What is a retention bonus?

A retention bonus is a financial incentive offered to employees to retain them in the company. This amount comes with the condition that the employee will continue working for the company for a specified period. Retention bonuses are a tool to retain critical talent, during organizational transitions, such as mergers, acquisitions, or project completions, or to reduce turnover in competitive job markets.

What is the purpose of a retention bonus?

A retention bonus is an excellent tool to:

• Retain talent: It motivates employees looking for other opportunities to stay back
• Reduce risks: It helps to reduce the risk of losing key talent during uncertain times, such as mergers, acquisitions, or restructuring
• Assure business continuity: It ensures the availability of key employees required for a certain period to continue projects or business as usual.

Also read: Learn more proven strategies to retain employees and reduce attrition.

How does a retention bonus work?

A retention bonus is a one-time financial incentive offered to employees to encourage them to stay with the company through a specific (critical) period. It’s not part of the regular salary or annual bonuses. Instead, it’s tied to a specific timeframe or milestone and paid only if the employee stays through that commitment.

From a planning perspective, retention bonuses are a tool in an organization’s compensation strategy to reduce turnover risk and stabilize key roles.

For HR, retention bonuses are part of proactive compensation planning. You’ll want to identify high-risk roles, estimate the cost of turnover, and flag key people for retention offers. Budgeting for these ahead of time, especially during headcount or M&A planning, signals to leadership that you’re thinking strategically about workforce stability.

Read more: How to Create a Compensation Plan: A Step-by-Step Guide.

It’s worth noting that retention bonuses are rarely efficient as a strategy for retaining employees who have handed in their resignations. If an employee has already handed in their resignation:

• A surprise retention bonus may feel reactive or transactional
• It can damage trust if the employee wonders, “Why now?”
• If accepted, the employee may still leave soon after (which can also demoralize teams).

Do retention bonuses have to be paid back in cases of workers quitting?

Yes, retention bonuses must be paid back, provided the retention agreement has a clawback provision, and the employee leaves the organization voluntarily before the agreed-upon retention period. A clawback provision clause makes an employee legally liable to return full or part of the retention bonus if they do not meet the terms and conditions of the agreement.

When should an organization consider offering a retention bonus?

Retention bonuses are helpful during periods of significant organizational changes or market fluctuations. You can specifically plan for offering retention bonuses in situations such as:

1. Major company restructuring: Whenever companies go through major restructuring or mergers and acquisitions, employees feel uncertain about their roles and start looking for another job. At this time, a retention bonus helps retain key talent.
2. Crucial projects: When crucial projects are ongoing, and losing key resources can lead to business risks, a retention bonus can become a tool for maintaining operational continuity.
3. Competitive job market: In a tight labor market where skilled workers are in high demand, retention bonuses can help organizations stay competitive and prevent valuable employees from being poached by rivals.
4. High turnover: For organizations experiencing high turnover rates, offering retention bonuses to flight risk employees (either identified through engagement surveys, eNPS ratings, or manager assessments through their direct engagement with their team members) can help stabilize the workforce.
5. Succession planning gaps: In cases of sudden departures of C-suite or senior leaders, with no selected and trained successors, a retention bonus can incentivize the most promising candidates to remain in the organization and participate in succession training programs.
6. After training attrition: After considerable investment in training (including reskilling and upskilling), providing a retention bonus incentivizes participants to remain and apply those newly acquired skills in your organization.

Is a retention bonus the same as severance pay?

No, a retention bonus is offered to retain employees for a specific period. On the other hand, severance pay may be provided to employees at the end of their employment.

Is a retention bonus a one-time thing?

Yes, a retention bonus is usually a one-time offer to incentivize employees to stay in the company. Organizations mainly provide such bonuses to ensure the business is not hit by losing key talent.

What is the difference between a performance bonus and a retention bonus?

Both performance and retention bonuses are financial rewards with an entirely different purpose. Performance bonuses are routinely offered as pay raises or one-time bonuses, typically as part of performance reviews. On the other hand, retention bonuses are one-time offers given to employees to retain them. These are aimed at retaining critical talent during crucial periods to ensure the business runs as usual.

Also read: Learn effective ways to link performance appraisal with compensation.

What are common retention bonus examples?

Some common ways in which you can pay retention bonuses to employees are:

1. Lump sum: A lump sum payment is a one-time payment made to employees after they complete an agreed-upon duration in the company. For instance, you can offer an employee a $50000 lump sum to stay for another two years in the company, and they will receive the amount after completing the second year.
2. Installment: Another option is to divide the retention bonus payment into smaller installments. For instance, if the retention commitment is two years, the employee can receive 25% after six months, another 25% after twelve months, and the last 50% after two years of employment.
3. Deferred bonuses: Deferred bonuses are another way to divide retention bonuses. You pay a certain amount upfront and the remainder after a specific milestone. For instance, an engineering lead who is a key resource for completing an upcoming module is planning to resign. You can offer him a $40000 bonus upfront to stay, and the remaining $40000 after the project is completed.
4. Tiered or staggered bonuses: These bonuses are designed to motivate employees to stay longer with the company as their employment duration increases. For instance, an employee can receive 20% of their salary as a bonus for staying one year, 25% for the second year, and 30% for the third year.
5. Stock options: Stock options are excellent for retaining employees who are invested in the long-term growth of a company (especially in start-ups). You can provide stock options with a vesting schedule matching the retention period as a bonus. For example, if you want senior leaders to stay for three years, they can cash out the stock only after three years.

Read more: 3 Types of Compensation: Choose the Best One for Your Team.

Who decides who should get a retention bonus?

Senior management, department heads, and HR work together to decide who will get a retention bonus based on the following factors:

• Individual contribution: Department heads look at ground-level project requirements and define critical resources for projects
• Market trends: HR understands market conditions and the possibility of refilling the role
• Business requirements: Senior management decides on project/resource priority based on business objectives and allocated budgets for retention bonuses.

What factors should HR or managers consider when deciding the amount of a retention bonus?

HR and managers need to consider below factors for determining the amount of a retention bonus:

1. Employee’s role and contribution: What is the employee’s current role, and are they contributing to any project that has a long-term impact on business growth?
2. Retention period: How long do you want to retain the employee? The longer the duration, the higher the retention bonus will be.
3. Company’s budget: How much of the budget can the company set aside for retention bonuses?
4. Current compensation: What is the employee’s current compensation package, and is the retention bonus a significant add-on to that amount?
5. Industry standards: Is it easy to fill back the role, and if not, what are the industry standards on compensation for that role? If you are hiring a replacement for that role, what would be the revised compensation and money spent on recruitment, onboarding, and training? You can offer a portion of that as a retention bonus.

How should organizations structure retention bonuses?

Organizations can structure retention bonuses in three ways to suit the organization’s needs as well as the market demands:

1. Lump-sum payment: The employee receives the full bonus after completing the agreed retention period. This arrangement is useful for short-term retention needs during mergers and acquisitions and critical projects. For instance, if your company is going through a major merger and needs your product head for a smooth transition, you can offer them a retention bonus for staying a year ahead.
2. Milestone-based payments: This bonus is rolled out at mutually agreed-upon milestones, such as every six months or specific project phases. This is particularly helpful if a company runs critical projects or faces attrition in roles with a competitive talent market. For instance, suppose a senior data engineer has resigned, and hiring skilled data engineers is tough for various reasons. In that context, it makes sense to offer them milestone-based payments to keep them motivated to complete the entire retention period.
3. Staggered or tiered payments: These payment installments increase with the duration of employment. For instance, they could be 1X after the completion of the first year, 2X after the completion of the second, and multiplied further. This arrangement is useful for high-growth companies that see more value in longer employee retention and can provide bigger incentives down the line.

What is a typical retention bonus structure?

According to a recent retention study, retention bonuses are 30% for salaried employees, 50% for other senior leaders, and 75% to 100% of base salary for the C-suite, including the CEO. These bonuses are either paid as a lump sum towards the end of the agreed-upon retention period or paid in installments at certain milestones.

What is a typical retention bonus agreement?

A typical retention bonus agreement is a formal written document that outlines the terms and conditions of the bonus offered to the employee. It includes the amount, payment terms, retention period, and consequences of non-compliance (what happens if employees voluntarily exit before completing the retention period?)

What should be included in a retention bonus agreement​?

The key clauses to include in a retention bonus are:

1. Parties involved: The name and identification details of both employees and employer.
2. Bonus amount and payment schedule: How much amount will be provided as a retention bonus, and what is the payment schedule? For example, will the entire payment be rolled out after completing the retention period, or will there be installments paid out at different milestones?
3. Termination: What happens if a company terminates employment before the agreed-upon retention duration or the employee voluntarily exits? The employer may still have to pay a portion of the retention bonus if there is a termination at their end. On the other hand, if any employee resigns, they become obligated to repay the early installments of the retention bonus provided to them till that time.
4. Governing law: Which jurisdiction’s laws will drive the validity of agreements?

What legal considerations are involved in offering a retention bonus?

There are legal compliance requirements when offering retention bonuses, mainly:

1. Local labour laws: The terms of retention bonuses should not discriminate against any race, religion, gender, age, disability, or national origin and should adhere to local wage and hour laws.
2. Tax implications: Retention bonuses are taxable income, and organizations must adhere to tax laws when making these payments.
3. Potential legal disputes: There could be potential legal disputes on the retention bonuses, especially if the employer terminates the employee or the employee resigns during the retention period. However, HR and senior executives with legal counsel should get all these conditions jotted down in a solid retention bonus agreement to prevent future issues.

How can organizations communicate the retention bonus effectively to employees?

Clear communication is key to ensuring the retention bonus achieves its purpose. To maximize retention bonus benefits, HR should:

• Conduct a 1:1 meeting: This is to understand the employee’s requirements and negotiate the terms before even putting a seal on it
• Complete the paperwork: HR can release the agreement for signature once conditions are finalized
• Schedule regular notifications: Keep employees informed about the bonus program’s progress and payment dates according to the agreed-upon schedule.

What are some alternatives to retention bonuses?

A retention bonus is helpful but may not always be the best way to retain talent. Sometimes, it may be out of your budget, or that’s not even what the employee is looking for. Here are some other benefits or processes that might be more attractive to employees, depending on their expectations and the career or life stage they are in:

1. Flexible work arrangements: Are they at a stage of their life where remote work options or flexible schedules are needed to improve work-life balance?
2. Supportive internal or global mobility measures: Do they want to be shifted to another department or another location?
3. Faster promotion: Are they eligible for a promotion that has been delayed for whatever reason? Can it be expedited?
4. More career development opportunities: Do they want immediate upskilling opportunities for growth?
5. Increased compensation: Can they get an immediate merit raise based on their performance? Or is their salary below market standards and subject to revision?

Also read: How to use AI to build an engaged workforce and increase employee retention.

Compensate and retain your workforce with Deel

Deel HR offers a complete suite of tools to help you build an engaged workforce and manage compensation planning:

• Detailed onboarding: Offer your new hires comprehensive and structured onboarding so they start on the right foot
• Transparent career development: Define career paths and the expectations for each role to ensure role clarity and motivation for growth in your organization. Enable the development plan functionality so your people develop development plans, retaining them for the long-term in your company
• Advanced learning management: Offer access to learning courses and the possibility for your people to define their learning journeys
• Frequent feedback and performance reviews: Through comprehensive performance reviews from peers, managers, and direct reports, your people get holistic feedback for their growth. With frequent 1:1 calls with their manager, your people stay engaged and aligned with team and company priorities
• Smooth compensation management: Link performance to compensation to ensure high performers are fairly rewarded.

Get in touch to streamline compensation management and increase retention in your organization.