Golden handcuffs are financial incentives set so high that employees are very likely to remain with their current employer. These incentives can be quite expensive for the employer, so they are usually only offered to the most valuable employees. The use of golden handcuffs is most common in those industries in which individuals are more likely to switch employers regularly, such as the software industry. Examples of the incentives that may underlie a golden handcuffs arrangement are:
- Stock options that will not vest until several years have passed.
- Phantom stock that has a cash payout only after a protracted period of time.
- A bonus that will only be paid following the passage of time.
- A hefty retirement plan that only vests with the passage of time.
The large payouts associated with these arrangements can trigger substantial tax liabilities for the recipients, so it can make sense to create deferred compensation arrangements that delay the need for tax payments.
There is an inherent penalty associated with a golden handcuffs arrangement, which is the lost earnings experienced by an employee if he or she decides to leave at any point prior to when the employer is obligated to make compensation payments.