The days of retention bonuses being reserved only for top-tier corporate executives are certainly numbered as 2 in 3 organizations surveyed last year said they offer targeted payments to top talent to stay on the job.
Global human resources management professionals and business leaders association WorldatWork found in its “Inventory of Total Rewards Programs and Practices 2022” that of 990 organizations surveyed, bonus levels were the highest ever, including:
- 88 percent offered signing bonuses.
- 73 percent offered spot bonuses.
- 67 percent offered retention bonuses.
“The talent market remains hot and sign-on, spot, and retention bonuses are reward mechanisms that can help win and retain key talent in response to economic indicators influencing a tight labor market,” said Alicia Scott-Wears, total rewards and compensation content director at WorldatWork. “Their utility in attracting and retaining talent can be impactful and cost-effective when used appropriately to their intention.”
Retention Bonuses: From Wall Street to Tech to All Markets
The practice of offering financial incentives to retain employees has roots in the concept of performance-based bonuses, which have been used for a long time. However, the specific term “retention bonus” gained popularity in the 1980s during a period of corporate restructuring and mergers.
To ensure the stability and continuity of operations during these transitional periods, companies began offering retention bonuses to key employees who were crucial for the success of the integration process.
Retention bonuses became popular during the dot.com era as tech companies used them in the late 1990s and early 2000s to retain skilled employees in the face of fierce competition.
Over time, retention bonuses have become more commonplace in various industries, with companies using them strategically to retain valuable employees through a particular achievement or timeline.
“There is an element of cost-effectiveness in utilizing these bonuses, as these are each a one-time expense versus an ongoing cost into the future with an increase to base pay,” Scott-Wears said. “While not aimed at addressing the long-term, each of these bonuses injects a boost to attraction and retention and it is important to monitor their effectiveness in your organization if you are implementing them.”
Understanding the Mechanics of Retention Bonuses
Retention bonuses are financial incentives offered by employers to employees, typically in the form of one-time lump sum payments or additional compensation.
They are designed to encourage employees to remain with the company for a predetermined duration, often during critical periods such as mergers, acquisitions, restructuring, or important production phases.
Retention bonuses typically have specific conditions and terms attached. These conditions can include remaining employed for a certain period, achieving specific performance goals, or contributing to the successful completion of a project.
The bonus amount is usually predetermined and may vary based on the employee’s level, role, or importance to the organization.
Common Elements Found in Retention Bonus Agreements
While no two retention bonus agreements are the same, there are some common elements found across different companies. Concepts typically found in a bonus agreement may include:
- Eligibility criteria and duration of employment.
- Specific performance or project milestones.
- Payment structure, whether as a lump sum or staggered over time.
- Recovery provisions if the employee voluntarily resigns or fails to fulfill the agreed-upon terms.
- Confidentiality and non-compete clauses to protect the company’s interests.
Indeed says that as an employee, accepting a retention bonus comes with tax implications since they are considered supplemental wages (any compensation in addition to an employee’s regular pay).
Taxes are usually applied to a retention bonus using either the aggregate method or the percentage method.
Retention Bonuses in 2023: Which Industries are Using Them?
Retention bonuses are commonly offered to employees who hold critical roles or possess specialized skills. Industries such as technology, finance, healthcare, and professional services are more prone to offering retention bonuses, as they often face talent shortages and tight labor conditions for skilled individuals.
Companies are offering these bonuses to employees because it’s becoming harder to retain top talent post-pandemic, executive career coach and people and cultural leader Candice Enriquez, told Get Ahead by LinkedIn News.
“Companies are very fearful of losing talent, especially if it’s somebody in the middle of completing a project or a merger and acquisition,” Enriquez told article author Brandi Fowler. “Mergers and acquisition is what it typically was before, but now it’s [increasing] because companies are having a hard time keeping the talent due to the gig economy.”
Workweek Chief People Officer and “I Hate It Here” newsletter founder Hebba Youssef also cited the “Great Reshuffle” (also called the “Great Resignation”) for a rise in retention bonuses.
“Your talent is an investment, and if your investment is walking away, the company ultimately loses somebody with subject matter expertise, someone they’ve developed and devoted time and money to,” Youseff told Get Ahead by LinkedIn News. “So, a lot of times, it’s so that they can retain those folks and maximize their investment, as well.”
Pros and Cons of Retention Bonuses
Let’s look at the pros and cons of retention bonuses from both the employer and employee points of view.
Benefits for Employers
- Talent retention: Retention bonuses can help retain valuable employees, preventing knowledge loss and the cost of hiring and training replacements.
- Stability during transitions: During periods of change, retention bonuses incentivize key employees to remain committed, maintaining operational continuity.
- Competitive advantage: Offering retention bonuses can position a company as an employer of choice, attracting and retaining top talent.
Benefits for Employees
- Financial incentives: Retention bonuses provide employees with additional income, recognizing their loyalty and contribution to the organization.
- Job security: The assurance of a retention bonus can alleviate concerns about job stability during uncertain times.
- Career development: Retention bonuses may be tied to specific projects or milestones, offering opportunities for skill development and advancement.
Disadvantages for Employers
- Cost: Providing retention bonuses can be expensive, particularly if offered to many employees or high-value individuals.
- Equity concerns: Offering retention bonuses to select employees may create feelings of inequality among the workforce, leading to morale issues.
- Dependency risk: Employees may become overly reliant on retention bonuses, leading to decreased motivation once the bonus period ends.
Disadvantages for Employees
- Potential obligations: Accepting a retention bonus may involve signing agreements with restrictive covenants, limiting future career opportunities.
- Career stagnation: Employees may feel locked in their current role or organization due to the financial commitment associated with the bonus.
- Unfulfilled expectations: If the company fails to meet the promised conditions or the anticipated rewards do not materialize, employees may feel disillusioned.
Retention bonuses serve as valuable tools for companies looking to retain key employees during critical periods. While they provide benefits for both employers and employees, it’s essential to carefully consider the associated advantages and disadvantages.
By striking the right balance, companies can foster loyalty, maintain talent, and drive long-term success in a competitive business landscape.