Sometimes, businesses need a tool to encourage talented employees to stay with them. A retention bonus is one of those tools.
Retention bonuses can entice or motivate key employees to stay with the company. But do these incentives always work? And are retention bonuses worthy investments for businesses?
What is a Retention Bonus?
Retention bonuses, otherwise known as ERBs, stay pay or retention package, is a tool used by businesses to attract or keep talent within the company. It is a lump sum of money that ranges from 10 percent to 25 percent of an employee’s base pay. This incentive, which is meant to prevent an employee from leaving their position, is usually a one-time payment.
Eighty-one percent of the biggest companies with more than 20,000 employees use retention bonuses. Businesses across all industries generally offer retention pay during a stressful times for the company, such as merger acquisition, critical periods of production or during a large project. In recent years, this form of incentive has grown in popularity as cases of corporate poaching have increased.
Understanding the Need for Retention Bonuses
Now that you know what a retention bonus is, it’s time to answer the next question: why do they matter?
When a company is going through a difficult or disruptive period of change, it offers financial incentives to key employees and senior executives to motivate them to stay with the business until everything is stable.
For example, a business that is shutting down a project or department will offer retention pays to its best employees to ensure that it has stable manpower to see the project or department through to the end.
Using ERBs as a retention tool improves the overall employee experience in your company. When you entice key players to stay with the business, this positively impacts their Intent to Stay (ITS), which is a key indicator that measures the probability of an employee staying with you.
With a retention bonus, you improve employee experience, as well as benefit from the following:
- Employees that feel more valued. Employees offered retention bonuses feel more appreciated. The business is declaring that their skills and work are valuable to them and they want to keep these people on board.
- Better productivity. Receiving a monetary lump sum encourages employees to be more involved and productive. A retention bonus ensures them that they can expect better incentives for their hard work.
- Better sales. When employees are productive, they will work harder. This can lead to more services or products sold.
- Improved employee loyalty. Happier and more satisfied employees are highly likely to recommend your brand to other people.
When Do You Use a Retention Bonus?
So, when is a retention bonus a helpful tool for a company? Consider the following reasons:
- The company is going through tough times or a big change (acquisition or merger). During uncertain times, it’s tempting for a key player to look elsewhere. A retention bonus encourages faith and loyalty in the company. According to the Bureau of Labor Statistics (BLS), 48 percent of surveyed employees said a bonus would encourage them to stay
- An employee has the skills needed by the company. Businesses need the best talent to keep their company successful. They need to make these people stay since finding good talent and training them can consume time and resources.
- The company wants to prevent poaching by competitors. In a competitive market, replacing the best people in the business can be difficult. When you find top talent, keep them from applying to other companies.
- The company wants to improve its negotiations. When the business wants to attract quality employees, retention pay may act as an enticing sign-on bonus during your negotiations.
- Retention bonuses keep employee morale high. When talented people leave, this will impact the people they leave behind (aka their team). Businesses can keep employee morale high by keeping employees with a retention bonus.
Who is Eligible for Retention Bonus?
Retention bonuses are offered to senior executives or key employees needed by the company to establish stability or to finish a project. The bonus can also be offered to employees who have completed training or obtained new skills that are vital to the operations of the business. A retention pay ensures that they won’t take their skills elsewhere.
Most businesses prefer to offer a retention bonus instead of a salary increase when they don’t have enough funds to commit to a permanent salary raise.
How to Set Up Your Company’s Retention Bonus Policy?
Retention bonuses aren’t part of an employee’s salary. Instead, it’s considered a supplemental wage, which is still considered a form of income by the IRS. Therefore, businesses need to know the tax implications for their team. The income from retention pays would be part of your employee’s annual taxes.
There are two ways how taxes will be applied to the bonus:
- Percentage method. This method uses a tax rate of 25 percent as the standard. However, if the amount reaches a million dollars, a 39.6 percent tax rate will apply.
- Aggregate method. This method adds the retention bonus to the employee’s yearly salary. The new total amount is used to develop the tax rates and will be provided through the employee’s W-4 form.
As for the exact amount of the retention bonus, there are many factors to consider:
- The employee’s base salary
- The employee’s role
- The employee’s length of service
- Their retention period
- The impact of an employee’s departure to the business
- The amount of money available for a retention bonus
- The company’s financial situation
When it comes to the retention bonus agreement, you must be clear with the agreement. Be clear with the following:
- The value of the retention bonus (how it was calculated plus the factors considered)
- The retention period an employee is willing to stay with the company
- The tax method used by the employer, so the employee knows about their tax obligations
- Stipulations concerning the retention bonus. This includes the completion of a project or productivity goals
Is Retention Bonus a Good Thing?
There are countless debates concerning retention bonuses and if they’re worth a company’s time. Some naysayers consider retention pays as a form of ‘blackmail’ that discourages employees from staying. Others call it a ‘bribe’ that doesn’t guarantee a payoff. More naysayers insist that companies should invest in better employee training programs so they wouldn’t be scared of losing talents.
The effectiveness of a retention bonus depends on how well it was arranged. Properly applied, they can be investments in the stability and continuity of an organization. Retention pays aren’t always needed, but there are times when an offering is appropriate (e.g. when a company goes on sale). It also increases an employee’s value, which is a boost to their morale.
Whether your business can benefit from a retention bonus or not depends on your company’s needs and budget. Before you offer one, carefully assess your current state to make the most out of this investment.