A retention bonus is a form of financial incentive to keep an employee at a company. It is basically a targeted payment or reward outside of an employee’s regular salary that is offered as an incentive to keep a key employee on the job during a particularly crucial business cycle, such as merger or acquisition or during a crucial production period. This particular payment meant to keep an employee from leaving the company, is generally a one-time payment. Here is everything you need to know about retention bonus including how it works, its benefits, reasons why companies offer it and should you or should you not accept the same.
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Understanding Retention Bonus
When an organization is going through a disruptive period of organizational change, it offers financial incentives to senior executives or key employees to persuade them to stay with the company. This financial incentive is referred to as a retention bonus.
For example, during a merger, restructure or reorganization, a company will attempt to retain its best employees to make certain that it has enough people working in the organization during challenging times. For instance, a business that is shutting down a department or project will offer retention bonuses to its best employees to ensure that the business has enough employees to see the project through to the end.
How does a Retention Bonus work?
Retention bonuses are not tied directly to work performance. A retention bonus, retention package or stay-bonus is a one-time lump sum payment an organization pays to an employee as an incentive to remain with the company for a specified period of time. The amount offered within a retention bonus package varies but it is generally based on a percentage of the employee’s salary, their role in the company and the time they have remained with the company.
The amount of the retention bonus depends on several factors such as the reason for the retention bonus, competitor’s salaries and the company’s finances. The average retention bonus is between 10-15% of an employee’s base salary, but the amount can go up to 25%.
Before giving the retention bonus, the employee must consider why they are giving the bonus to determine the amount to be given. If the goal is to keep the employee from going to work for a competitor, then the competitor’s salary will contribute to the amount of the retention bonus. If a company wants to keep an employee on for the duration of a challenging project, they should consider the amount of extra time an employee will be expected to work as well as the overall value of the project.
Benefits of Retention Bonuses
Retention Bonuses can be useful tools for companies looking to keep important employees in their company. There are many benefits of offering retention bonuses:
1. Increased Productivity
Although retention bonuses are not directly tied to work performance, employees may still work harder or increase productivity due to the bonus.
2. Company Loyalty
If an employee accepts a retention bonus and signs a contract to remain with the company, that employee is unlikely to leave before the end of the contract. This can help a company establish long-term loyalty.
3. Improved Morale
Employees will probably feel appreciated and valued by the company when offered a retention bonus. High morale can go a long way in improving overall long-term retention with or without bonuses.
4. Consistency to Outsiders
Maintaining and keeping employees or top-level executives during a difficult time for the company can be valuable to external stakeholders like investors. Keeping a consistent team in place could keep investors from withdrawing support during a time of company transition.
5. Reliable Workforce
Retention bonuses can help establish a reliable group of employees during a challenging time for the company, such as a merger or a high production push. This, in turn, can increase overall profits as the company knows there will be people working.
6. One-Time Payment
A retention bonus is a one-time payment. This can be a great way to incentivize employees to stay with the company and reward them for their commitment to the business but not raise overall salary costs. This is especially true during company transitions.
7. Retaining Highly-trained Employees
Retention bonuses can be used to keep employees who recently completed training or continuing education from taking their skills to a competitor.
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How to decide if you should accept a Retention Bonus?
If the company you work for has offered you a retention bonus, you are a valued employee and management has noted your hard work. Your contributions are considered valuable assets, and the organizational leadership determined that losing you as an employee would negatively affect the overall company productivity and profit. Carefully consider the following factors when determining whether to sign a retention agreement or begin negotiating.
The reasons a bonus is offered
Companies offer bonuses for different reasons. Consider the determining factors behind your offer. The company might offer a retention bonus to secure quality employees during a time of transition or to ensure continued success and keep talented employees from going to work for a competing organization. Evaluate your thoughts about the justifications behind the offer and consider whether you agree with the company’s motivating factors or if you find the tactic questionable.
Your opinion of the company and your experience
Review whether your own values and priorities still match those of the company you work with. Consider your experience with the organization so far and the leadership styles you’ve encountered. A positive company culture is important to job satisfaction.
The current job market within your industry
Research current job openings that match the qualifications and responsibilities you currently hold. You can begin by searching based on your specific job title. Determine the status of the job market and how easily you would find a position with pay and responsibilities comparable to your current position. Knowing your available options and whether your current salary is fair will inform your judgement in deciding if a retention bonus is right for you.
Your tax responsibility
Retention bonuses are considered taxable income. However, because they are supplemental wages, your tax responsibility may differ from that of your annual salary. Consider the tax rate when contemplating if you should accept a retention bonus. A tax professional can answer your questions regarding things like aggregate tax or percentage tax. It may be financially beneficial to request a raise over a bonus.
Your career path
The retention agreement will show the amount of time you will commit to the company. Think about how the decision to remain will impact your career path and ability to move up. If upward mobility is important to you, understand whether there are opportunities for you to do so within the company and how a role shift will affect your agreement.
Tips for Salary Negotiation in Retention Bonus
When deciding if a retention bonus will work for you, you may ask for more funds or negotiate for a shorter amount of time to commit to the company.
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Frequently Asked Questions (FAQs)
When companies offer a retention bonus, is a retention bonus income?
As an employee, accepting a retention bonus comes with tax implications. Retention bonuses are considered supplemental wages. Supplemental wages are any compensation in addition to an employee’s regular pay. While a retention bonus is not considered part of an employee’s salary, it is still considered income and part of total gross pay and hence it must be reported as income on your yearly taxes.
How does a retention bonus work?
Employee performance is usually not a determining factor in a retention bonus. Rather, a retention package is a monetary incentive offered to keep an employee at the company for an agreed amount of time.
What is a retention offer?
In contrast to a retention bonus, which is offered by employers to incentivize employees to stay with the company, a retention offer is issued by credit card companies when customers attempt to close their accounts. The offer is issued to keep the customer’s business and may include an increase in the type of rewards the credit card offers, such as points or miles, an annual fee waiver, statement credit, or a different incentive.
Should you accept a Retention Bonus?
If you receive an offer of a retention bonus to stay with your company during a merger, acquisition, or another period of transition, it’s really a personal choice as to whether or not you decide to accept it. If you were planning on staying with the company anyway, it’s probably a good idea. However, do keep in mind the terms of your contract. If you’re considering leaving, carefully weigh the pros and cons.