Golden Handcuffs

These are deferred incentives provided to some employees to encourage a longer employment tenure.

Patrick Curtis

Reviewed by

Patrick Curtis

Expertise: Private Equity | Investment Banking


September 25, 2023

What Are Golden Handcuffs?

Golden Handcuffs are deferred incentives provided to some employees to encourage a longer employment tenure. These incentives include bonuses given to individual employees to persuade them to work for the business longer. Like retirement plans, they are frequently offered as postponed pay and benefits.

Golden handcuffs are employee benefits, similar to health insurance and pension contributions, which can be valued at many times the current salary. 

As a result, employees who sign up for these benefits might receive higher salaries or better retirement benefits. 

There are two types:

  1. The first type provides more money to the employees when they leave the company. Therefore, this type is not visible as a "handcuff" because the employees will have more money if they leave the company than if they stay.
  2. The second type does not provide real benefits to the employee when they leave or retire but rather creates "passive" value for them by tying their salary to their pension. If you want to retire early or move on from this company, you would need to lessen your pension's payout value.

Typically there is a contract between an employee and employer, where the employee agrees to stay at the company for a certain time in exchange for a more lucrative compensation package than the original plan. 

This agreement can be difficult for an employee to break because it usually includes clauses about what will happen should an individual decide to terminate their employment. 

The company has put measures in place to ensure that if any clauses of the GH Effect agreement are broken, conditions must be fulfilled on both sides for this agreement to become null and void. 

This also means that no party is at fault if anything goes wrong.

Key Takeaways

  • Golden handcuffs are deferred incentives offered to employees to encourage them to stay with a company for an extended period.
  • There are two main types of golden handcuffs. One type provides employees with more financial benefits if they leave the company, while the other creates passive value by tying an employee's salary to their pension, discouraging early retirement or departure.
  • Golden handcuffs typically involve a contractual agreement between the employer and the employee.
  • Companies use golden handcuffs to retain valuable employees, especially high-level executives.

Why Use Golden Handcuffs?

Finding the right people to fill the vacancies could be very challenging if you have a company with a high turnover rate. Keeping employees on your team for as long as possible is important.

For some companies, student turnover can be a problem when they have hired many students, and the timing of their leave coincides with that of other students. Unfortunately, many businesses will have difficulty dealing with this if they are unprepared for it.

Thus, companies use deferred incentives to encourage certain employees to stay with the firm longer. 

The benefits typically include short-term monetary benefits like a higher salary and bonuses or long-term benefits like health care or retirement funds. 

Interestingly, these benefits are primarily used to retain high-level executives who would otherwise easily leave an organization for a more lucrative opportunity elsewhere and less to retain the average employee.


The idea is that these deferred incentives will help keep employees loyal and encourage them to stay with the company as they're vested into their pension funds or salary through bonuses.

How Are Golden Handcuffs used?

The incentives may be given as a lump sum payment in return for a longer service period or as a combination of cash and shares.

The inducements may also be used to retain low-paid workers, but this is rare.

While this provides deferred incentives with potentially more value than immediate incentives, it has been criticized as unfair when used by companies that are not financially healthy.

Employees offered these incentives may be more productive over a longer period, which helps an organization reduce the number of high-quality candidates it has to recruit.

Hiring with this policy in place can help companies avoid unnecessary employee turnover, which is costly for businesses. It can also enhance retention rates, leading to an increase in the average tenure of employees.

Disadvantages of hiring with golden handcuffs

Hiring with these handcuffs can be seen as a way to tie an employee to the organization for a longer period, which is not always beneficial. However, it allows companies to benefit from these employees' skills and experience.

For example, if an organization wants to hire an employee for five more years, it may offer bonuses or compensation to ensure that commitment.

Some organizations use golden handcuffs with employees in high-demand fields, such as IT professionals and data scientists, as they have very hard skills for others to find in the current labor market.

One of the main reasons why hiring with this effect may not be beneficial is the potential cost of hiring and retaining these employees. 

If they are given out too freely, it is more likely that they will feel unappreciated and consider leaving. Employees feel underappreciated because they gain the same benefits as others. 

Additionally, employees can simply walk away without additional costs imposed on them. 

Golden Handcuffs Stigma

People stigmatize this commonly used policy as a tool companies use to keep their employees from leaving.

However, they are often used because keeping certain employees around is in the company's best interest.

There is quite a lot of research on this topic, and many studies indicate that this policy is most successful when used in benign situations where no one is coerced into staying at an organization for a long period.

A recent study by researchers at University College London found that people were more likely to favor golden handcuffs if the incentives were given to employees who were very close to retirement or already retired.

This policy can work well with long-term incentive plans where the employee agrees to stay with the company for a specified time before receiving any benefits (e.g., five years). Then, workers don't have to worry about losing their perks if things go badly.

However, not everyone agrees with these findings and feels that companies should not use these tactics.

Limitations of Golden Handcuffs

They refer to any limitations that hold you back from your full potential.

1) Fear 

People may fear these handcuffs because they can create a sense of entrapment or commitment to a company. 

Employees granted these handcuffs may feel pressure to stay with the company, even if they are unhappy with their job or the company's management, to receive the benefits associated with the golden handcuffs.

Your fear of failure might be holding you back. You may not be ready to take a leap of faith yet.

2) Having a family 

They can significantly impact an employee's work-life balance because these benefits are designed to encourage employees to stay with a company for a longer period. They may pressure employees to prioritize their job over their personal life. 

This can lead to a lack of work-life balance. Employees may feel they need to be available for work at all times to maintain their job security and receive the benefits associated with the golden handcuffs.

3) Money 

If you are worried about money, there are plenty of options for people who want to start their own business or switch jobs. 

For example, if you want an online business, there are plenty of platforms to help new business owners launch a company. But if this isn't something that interests you, why not try for a position at a different company?

Hidden Golden Handcuffs

These handcuffs are an incentive that allures someone to stay in a company, but the desire for more money or success can make them want to leave. They are considered a negative incentive because it prevents people from working harder to advance their career and progress.

Some invisible uses of this policy are stock-based compensation, where employees are given stocks as part of their salary. When they quit, they have to sell back their stocks at the current price, and if it's lower than what they wanted, they will lose a lot of money.

One example of this policy in use is high salaries in the entertainment industry - actors and actresses can't move away from Hollywood because there are not many other places that have lucrative jobs.

This causes them to stay at their current position because they don't want to lose their qualifications, even if it means putting up with a toxic workplace. 

The other reason is that the job market has shifted dramatically in recent years, which makes it hard for employers and employees to match each other's needs. 

For example, employers don't want to increase salaries and wages because it will cost them more money and affect their bottom line. 

The importance of reading the contract before signing

It is important to read and understand the terms of a contract before signing it. Some contracts are not as transparent, making an individual more susceptible to invisible golden handcuffs.

To avoid this, it is very important to be vigilant when reviewing contracts and ensure that the terms align with what you want from a company.

One of the most important responsibilities of an employee is to read their employment contract. Employers have a responsibility to ensure that contracts are clear and properly worded. 

However, even if this isn’t the case, the employee must still read the contract carefully and ask questions should they find something unclear.

The subtext of an employment contract is important because it can provide valuable insights into what may happen in the future or what has happened in past agreements.

The best way to avoid being contractually obligated to something you do not want is to read the contract before signing. By reading your contract, you will understand your obligations and the benefits you can receive.


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Researched and Authored by Gregory Cohen | LinkedIn

Reviewed and edited by Divya Ananth | LinkedIn

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