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Retention Bonus: Definition and Example

by / ⠀Finance / August 2, 2022
retention bonus money

Have you ever heard of a retention bonus? You may have come across that term as an employee, employer, or just in day-to-day life. But, do you know what it is?

What is a Retention Bonus?

According to the Cambridge Dictionary website, a retention bonus is:

  • An extra payment that is given to an employee as a way of persuading them not to leave the company, especially at a time when the company is experiencing big changes.

Also known as retention pay or a retention package, it can be a surefire way of retaining an employee.

Now here is something important to understand. A retention bonus has no link to the performance of an employee, but rather as an incentive to keep the employee at the job. A retention bonus is usually around 10-25% of the employee’s pay. When the employee agrees to the retention bonus, it also determines how much the bonus will be.

A retention bonus is not a part of every job and is usually for large businesses with well over 20,000 workers. Also, a retention bonus tends to also be for important or top-level employees. As stated before, the retention bonus is usually for when the company is going through changes such as a company being merged or bought. Or perhaps it was for a big project. But, many also give these bonuses as they fear that their best employees will be poached by the competition.

How Does the Retention Bonus Work?

Companies will usually create a contract to inform the employee just how long they will be working for them. Then, as part of the deal, the employee will be with the business for the retention bonus. Of course the tenure the worker will be there for depends on the job and what the company needs. The employee will also receive the bonus either all at once or divided up over time.

The amount in the bonus is determined through details such as the pay of competition, company finance, and other factors. An employer has to be the one to come up with the amount of the bonus and why they are giving them the bonus. Items like competitors, the worth of a project, and such give the employer more info.

Is It Taxable?

The retention bonus, if accepted does come with the responsibility of taxes. A retention bonus is known as something called a supplemental wage. These types of wages are known to be a type of compensation for an employee.

A retention bonus is not part of the employee’s salary, but it is still part of the income that they receive. In this way, the employee needs to mention it when filling out taxes for the IRS.

A retention bonus can be used with either the percentage tax or the aggregate tax method. With the aggregate method, it can make an increase in tax rate rather than the other method. However, this all depends on the amount received. One good idea would be to make contact with a professional in the tax world for any assistance on this matter.

The Benefits of a Bonus

The retention bonus is a smart instrument to keep a company’s most important workers in their employment. It can also be a win-win situation. The employer keeps their employee and the employee can receive the following:

  • An increase in work productivity. Employees will work harder because they got the bonus despite retention bonuses are not related to a worker’s execution of the job.
  • This is a sure way of retaining an employee, hence the name. This can help a worker stay longer due to loyalty.
  • An increase in morale due to the employee feeling valued at the business.
  • The retention bonus is helpful when the company goes through dramatic shifts. It reassures shareholders that people aren’t abandoning ship and that there is a loyal workforce. Remember, consistency is key.
  • While the it is usually just a one-time payment, it does help employees. You see, when an employee receives a bonus, it makes them want to stay and work for the company. This is an important crutch to have when the business is going through a transition.
  • Finally, while the bonus does keep the employees happy and motivated, it also helps the business. Why? because then the company has to worry less about new employees and they get to keep their already well-trained employees.

Conclusion

In all, the retention bonus is an important tool to have in your arsenal as an entrepreneur and as a boss. There are many perks to the retention bonus for both parties involved. The company gets to retain high-level and highly-trained employees who are going to be working harder with good morale. While the employee is happy to take home a good bonus to their family and use it on themselves while also feeling valued.

About The Author

Tristan Anderson

Hello! My name is Tristan Anderson and I live in Manhattan, Kansas. I enjoy being in nature and animals. I am also a huge geek who loves Star Wars and has a growing collection.

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