Retention bonuses are commonly used in the corporate world where there is high competition for key players.
What Is a Retention Bonus?
A retention bonus is a substantial sum of money paid to an employee. The value of these bonuses can range from 10% to 20% of an employee’s base pay. This is a one-time payment awarded in addition to the regular base salary of the employee. Depending on the agreement, the amount can be divided over a particular time period rather than given as a lump sum. These bonuses are beneficial to an employer. They are generally more cost-effective than an overall pay rise. They are usually used to encourage a valuable employee to stay motivated to remain within an organization. This type of bonus is generally only offered to a very small percentage of the workforce and are usually reserved for those in higher management or executive positions. If an employee is at risk of being headhunted by a competing firm, a retention bonus may encourage them to remain loyal to the company. Retention bonuses are used across a range of industries. However, they are more commonly used in larger companies and offered to high-level employees and those with specialized skills or knowledge.
How Do Retention Bonuses Work?
When Are They Used?
A retention bonus is a financial incentive. It encourages an employee who is at risk of resigning to remain with the company. Employees are chosen to receive a retention bonus based on their expert knowledge and talent. They are regarded as the highest skilled and most valued contributors to the organization. Retention bonuses may also be used when a high-level employee, such as a senior executive, is considering leaving the company. Receiving a one-off payment may encourage them to change their mind and remain loyal to the organization. They can also be used when an employee is at risk of being poached by another company. In highly competitive industries, this approach can be advantageous.
Are There Any Conditions?
Retention bonuses might also be referred to as a ‘retention package’. This is because the payment is often accompanied by an agreement or a contract. This agreement may state how long the employee is expected to remain with the company. It might also state when the bonus will be paid. Upon receipt of the bonus, that employee is expected to remain loyal to the company for a set amount of time. This period varies depending on the needs of the employer. However, without a contract, it is at the discretion of the employee if they do stay loyal and remain. For example, a set period might be after a particular project has been completed or after a period of change has been successfully navigated.
How Much Is Paid?
The value of the bonus may depend on how many years the employee has been in service. It could be a lump sum or a percentage of their salary. The amount paid as a retention bonus will also be affected by the company’s current budget and financial situation. These factors, as well as the rates of competing firms, are taken into account when deciding on the value of the bonus. Estimates of the average amount paid range between 10–20% of an individual’s base salary. However, management can increase or decrease this as appropriate depending on the particular situation. Often the amount paid is considered to be confidential information. This is why estimates vary. although retention bonuses can be significant sums of money for some employees. It is worth bearing in mind that the payment is defined as supplemental income, so it could be subject to tax implications. The value received must be reported on yearly tax declarations.
Which Companies Use Retention Bonuses?
Retention bonuses are most often used in large companies. Those with over 20,000 staff are more likely to award them. These larger companies have the finances to award large sums of money in an effort to retain their key staff. They are very rarely used for smaller companies, for example, those with fewer than 100 employees. This is due to the sizeable nature of the bonuses, which may not be affordable for smaller organizations, particularly during critical business periods when finances may be unstable.
Why Are Retention Bonuses Useful?
There are various ways that retention bonuses can be helpful. Here are some ways in which they can benefit an organization.
Demonstrate Targeted Generosity
Retention bonuses target specific individuals. This means they can be more effective than an overall salary uplift. These generous bonuses effectively reward an individual’s work ethic and company loyalty. They effectively value the unique contribution the person has made in the workplace. The payment is appreciated by staff, and the goal of retaining them in the company can be achieved.
Support Periods of Change
Retention bonuses can reward specific periods of time in a tailored way, for example, during a forecast period of instability for the business. Company mergers or acquisitions, for example, can be stressful situations. Employees might be considering whether to remain or move on to another organization. Implementing a retention bonus package is an effective financial incentive to use in the short term, particularly when long-term finances may be difficult to predict. It ensures that key staff remain in the company. Their skills can be vital in assisting the company through difficult periods. This means that the company can be stabilized to support the movement through these times.
Provide a Morale Boost
During difficult business periods, it is important to keep the morale of staff high. Situations such as mergers, problems with markets or organizational change will affect staff. Paying a retention bonus can show staff that their efforts are valued by the company. For employees who are motivated by financial rewards, this can be an effective technique. Such bonuses demonstrate to staff that their contributions are valued and appreciated by the company leaders. It can also be used to effectively encourage staff to remain with the company. They may be inspired to develop further skills to benefit the company.
Can Contain Stipulated Conditions
A retention package can stipulate exact conditions, for example, the particular duration a staff member is encouraged to remain in the organization without a longer-term commitment. It can be a useful way to demonstrate to all employees what standards they need to aim for if they wish to receive bonus pay. When employees understand what criteria bonuses are paid for, they can develop their skill set to be eligible for future opportunities. Another condition might be the payment schedule. The bonus amount could be paid as monthly installments rather than a one-off lump sum. It may also be stated that the bonus will be paid at the end of a given time period rather than immediately. This is useful when a business is navigating a difficult period and needs to retain key staff to assist with these changes.
Retain Valuable Staff
Keeping the most highly skilled individuals is beneficial to a company. It is costly to train new recruits. This means that retaining the more experienced staff can save costs in the long term. By rewarding certain staff, it can create a culture where work ethics are valued. This can motivate other employees and encourage greater productivity. It could also encourage employees to develop their skills and knowledge. The employee receiving the bonus would then act as a role model to other staff. This will keep skilled employees within the company and reduce the risk of losing key staff to competing businesses. Although they are designed to motivate, inspire and retain workers, they may not have the desired impact on the company. Here are some points to be aware of before awarding retention bonuses.
Negative Connotations
Employees might perceive the offer of a retention bonus as an attempt to buy their loyalty to the organization. In this case, they won’t feel as valued for their contributions. They may feel as if they are being ‘bought’ rather than intrinsically valued. The payment of retention bonuses might cause staff to worry about the fate of the company. It could be perceived as an act of desperation by a company to cling to their employees. This reduces employee confidence in the ability of the management team. If this occurs, the payment of retention bonuses will have the opposite effect and staff could leave pre-emptively.
Underlying Issues
Giving an employee a retention bonus might not address the fundamental reasons why they were considering leaving in the first place. For example, they may be unhappy as a result of management decisions, or perhaps they felt dissatisfied with the job and are looking for more of a challenge. In cases like this, the offer of money may not compensate them enough for their experience on the job. This could result in them leaving the company despite dangling the carrot of a retention bonus.
Employee Motivation
Considering the personality and motivations of employees will help you decide if a retention bonus is the best technique to retain the employee. If a staff member is motivated by money, then a retention bonus is a helpful way to encourage them to increase productivity. However, if job satisfaction is their prime motivator, a retention bonus may not be enough to encourage them to remain in the organization. A different persuasive technique could be used to better effect.
Workplace Environment
If some staff are in receipt of a retention bonus whilst others aren’t, life in the workplace could become difficult. Tensions could arise, and conflict may result between staff. This could create a stressful work environment that will negatively impact the workforce. Also, individuals who receive the bonus may become complacent. Their performance efforts may reduce and productivity decline. Those who did not get a bonus may feel undervalued and unappreciated by the company. This could create a negative attitude towards management.
Responding to the Offer of a Retention Bonus
Whether or not an employee accepts this type of bonus ultimately depends on their individual circumstances. A retention bonus is a sizeable payment. Given they are not awarded often, they demonstrate the company’s confidence in an employee’s skills, abilities and contribution. If an employee is happy with the direction the company is moving in, then remaining with the company could be a wise career choice. However, the current job market might offer comparable positions. If these are attractive, the employee might prefer to move on to a different organization if the salary is higher. Another consideration is the amount of tax that will be payable. It is wise to consult a finance professional before deciding whether to accept the offer of a retention bonus.
Final Thoughts
When contemplating retention bonuses, it is wise to weigh up the pros and cons of this decision. In some cases, this type of bonus can be a quick-fix solution. However, in more complex cases, other techniques may be better. Consider the likely impact on the individual receiving the bonus as well as the wider workforce. When a company has the available finances to support an employee, it can make good business sense to award a retention bonus. Considering the short-term effect, they can keep key players within a company who can assist through difficult business periods. However, there is ultimately no guarantee that they will prevent staff from leaving the organization long term. In this case, other solutions may be necessary alongside the payment of retention bonuses. Retention bonuses should not be considered as the go-to solution for every problematic period of the business. Using them sparingly and strategically will bring the most significant benefit.
