Retention Bonus Best Practices: A Guide for Employers

Organizations affected by workers leaving their jobs during the Great Resignation are seeking the best ways to maintain a full staff and reduce turnover. One option to do this is by offering an employee retention bonus. Continue reading to learn some recommendations for retention bonus best practices, including specific examples and benefits.

What is a Retention Bonus?

An employee retention bonus is a tool used to attract and retain workers within an organization. It is paid to an employee in exchange for staying with the company for a specified time.

These bonuses are lump-sum payments often split into more than one installment in exchange for the employee remaining with the organization and continuing to deliver high-quality work. For example, an employee who received a three-year retention bonus of $30,000 might receive a $10,000 payment at the end of each year, with the final $10,000 paid at the end of year three.

Benefits of Offering Employee Retention Bonuses

When offered a retention package, employees feel more valued, and their intent to stay (ITS) increases. When ITS increases:

• Productivity improves: An employee retention bonus encourages increased investment and productivity since the employee understands the reciprocal nature of the agreement.
• Worker loyalty and brand recognition strengthens: Improvement in workplace morale encourages employees to share their experience with others and recommend your organization to their connections, including potential new recruits.
• Sales increase: Employees who receive a retention bonus often work harder, which in turn can increase sales of services and products.

Circumstances for Offering Employee Retention Bonuses

There are two primary reasons employers offer retention incentives:

1. There is a need to attract and keep trained talent continually.
2. There is a desire to maintain business continuity and keep projects moving, even during times of uncertainty and difficulty.

Expanding on those two reasons, circumstances and examples for which an employer might offer an employee retention bonus include:

• Key staff skills need to be retained for business continuity.
• The business is going through a merger, acquisition, or challenging times and wants to avoid key employees looking elsewhere.
• There is a need to improve the company’s bargaining and negotiating power to hire talent in a competitive labor market.
• The employer wants to avoid its staff being poached by competitors.
• It is better for the business to manage cash flow with a one-time, lump-sum payment vs. increasing base salaries.

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Determining Retention Bonus Amounts

Retention bonus amounts often range from 10% to 25% of an employee’s annual base salary. Factors companies consider when determining retention incentives include:

• Base pay and role
• Length of service
• Retention timeframe requirements
• Consequences to the company if a potential departure were to occur
• Financial stability of the business

The reason you are giving a retention bonus will help determine the payment amount as well as the timing. For example, if you need to keep a key employee because their loss will significantly impact your company, the payment will be based on salary and the amount deemed necessary to keep them with the payouts occurring over the next several years. If your goal is to keep someone in a position through a merger or important project, then the payout timing will be based on the estimated end date.

Retention Bonus Agreements and Contracts

Each retention package you offer should include a retention bonus letter or agreement. Retention bonus agreements provide clarity about the retention payment and expectations and should include:

• The retention period the employee is agreeing to
• The retention amount and how the value was determined
• The tax implications of the employee receiving the retention bonus
• How the employee retention bonus will be delivered and the timing of payments
• The payment’s stipulations, including work productivity goals and employment terms
• The impact the retention bonus might have on other benefits, such as severance pay
• What will happen regarding the bonus if there is a significant change in the company (e.g., what will happen if a merger or acquisition were to occur)

These employee retention bonus best practices and recommendations will support you in taking a step toward attracting and retaining employees needed in your organization. For additional guidance on employer retention strategies and more, visit iHire’s Employer Resource Center.