If you’ve been offered a retention bonus, you’re probably feeling really valued and grateful for a significant boost to your bank balance. These are all valid feelings as employers only usually offer retention bonuses to top-performers. However, pro’s usually come with con’s, so finding out exactly what you are getting into when you agree to a retention bonus is vital.
Retention bonuses help companies retain talented, experienced, and engaged employees by paying them a bonus so they don’t fly the nest for better horizons. Clearly, this can provide a competitive edge and ensure smooth business operations for the employer. But as an employee, you need to assess whether a retention bonus is the right move for you too.
In this article we have all the info you need to evaluate the pro’s and con’s of a retention bonus, including:
What is a retention bonus?
How does a retention bonus work?
What are the tax implications of a retention bonus?
Should you accept a retention bonus?
Pro’s of a retention bonus
Con’s of a retention bonus
How to negotiate a retention bonus
According to the US Bureau of Statistics, the number of people quitting their jobs reached an all time high in 2021, with quit rates (number of jobs quit as a percentage of total employment) peaking at 2.8 percent - the highest since 2001.
What is a retention bonus?
A retention bonus is a monetary reward paid to employees over and above their salary to incentivize them to stay with the company during a critical business period. This could occur during a notable business cycle, such as a merger or acquisition, relate to delivery of a major project, or involve supporting a period of significant product or service demand.
Retention bonuses are a contract, with the agreement outlining the period the employee will stay with the company in return for a specific amount of money. This, usually one-time or sometimes paid via installment deal, prevents the headache of a top employee deciding to leave at the worst possible time. Retention bonuses often equate to a significant amount of money, typically 10 to 25% of base pay (but sometimes a lot more).
How does a retention bonus work?
Companies who have identified top talent they wish to retain will wrap up their retention bonus offer in a formal agreement (often a contract). Every retention bonus agreement will be different, but most will have similar terms and conditions that the employee must agree to in order to receive the bonus. Here are some of the common elements you can expect to see:
Employment status. This will outline the specific period of time the employee will need to remain employed by the company in order to receive the bonus payment.
Bonus amount. The amount of bonus that will be paid either in a one-off, lump sum payment or distributed (vested) over a specific period of time.
Financial health. This term outlines that the company must be solvent and meet specific liquidity requirements for the bonus payment to be issued. Clearly, if the company is no longer operating, they won’t be issuing any bonus payments.
Reimbursement agreement. In the event of a bonus being paid via installments and the employee leaving the company prior to the final installment, the employee may be required to repay or reimburse previously received bonus payments.
Non-disclosure agreement. Employers won’t want any details of their retention bonus to be leaked to competitors or external parties. Non-disclosure agreements ensure employee confidentiality for the duration of the agreement.
Signature. An obvious requirement to make the agreement legally binding when signed by both the employee and employer.
Other legal terms. Retention bonus agreements may also include continued employment disclaimers (no guarantee of employment after the vesting period) or bonus assignment clauses (what happens in the event of a company merger or acquisition).
- Look out for red flag conditions in a retention bonus agreement. Is there a performance criteria with no legal repercussions? How long is the tie-in period? These will be strong indicators to politely decline the offer.
- Be blinded by the money. While a retention bonus can provide a quick cash infusion, it’s not going to ensure job satisfaction. Weigh up the short-term gain against your long-term career goals.
What are the tax implications of a retention bonus?
The IRS considers all bonuses, including retention bonuses, as supplemental income so there will be tax implications if you accept a retention bonus. Supplemental income is defined as any compensation paid over and above the employee’s regular wage.
There are two ways taxes can be applied to a retention bonus: the percentage method or the aggregate method. The percentage method involves total bonuses for the year being taxed at a 22 percent flat rate if under $1 million (anything over $1 million is taxed at 37 percent).
The aggregate method involves your bonus and regular income being combined on one paycheck, then your payroll department will withhold taxes on the entire aggregated payment at the same rate (this rate depends on your filing status and W4 information).
Should you accept a retention bonus?
If you’re wondering whether or not to accept a retention bonus, it’s a good idea to take a step back and take stock of your current work situation in the first instance.
Do you want to stay with the company? Are you enjoying the work? If the retention bonus will be attached to a specific project over a designated period of time, think about how comfortable you feel in performing your assigned project duties.
If you’re happy with the company culture, enjoying your work and feeling motivated, it makes sense to say yes to the retention bonus offer. Conversely, if you feel that you would like to switch things up career wise in the next six months and a retention bonus would tie your hands in terms of searching for a new role, then it’s probably best to politely decline.
Another factor to think about is the current job market in your chosen industry. Would it be easy to secure another job? Would another job offer the opportunity for progression? Researching the current demand in your industry for your specific skill set should give you a good indication of whether it’s better to jump ship or stay put.
Top-rated employers will ensure they clearly communicate the criteria and expectations of the retention bonus program, provide and encourage regular feedback, and deliver payouts promptly and fairly. If they don’t practice or commit to these factors, it can be a major red flag.
Pro’s of retention bonuses
Retention bonuses offer great benefits to both employers and employees so it makes sense that they are increasing in popularity. Here are some of the pro’s of retention bonuses from an employees perspective:
Financial incentive
Retained employees benefit from a significant financial boost, ranging from 10 to 25 percent of base salary (if not more) for simply staying with the company. Although this is a one-time payment and money isn’t everything, it’s still a huge factor to consider when deciding whether to accept a retention bonus.
Morale boost
Having your employer identify you as one of the top-performing employees is extremely flattering and tells you how much you are valued by the company. Retention bonuses are usually only offered to a select few, making this recognition extremely motivating, not only to the recipient but the wider team who will want to try and secure this reward in the future.
Job security
Retention bonuses offer a guarantee of employment, which during times of recession and economic uncertainty, can be a major stress-reliever. Feeling valued and receiving a financial boost is great, but having guaranteed job security when many others don’t can be priceless.
Con’s of retention bonuses
Looking through the other side of the lens, there are disadvantages that you should factor in when deciding whether or not to accept a retention bonus. Here are some of the con’s to accepting a retention bonus before considering all your options:
Missing out on exciting job opportunities
When you accept a retention bonus, you’re essentially locking yourself into an agreement to stay with the company for a predetermined period of time. This means if a desirable job opportunity crops us during this time, you will have to let it pass, as you are bound by the retention bonus contract. As a result, you may feel frustrated and stifled in your role.
Workplace conflict
The fact that a select few of employees have been offered a retention bonus, and others have not, is likely to not sit well with some people and quickly work its way through the grapevine. This is bound to cause some friction, negativity, and discontent, which could lead to a potentially toxic and unpleasant work environment.
Buying loyalty
If you receive a retention bonus when you hand in your letter of resignation, you may think this is a knee-jerk reaction from the employer in order to prevent you from leaving the company. This can make you feel less valued. Essentially this may feel more like buying your loyalty rather than recognition for your strong performance.
How to negotiate your retention bonus
Ready to sign your retention bonus agreement? Before you do, it’s a good idea to take some time to review the proposed agreement fully to ensure it meets your requirements. After all, it may be worth doing some negotiating to ensure that both parties achieve a fair outcome.
Remember that the ball is in your court, as essentially the employer wants you to remain with the company, so there is no harm in negotiating to your best advantage. Follow these steps to tackle the negotiation process:
1. Find out how the bonus amount has been calculated. Is this based on your performance to date, your tenure with the company, or your perceived value to the organization? This will help you assess whether this is a fair offer or if there is room for improvement.
2. Fully review the initial bonus offer and make sure you understand all the terms and conditions attached to the agreement. Once you sign, it’s a legally binding document so make sure you understand it fully or seek some legal advice if you feel unsure.
3. Negotiate based on what you want out of the situation. If you feel the bonus amount is too low, then don’t be afraid to ask for what you deserve (but be realistic too). Maybe you can negotiate an early release from the retention period if you deliver the project ahead of schedule or factor in hybrid-working if this would be a plus for your work-life balance.
If you decide to decline a retention bonus offer as you’re ready for a new start, check out Careerio’s Job Search finder to help you take the next step in your career.
Key takeaways
Retention bonuses are a monetary reward to incentivise an employer to stay with the organization during a critical business period.
Key terms of a retention bonus may include employment terms, non-disclosure agreements, reimbursement terms, and bonus payment terms.
Looking at the pro’s and con’s of a retention bonus agreement will help you make the right decision in terms of whether to accept or decline the offer.
Don’t be afraid to negotiate your retention bonus. Consider what is important to you in terms of key deal-breakers and make sure you get what you want out of the situation.
