What's a Retention Bonus? How Does it Work?

What is a retention bonus? Businesses can want a tool to encourage important workers to stay on board. Employee retention bonuses might encourage employees to stay with their company. The effectiveness of retention bonuses is influenced by a number of factors.

What is a retention bonus?

A retention bonus, also known as retention pay or a retention package, is a one-time payment made by a company to an employee who commits to staying with the company for a set period of time. Retention incentives are usually substantial sums of money, ranging from 10% to 25% of an employee's base compensation. The length of time the employee commits to staying with the company is determined by the package.

Large companies with over 20,000 workers are the most likely to provide retention bonuses. Retention incentives are offered by companies in all industries, generally to top-level or important personnel. Retention incentives are typically offered at a difficult moment for the company, such as a merger or acquisition, a major project, or a key period of production. Companies are increasingly using these incentives to deter competitors from recruiting valued personnel.

How does a retention bonus work?

Retention bonuses aren't based on how well you do your job. Rather, they serve as a motivator to stay with the company. In most cases, corporations construct a contract that specifies how long an employee will stay with the company in exchange for a bonus. The length of time an employee is expected to stay is determined by the company's demands, although it is rarely indefinite. Employees can choose to get their bonus in one single payment or over a certain length of time.

The size of the retention bonus is determined by a number of criteria, including the rationale for the incentive, rival wages, and the company's financial situation. The usual retention bonus is between 10-15% of an employee's base salary, but it can be as much as 25%.

To calculate the size of the retention incentive, employers must evaluate why they are offering it. If the aim is to keep the employee from going to work for a rival, the pay of the competition will factor into the retention incentive amount. If a company wishes to retain an employee for the duration of a difficult project, they should think about how much more hours the person will be asked to work as well as the project's total worth. A company must also evaluate how much money it has available to pay the employee in a single payment.

When companies offer a retention bonus, is it considered income?

Accepting a retention incentive as an employee has tax consequences. Bonuses for staying put are called supplementary pay. Any remuneration given in addition to an employee's normal salary is referred to as supplemental wages.

The IRS considers a retention bonus to be income and part of total gross compensation, even if it is not part of an employee's salary. As a result, you must record it as income on your annual taxes.

The aggregate tax technique or the percentage tax approach can be used to tax retention bonuses. The aggregate tax technique usually yields a higher tax rate than the percentage tax method, although this is depending on the specific data. When deciding how to manage your retention bonus, it's essential to seek advice from a tax specialist.

The entire retention bonus is included with your yearly pay under the aggregate tax method. This amount is then used to calculate the tax rate. Your tax rate is determined by the W-4 form.

The flat tax rate of 25% of the bonus is calculated using the percentage tax technique. The retention incentive is taxed at a rate of 39.6% if it exceeds one million dollars. If your retention incentive was 1.3 million dollars, for example, $300,000 would be taxed at 39.6% and one million dollars would be taxed at 25%.

Benefits of retention bonuses

Retention incentives can be an effective strategy for organizations trying to maintain important employees or top-level employees. Businesses can profit from retention bonuses in a variety of ways:

Productivity

Although retention bonuses are not directly linked to job performance, they can motivate employees to work more or produce more.

Loyalty

If an employee accepts a retention incentive and signs a contract committing to stay with the company, he or she is unlikely to quit before the term expires. This can assist a business in establishing long-term loyalty.

Reliability

Retention incentives can aid in the formation of a dependable group of employees during a difficult period for the business, such as a merger or a high-volume production push. As a result, overall earnings can improve since the company knows there will be people working.

Improved morale

When employees are awarded a retention incentive, they are likely to feel appreciated and valued by the company. With or without bonuses, high morale can go a long way toward increasing overall long-term retention.

Consistency

External stakeholders, such as investors, can value the retention of important personnel or top-level executives during a tough period for the company. Maintaining a stable staff might prevent investors from abandoning the company during a period of transformation.

One-time payment

A one-time payment is a retention bonus. This is a wonderful approach to encourage employees to stay with the company and reward them for their dedication while keeping overall pay expenses low. This is especially true when a company is going through a transformation.

Keeps trained/key employees

Employees who have recently finished training or continuing education might be offered retention bonuses to keep them from going to a rival. Retaining key employees is vital to business growth. Financial incentives can keep ensuring job satisfaction.

How to decide to accept a retention bonus

If your employer has awarded you a retention incentive, you are a valuable employee who has been recognized for your efforts. Your contributions and hard and soft talents are valued assets, and the company's leadership concluded that losing you as an employee would have a detrimental impact on overall productivity and profit. When deciding whether to sign a retention agreement or start negotiating, keep the following points in mind.

There are many possible benefits of offering retention bonuses and/or a financial incentive. Before accepting, consider the following:

The reasons for offering a bonus

Bonuses are given to employees for a variety of reasons. Take into account the deciding elements in your offer. A retention bonus can be offered by the company to retain excellent personnel during a period of change or to assure continuing success and prevent talented people from leaving to work for a competitor. Examine your feelings about the offer's explanations and decide if you agree with the company's driving elements or think the strategy is dubious. It's critical to weigh these elements in order to make the best selection and work with a reputable company.

Your impressions of the business and your own experience

Examine if your own beliefs and priorities still align with those of the organization where you work. Consider your previous interactions with the company and the leadership styles you've experienced. Job happiness is influenced by the corporate culture.

The present state of the job market in your field

Look for current job vacancies that match your present credentials and responsibilities. You can start by looking for jobs based on your work title. Determine the state of the job market and how easy it would be for you to obtain a position with equivalent income and responsibilities to your current one. Knowing your choices and whether or not your present wage is fair can help you make an informed decision about whether or not a retention incentive is suitable for you.

Your tax obligations

Bonuses for staying with a company are taxed. Your tax liability can differ from that of your yearly pay since these are additional wages. When deciding whether or not to take a retention incentive, keep the tax rate in mind. Your queries about the aggregate tax or percentage tax can be answered by a tax specialist. It can be more financially advantageous to request a raise rather than a bonus.

Seek advice from a tax professional if considered about this lump sum payment.

Your professional journey

The retention agreement will specify how long you will stay with the company. Consider how your decision to stay will affect your professional path and capacity to advance. Whether you want to move forward in the company, find out if there are any chances for you to do so and how a position change would affect your contract.

Common questions

Questions about bonuses.

What is a bonus?

A bonus is a monetary gift that exceeds the recipient's expectations. Organizations utilize incentive and performance bonuses to motivate and reward their staff. A bonus can incentivize employee performance on the job.

How do retention bonuses work?

A retention bonus is a one-time payment or award given to an employee in addition to their normal compensation as an incentive to retain them on the job. If an employer believes that a key employee is planning to leave for a rival, they can be paid a retention incentive to keep them.

Who can sign off on a retention bonus on behalf of the company?

Senior executives are the only ones who are able to sign-off on a one-time monetary incentive. Commonly, managers are part of the conversation. Though, executives approve the additional budget request.

What is a bonus agreement?

A stay bonus agreement, also known as a retention bonus agreement, is a written contract between a corporation and a key employee that incentivizes the person to stay with the company. During a transition time, this sort of agreement is frequently utilized to provide important workers with an incentive to stay with the company.

When will a retention bonus get offered and paid?

If a department is closing, for example, they could offer retention bonuses to the highest performers/most valuable employees in order to get them to stay.

The majority of retention incentive incentives are paid out three to twelve months after a transaction is closed. It might take 24 to 36 months for important workers who are crucial to long-term success. Stay bonus agreements can also include an acceleration clause that makes them due if the buyer terminates the employee's employment.

What amount can I expect with a retention bonus?

Retention incentives are usually substantial sums of money, ranging from 10% to 25% of an employee's base pay. The length of time the employee commits to staying with the company is determined by the package. Large companies with over 20,000 workers are the most likely to provide retention bonuses.