The retention bonus: a look at the pros and cons

If you’re a top performer in your company, your employer may offer you a retention bonus as an incentive to remain in your position. Sounds pretty good, right? However, this bonus comes with stipulations, including a formal agreement to stay with the company for a specified period of time. While it can make financial sense to accept a retention bonus, there are other factors to consider, including your job satisfaction and long-term career goals.

This guide will provide an in-depth look on:

• The meaning of a retention bonus

• Elements of a retention bonus agreement

• The tax implications of this bonus

• The benefits and drawbacks of receiving this bonus

What is a retention bonus?

A retention bonus is a financial incentive offered to an employee to get them to stay with a company. It’s usually a one-time payment, though some companies may pay retention bonuses in installments. The amount of the bonus can vary, but it commonly ranges from 10% to 25% of an employee’s base salary.

Companies may offer retention bonuses because they want to keep their best employees from leaving to work for competitors. Another reason is they’re going through a critical business period, such as a merger, acquisition, or major project. Finally, if they believe an essential employee may be looking for a new job, they’ll want to give the employee a reason to stay.

Elements of a retention bonus agreement

Retention bonuses are a contract outlining the period the employee will stay with the company in exchange for the bonus. 

Common elements of this contract include:

• Employment status. The employment status outlines the date, often called the vesting date, that you must be working at the company to receive the bonus.

• Financial terms. This is the amount of the bonus you will receive.

• Financial health. This term is a disclaimer that the company must be solvent and meet specific liquidity requirements to issue the bonus payment.

• Reimbursement agreement. If you’ll receive your bonus in installments, this condition specifies you must reimburse payments if you leave the company before the final installment.

• Non-disclosure agreement. This condition prohibits you from disclosing details about the retention bonus to competitors or external parties.

• Signature. You and your employer will both need to sign the agreement to make it legally binding.

Do you have to pay taxes on a retention bonus?

A retention bonus is taxed. So, if you receive one, you’ll need to report it when you file your yearly tax return. That’s because the IRS considers bonuses to be supplemental income, or income you receive in addition to your regular pay.

There are two ways taxes can be applied to a retention bonus: the percentage method or the aggregate method. The tax method to use depends on how much you receive and how your employer issues the payment. If you’re unsure how to report your retention bonus, consult with an accountant or advisor when filing your return.

3 Pros of retention bonuses for employees

For many employees, retention bonuses can be a welcome source of additional income and a measurement of their value to an organization. 

Three benefits of a retention bonus include:

1. Financial incentive

While money isn’t everything, a retention bonus can be a significant boost to your finances. You can put the payment toward an emergency fund, a major expense, or your savings.

2. Morale boost

When your employer offers a retention bonus, it shows you how much they value you. They’ve identified you as a top performer. Most companies only offer retention bonuses to select employees, which can make it an extremely rewarding incentive.

3. Job security

Retention bonuses offer a guarantee of employment for a specific period. During a recession and economic uncertainty, this job security can be a major stress-reliever. Feeling valued and receiving a financial boost is great, but having guaranteed job security can be priceless.

3 Cons of retention bonuses

While a retention bonus offers many benefits, it can also come with some disadvantages. When deciding whether to accept this bonus, consider these three potential drawbacks:

1. Contractual agreement to stay

When you accept a retention bonus, you’re essentially locking yourself into an agreement to stay with the company for a set period. If you get a desirable job opportunity during that time, you’ll have to let it pass or risk paying back the bonus. As a result, you may feel frustrated and stifled in your role.

2. Workplace conflict

If your co-workers discover you’ve received a retention bonus and they haven’t, it may cause tension. Friction and discontent could lead to a potentially toxic work environment.

3. Buying loyalty

If you receive a retention bonus when you hand in your letter of resignation, you may think it’s a knee-jerk reaction to prevent you from leaving. In other words, it can feel like they’re buying your loyalty, rather than recognizing your strong performance and valuable skills.

Should you accept a retention bonus?

Ultimately, you’re the only one who can decide whether to accept a retention bonus from your current employer. Some factors to consider as you make your decision include your job satisfaction and the enjoyment you get from your work. The company culture and your career goals play a part as does the current job market in your chosen industry.

If you enjoy your job and want to remain with the company, it makes sense to accept a retention bonus if your employer offers it. Remember, you have the power to negotiate the bonus if you feel like it’s too low. You can also ask for different terms if your employer won’t offer more money. For example, maybe you can negotiate an early release from the vesting period if you deliver the project ahead of schedule.

Receiving a promotion can be an exciting step in your career, and there are a lot of factors to consider. If you’re unsure how to get there, Career.io’s Pathway to Promotion tool can be just what you need to climb the corporate ladder. 

Key takeaways

1. A retention bonus is a monetary incentive to get an employee to stay with an organization during a critical business period.

2. Key parts of a retention bonus agreement often include employment, financial, and reimbursement terms.

3. Weighing the pros and cons of a retention bonus agreement can help you decide whether to accept the offer.