Retention Bonus

Updated on April 11, 2024
Article byJyotsna Suthar
Edited byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Retention Bonus?

A retention bonus is an extra incentive company gives to its key employees apart from the regular salary to stay or continue in the same organization. It helps develop a reliable trust of employees that promises to stay during a crucial phase of business like merger or acquisition, or business cycle.

Retention Bonus

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It helps in retaining valuable staff by boosting their overall morale. Also, it opens communication channels between employees and the company. However, employees might sometimes feel negatively affected by thinking companies try to buy out their loyalty.

Key Takeaways

  • Retention bonuses are payments or rewards the company gives its key employees, especially senior executives, to ensure they remain with the company during its disruptive phase.
  • The bonus can be 10-15% of the employee’s salary. However, depending upon the employee’s worth, it can sometimes go up to 20%.
  • The employer gives retention bonuses to the employees to make them stay in the same company. In contrast, they give a sign-on bonus when a person accepts a job offer letter.
  • Countries like the United States, Australia, England, and India have levied a tax on bonuses. It is taxable under the Internal Revenue Standard at a flat fee of 22-25%.

Retention Bonus Explained

A retention bonus is a one-time payment or reward that companies pay to employees. Companies usually pay it when a highly valuable employee leaves the organization. Thus, receiving the benefit may make them stay for the long term. This concept gained popularity in the 1980s when employers rewarded employees for staying with the company as corporate poaching increased.

The chances of losing potential employees to rivals are high in an ever-growing economy or during disruptive business cycles. So, companies try to retain their valuable employees. A retention bonus agreement gets signed between employee and company stating certain terms and conditions.

The bonus depends on how long an employee stays with the company. However, the length of the contract depends upon the company’s needs. The retention bonus policy ensures that the employee does not leave the company. During this time frame, the employee must stay loyal to the company.

The company can decide to pay a bonus either in a lump-sum amount or quarterly amounts. The bonus can be 10% to 15% of the employee’s salary. However, depending on the circumstances, it can go up to 20-25%.

Companies consider a few factors before awarding a bonus to a member of staff. First, employers must select the right employees eligible for a job retention bonus. If the aim is to prevent the employee from joining a rival’s company, the bonus must be equal to what the competitor provides.

Also, the employer needs to understand the reason for leaving the company. In such cases, the employer must communicate effectively to retain the staff. For example, the 2022 Employee Experience Trends report says happier employees stay longer with the company. In addition, almost 85% of employees get a sense of belongingness with the company when receiving a bonus.

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Let us look at some retention bonus examples to comprehend the concept better:

Example #1

Suppose Jenny is a hardworking employee working in Fox Technologies. Per her performance, she applied for a salary rise, but the company denied it. So, another company approached her for a job role. In contrast, Fox Technologies was upcoming with a project that could potentially boost the company’s sales. And it needed Jenny to play a vital role in it. However, when the former company learned about her resignation, they offered her a bonus.

Per the retention bonus policy, she will get 15% of her salary for working with the company for 1.5 years. In return, she has to refrain from revealing any company’s secrets or approaching other companies.

Example #2

In early August 20, 2022, crypto lender Voyager refrained from providing any retention bonus to its staff. The company was going through legal proceedings to restructure the business. Thus, they asked the United States Bankruptcy Court to approve a “Retention bonus plan” of $1.9 million. As per this plan, 38 employees received a job retention bonus. However, Voyager’s creditors disagreed with the decision.

Example #3

The United States government has decided to provide an army retention bonus to the soldiers. Per the Selective Retention Bonus (SRB) program, the soldiers are eligible for bonuses of $20000 for three years. However, the only criteria for an army retention bonus are completing 17 months of continuous active service but not more than 14 years of active duty.

Retention Bonus vs Sign-On Bonus

Although retention and sign-up bonuses add up the income, they are distinct. The employer gives the former to the employees to make them stay in the same company. The latter occurs when a person accepts a job offer letter. However, there are instances where the employer might give both to the staff.

SectionRetention BonusSign-On Bonus
MeaningProvided to retain or keep that employee in the same organization.Sign-on bonus is a bonus given to newly joined employees or trainees.
PurposeTo make employees stay with the company during a crucial business phase.To retain fresh trainees, continue working with them in return for extra pay.
 Paid when an employee intends to leave the company.Paid when an employee accepts the offer letter.
Bonus amount10-20% of the employee’s salary.$150-$100,000

Retention Bonus Benefits

1. Benefits For Employees

The Employee gets an additional monetary incentive. Most of the time, it goes to 15% of their base compensation. Accepting the agreement improves the relationship of the employee with the company. They foster a long-term relationship with the company. . They also gain the trust of their employees, and their loyalty gets demonstrated. Thus, the employee’s general value gets publicly boosted.

2. Benefits For Employers

This bonus helps the employer to retain their valuable employer. Retaining an old employee for a very long time helps the company have a good cross-training opportunity before the employee leaves. Old employees support in specific aspects and help to complete unique projects. The additional bonus also motivates the employee to give more output to meet the criteria of the additional bonus. The old employees can focus on specialized knowledge to help their company. Lastly, it may cut the net expense required to hire a new employee.

Is Retention Bonus Taxable?

According to the Internal Revenue Standards (IRS), employee retention bonuses are taxable because they fall under the supplementary wage category. Therefore, they are an additional compensation given to the employees. Taxes can be paid either by percentage or aggregate method.

Countries like the United States, Australia, England, and India have levied a tax on bonuses. As per the percentage method, bonuses get taxed at a flat fee of 22%. If the bonus is more than 1 million, the tax rate would be 37% or that year’s highest income tax percent. For example, if the bonus is $2.3 million, $2 million will get taxed at 37% and 22% for the rest ($30000). In contrast, the aggregate method allows individuals to combine the bonus with the employee’s salary. The tax rate will depend on the total amount submitted to the IRS.

Frequently Asked Questions (FAQs)

1. Is the retention bonus paid every year?

It depends upon the companies as many different retention schemes exist. Most companies pay at the end of the year or after 3-5 years. However, if they pay at the end of the year, it might be considered a part of the Cost to Company (CTC).

2. Who is eligible for the aged care retention bonus?

Aged care workers who have delivered their services face-to-face and not telehealth can apply for a retention scheme. For example, dressing, hygiene and grooming, showering, feeding, and similar things. Per this scheme, they will receive a bonus of $400 employed on or after February 28, 2022.

3. How to reject a retention bonus?

Following is the way through which one can reject a bonus:
– Understand self-wants (what are the reasons for rejecting them).
– Make your decision.
– Talk to the concerned employer about the decision.

4. Is a retention bonus a good thing?

It depends on the intentions of the employer and employee. Sometimes, employees might get a negative idea that they are being brought rather than valued. While just focusing on a few employees, others might feel disheartened. Employees sometimes leave because of work culture and get compensated with a bonus.

This has been a guide to What is Retention Bonus and its meaning. Here, we explain its examples, taxation, and benefits and compare it with a sign-on bonus. You may also find some useful articles here:

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