when to offer one and when should an employee accept one and stay. There are definite pros and cons to weigh.

Visier, an HR data analytics company, not surprisingly, says HR and hiring managers should take an analytical approach to deciding whether to make a counteroffer.

With 75% of employees in the LiveCareer survey reporting that money – on average a 20% pay hike – was the top reason for accepting a new job, Visier suggests companies begin their counteroffer decision-making with compensation. How does the employee’s comp compare to their peers and the employee group? Do they perform at a higher level?

It’s also useful to see how the person compares to others working at a similar level but in different functions. “This comparison helps you determine how well she is being compensated within her existing pay band,” says Visier.

The next step is to assess the employee’s value to the company. Top performers are universally more productive than their peers. How much more productive depends on the job, but studies put the floor at about 40% to over 400%. If the individual is a strong performer, what is their future value? 

The Visier formula takes into account the employee’s tenure at the company and their growth potential. This is something of a balancing act between rising star with a short tenure, untested by adversity, and a longer tenured, steady performer who may have reached their peak.

In addition, the effect on the team, the work unit and the company as a whole has to be considered. Research shows that it can cost anywhere from 1x to 3x salary to replace a worker in a significant, white-collar or professional role. This takes into account the recruiting and training cost, the effect on the team that has to cover the work, as well as the loss productivity until the new hire is up to speed. 

If the new job offer is from a competitor, the impact is easily far greater.

Even when the analysis points to a counteroffer, many HR professionals and hiring managers say they’re a bad idea. Almost a third in the LiveCareer survey said counteroffers hurt morale and create trust issues with the employee – if they were willing to leave once, they’ll do it again. Nor, say 45%, is it a long-term retention solution.

As it turns out, there’s a good deal of evidence to support that. The survey found 57% of employees who accepted a counteroffer were gone in two years; 17% left in less than one.

An HR executive told the Society for Human Resources Management, “Our theory is that anyone who can get another job can also get more money.  And if we’re pushed into making promises about future promotions to keep someone on board, it gets to be real messy, and I have to wonder about that employee’s commitment.”

For some of the same reasons, employees should think long and hard before accepting a counteroffer. Nearly a quarter of senior executives in a survey by global executive search firm Heidrick & Struggles advised turning down a counteroffer. 40% said accepting one would adversely affect their career.

A counteroffer with a pay bump may be tempting, but more often there were other reasons behind the decision to consider another job. The LiveCareer survey found 62% of workers left because the new job was a better overall fit. More than 4 out of 10 said it offered a better career path, better work assignments and because they simply desired a change..

Just as employers should take an objective look before making a counteroffer, employees should do the same.

In the end, 45% of all counteroffers are turned down.

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