Definition
A retention bonus is an incentive offered to a key employee by the management of a company to retain them during a particularly critical business cycle. It is typically a one-time payment made to the employee and is usually substantial. The bonus is intended to keep the employee working at the organization for a certain period of time.
Key Takeaways
- A retention bonus is a financial incentive offered by an employer to a valuable employee to stay with the company during a critical business cycle. This bonus is to encourage the employee to stay through a rough patch or a period of business transition.
- The retention bonuses are usually a one-time payment and given at the end of the period. They are typically calculated based on the salary of the employee – it can range from 10% to 25% of the annual salary, but can go higher depending on the importance of the role and the desperation of the company to retain that employee.
- Retention bonuses are mutually beneficial, as they ensure continuity for the company and provide additional compensation for employees. They are particularly common in industries experiencing mergers or acquisitions, where attrition rates can be high.
Importance
A retention bonus is a crucial financial instrument used by companies to maintain key employees during periods of transition or uncertainty.
This could be such situations as a merger, acquisition, or a significant project where the company needs to ensure the availability of competent staff to run operations smoothly.
The bonus acts as an incentive that encourages key employees to remain with the company for a particular period, ensuring continuity and stability.
By preventing employee turnover at critical times, it helps to reduce recruitment costs, safeguard intellectual capital, guarantee project continuity, and minimize disruptions.
Hence, retention bonuses are significant in managing human resources, especially during challenging times.
Explanation
The purpose of a retention bonus is fundamentally to ensure key employees remain within a company for a specific period of time, especially during critical business periods or organizational changes. It is a special payment or incentive offered by the employer to motivate and retain top performers or highly skilled workers.
Examples of circumstances where a retention bonus may come into play could be in instances such as mergers, acquisitions, or other significant company events that may risk losing valued employees. Retention bonuses are essentially used as a safeguarding tool to minimize disruption and maintain stability within a company by retaining indispensable personnel.
Such bonuses usually amount to a percentage of the employee’s regular salary and are generally paid out after a specific tenure or at the completion of a project. Employers employ this tactic as it can be more affordable and efficient to retain talented employees through bonuses, rather than hiring and training new staff members.
Examples of Retention Bonus
Company Mergers and Acquisitions: When Company A decides to acquire or merge with Company B, employees of Company B might be worried about their job security and might start looking for new opportunities. In this case, Company A might offer a retention bonus to key employees in order to encourage them to stay through the transition phase. For example, when tech giant Microsoft acquired LinkedIn for $
2 billion in 2016, retention bonuses were likely offered to retain key LinkedIn executives and employees throughout the merger process.
Project Completion: Retention bonuses can also be used to incentivize employees to complete a crucial project. For example, a construction company might be contracted to build a large commercial mall. They may offer their project leader and key team members a retention bonus in order to ensure they remain on the project until it has been fully completed.
Challenging Financial Situations: If a company is going through a difficult financial round, they may use a retention bonus to keep their top employees who may be considering leaving due to the instability. For instance, during the financial crisis of 2008-2009, AIG (American International Group Inc.), an insurance corporation which was significantly affected, controversially paid out $165 million in retention bonuses to executives and staff members. Despite the negative public sentiment, the aim was to ensure the stability of operations and prevent mass employee exit during the crisis.
FAQs about Retention Bonus
What is a Retention Bonus?
A retention bonus is a financial incentive offered by a company to a valuable employee to stay with the company, especially during a critical period. The goal of this bonus is to keep key employees from leaving the company for a predetermined period.
When is a Retention Bonus typically paid out?
A retention bonus is usually paid out after a set period that both the employer and the employee agree on. For example, this could be after an important project is completed or after a certain milestone is reached within the company.
Is a Retention Bonus taxable?
Yes, a retention bonus is considered taxable income. Employees will need to report their bonus as income when they file their tax returns.
What’s the difference between a Retention Bonus and a Signing Bonus?
A retention bonus is given to retain current employees during times of uncertainty or change nor during a special project, while a signing bonus is given to a new employee as part of the hiring process to encourage them to accept the position.
Related Entrepreneurship Terms
- Employee Retention: This term refers to the ability of a company to retain its employees. Retention bonuses are often used as a strategy to improve employee retention.
- Severance Package: A severance package is a group of optional benefits granted to employees who are being laid off or are choosing to leave the company. Like a retention bonus, this package could be offered to persuade a valuable employee to remain with the company during a merger or take-over.
- Golden Handshake: This is a large payment or other financial compensation agreed to be paid to a senior executive upon severance from a company. It’s essentially a type of retention bonus commonly offered to executives.
- Sign-on Bonus: This is a monetary incentive offered by a company to attract top talent to the organization. Unlike a retention bonus, a sign-on bonus is given at the start of employment with the company.
- Vesting Schedule: This term refers to the set times at which an employee becomes eligible to receive certain employer-provided benefits, including retention bonuses, matching contributions to retirement plans, and stock options.
Sources for More Information
- Investopedia: Comprehensive resource for finance and investment terminologies, including a detailed article on Retention Bonus.
- Corporate Finance Institute (CFI): Professional training and certification provider specializing in financial modeling, valuation, and other financial skills, including resources on Retention Bonus.
- Society for Human Resource Management (SHRM): Provides resources on how HR deals with retention bonuses and other employee compensation strategies.
- Forbes: A leading source for reliable news and updated analysis on personal finance, including original articles addressing the implications of Retention Bonus.
