We’re currently in the midst of something dubbed ‘The Great Resignation’. Employees worldwide, from North America to the UK, are quitting their jobs at a record pace, especially since they hold the leverage with employers offering higher salaries, envious perks and more opportunities than ever before.

The epidemic levels of people leaving their companies makes retention a real challenge. Businesses that aren’t focusing on retention and are happy to just hire new people are only racking up their own costs. 

Some studies show it costs more to hire a new employee than to retain one. That’s because the actual costs involve:

  • Recruiting: Advertising, interviewing, screening and hiring costs.
  • Onboarding: Training and management costs.
  • Lost productivity: The time it takes for a new employee to reach the productivity levels of the previous employee.

That’s not to mention the cultural impact, any errors they make, a lack of engagement and more. One way employers can overcome this issue is to offer existing employees a retention bonus. But what is a retention bonus? And how does it work?

What’s a Retention Bonus?

As a business, employers need something to entice their current workforce to stay with the company. Of course, nobody remains in one job forever, but they want to keep hold of their talented team and a retention bonus can convince employees to stay.

A retention bonus, retention pay or a retention package is essentially a lump sum of money businesses will pay to employees to remain with the organization for a certain period. It’s more than just a $50 bonus here and there, too. A retention bonus can be quite a sizeable amount, ranging between 10% to 25% of an employee’s base salary. The time an individual agrees to stay with the business also depends on the package.

Retention bonuses tend to be the norm in large companies — usually with 20,000+ employees on the books. Businesses in many industries have adopted this strategy, offering retention bonuses to key employees and top-level talent as a strategy to keep competitors from poaching their most valuable assets.

Some organizations have retention bonuses as standard and offer it as a perk. The longer an employee remains with the business, the more financial rewards they can gain. In other cases, companies tend to offer a retention bonus during stressful times or moments of impactful change, such as mergers, acquisitions, in the middle of vital projects and more.

How Does it Work?

First off, a retention bonus has nothing to do with an employee’s work performance. It ties directly to the length of service as an incentive for employees to stay with you. Usually, a company tends to draft up a contract stating how long the employee will remain with them in exchange for the retention bonus sum.

The length of stay is down for the company to decide as it’s based on the business needs, not the employee. However, it’s rarely an indefinite time, so there’s always a deadline or end date. Once an employee works to the period outlined in the contract, they need to receive their retention bonus either in one lump sum or divided over the period stated in the agreement.

Then there’s the actual sum of money. This amount depends on various factors, including the reason for offering a retention bonus in the first place, the salary competitors are offering and also the state of the company’s finances, as you can only provide what you can realistically afford — especially in a lump sum.

Providing a retention bonus is crucial in deciding how much to offer. If you want to stop valuable talent from joining the competition, then the salary the competitor is offering should contribute to the retention bonus total. If you need to keep employees during a critical project, then you need to consider how much extra time the individuals will need to work and the value of the project.

As stated, most companies offer an average retention bonus between 10-15% of an employee’s base salary but can reach 25% in some instances.

Is Retention Bonus Classed as Income?

Technically, yes. When an employee accepts a retention bonus, it has tax implications. Although it’s classed as a supplemental wage, it’s still classed as income and part of the total gross pay by the IRS. So, make sure it’s reported as income on yearly taxes.

A retention bonus can be taxed in two ways, too. Either using the aggregate tax method or the percentage tax method, but always speak to a finance or tax professional to ensure you report the correct figures regarding the retention bonus.

What Are the Benefits of a Retention Bonus?

Retention bonuses benefit both the company and employees, including:

  • Retain highly-trained and talented employees: Keeping talent is essential. A retention bonus ensures highly trained employees remain with you for longer and can share their knowledge with others.
    • Company loyalty: Once a contract is signed, employees are unlikely to leave before it, establishing loyalty.
    • Better consistency: When higher-ups and stakeholders see employers retaining talent, they remain bought into the business.
    • A reliable workforce: Whoever has signed the contract and sticks around during a challenging time can be considered reliable during a time of need.
    • A one-time payment: As a retention bonus is a one-time payment, it’s a foolproof way of incentivizing people to stay and rewarding them for their commitment without increasing salary costs.
    • Increased productivity: While not related to performance, a financial incentive can make individuals work harder.
  • Improved morale: When employees are offered a retention bonus, they feel valued and appreciated — this can have a domino effect on other benefits.

Final Thoughts

Offering a retention bonus is vital for an employer to consider and deciding whether to accept is a big decision if you’re the employee being offered one. If you’re the employer, consider whether it’s a worthwhile investment. If you’re the employee, determine if you should accept it or a different opportunity makes more sense, especially from salary, development and tax perspectives.

For more tips, tricks and advice to help you excel in your career, make sure to head over to our blog.

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