In most situations, upon learning of this new offer, the company must decide if it wants to provide the employee with a counter offer and work to retain him/her. Never is there an obligation to counter, but there are side effects all possible decisions.
Countering should fundamentally be a financial decision
The decision to counter (or not) needs to have an associated business case. A business should look at the following:
- Direct cost to counter: what incremental costs would the company incur beyond the existing cost of that employee (extrapolated and aggregated over time)
- Direct cost to replace the employee: how much cost would likely be incurred to hire a replacement employee
- Indirect cost of reduced business performance: what business disruption will and could result from having an open position (look at the range)
If the cost to counter is less than the sum of the direct and indirect costs associated with losing the employee, there could be a compelling case for countering, this is not enough to justify countering.
Exits often represent hidden opportunities
Often the first instinct is to imagine the departure of an employee as if all his/her responsibilities will suddenly cease to be accomplished resulting in serious business disruption. Fortunately, in almost any reasonably functioning company, this is an unrealistic exaggeration of the impact. Other employees will inevitably step carry some or all the additional burden created by the departure. Some impact is likely, but rarely at this extreme level.
In many cases, companies can emerge from the short-term hassle of an unexpected departure stronger than they started. While the exit of an under-performing employee could certainly create such a result, even losing good performers can bring positives.
For example, when a company promotes an existing employee into a recently vacated role many good things can happen. The cost of the role may decline with a more junior person occupying it. That more junior person often increases his/her contribution to the company to prove the promotion was deserved. This also reduces the cost to hire a replacement employee by enabling the company to hire a more junior replacement. Over time, this sort of behavior contributes to a culture where employees expect opportunity and see growth potential increasing both retention and productivity.
Other hidden opportunities may be subtler. Organization restructuring generally elicits an adverse reaction from employees and businesses often feel compelled to make any reorganization a comprehensive effort. Exits provide an opportunity to make localized organizational design changes without drawing attention to those activities. Employers can avoid the adverse reaction to elective change by packaging that change as part of the necessary response to an unexpected event.
Managing the cultural impact is critical
Even though the decision to counter should be a financial decision, there are associated cultural impacts which cannot be ignored because over time they generate their own financial impacts. Though the counteroffer decision should be a private one between one employee and the company, employees commonly make the discussion public knowledge. Thus, companies should consider decisions as if they were intended to become public knowledge.
The actual implications are difficult to forecast, but the possible impacts from the decision are generally predictable. Offering a counteroffer to an employee can:
- Suggest to employees that the company knowingly underpays employees relative to the market
- Encourage employees to seek other opportunities to negotiate higher pay even if they have little interest in leaving
However not offering a counter can:
- Suggest that the company does not value its employees
- Discourage employees from discussing their situation and needs with the employer before making the decision to leave
The last point is particularly problematic because employees who are not comfortable communicating openly with employers or who see no potential value in doing so constrain the company from employing retention tool it would otherwise like to employ.
The best counter offers are not monetary
Most people would not turn down a raise, but few people move jobs only for an increase in pay. Moving jobs is inherently risky and involves significant effort and stress. While it is often more comfortable for people explain their job choice based on earning more money, this explanation is rarely comprehensive and the change in pay is frequently only a tertiary concern in the overall decision process.
Most people leave a job in the pursuit of better or faster career advancement or to exit an unpleasant situation (e.g. poor relationship with supervisor or work-life balance that is incompatible with family situation). Often these issues could not be addressed with more money, but if resolved (sometimes with zero financial cost to the company) may eliminate the interest in leaving the company.
Some of the most effective counteroffers involve:
- Articulating a clear path for career growth with an explicit explanation of how the employee impacts the progression
- Adjusting work-life balance (e.g. enabling working remotely or adjusting working hours)
- Changing office context (e.g. transfer of departments or locations)
- Modifying non-monetary rewards (e.g. adding vacation days or supporting continuing education efforts)
The most successful counteroffers retain people by addressing the true root cause of their interest in leaving not meeting market reference points. Counteroffers that do this without adjusting pay limit the downside risk to the employer, while creating access to upside potential and increasing the likelihood of retention. These counteroffers allow employers to care for employees without unintentionally inviting a flood of frivolous future renegotiations.
While it is rarely feasible to say that a company can adopt a policy of always or never countering and appropriately address all situations. However, companies that address the root causes for employees considering alternative opportunities are regularly more successful at retaining employees than those that simply seek to match offers.