Retention Bonus | Meaning and Definition

What is a Retention bonus?

A retention bonus is a payout given to employees in addition to their regular payout to ensure they stay longer with the organization.

A negotiable retention bonus helps to remain competitive within the industry and reduce churn rate.

How Retention Bonuses work?

Organizations generally take various measures to ensure that employees do not immediately leave the organization after taking the retention bonus.

Most organizations make contracts or written agreements to ensure retention of employees.

A retention bonus agreement states how long the employee has to remain in the organization after signing a retention agreement or contract.

For example- If an employee is working on a certain project and the employer wants the employee to stay with them until the project is completed he can mention the date of project completion in the contract.

While the company can pay the retention bonus in a lump sum amount they can also pay the retention bonus along subsequent months.

Using the monthly payout of retention bonus the employer can ensure that employees will stay till the end of the retention bonus payment.

There is always a door for negotiation. An employee can always negotiate their retention bonus if they are not satisfied with it. They are free to reject if the retention bonus is not fair according to them.

Retention pay is fully taxable under the taxable income. The organization can put the retention bonus under the salary head to charge retention bonus under a highly taxable bracket.

Circumstances in which retention pay/ retention bonus is provided:

A retention bonus is provided under certain circumstances. Some of these circumstances are:

In order to ensure the best talent retention in the organization, a retention bonus is provided to employees.
Retention pay is provided when a company is experiencing a merger, acquisition or organizational restructuring.
When management suspects that an employee is going to leave the organization, a retention bonus is provided to motivate them to stay with the organization.

Factors to consider while providing retention bonus

Retention bonus typically varies from organization to organization in the range of 10-15% of an employee’s basic salary. It can be provided in a lump sum, weekly or monthly.

1. The state of the job market

In a competitive job market it’s necessary for organizations to hold employees for a long period of time. In order to motivate employees to stay long with them, organizations provide retention bonuses. It is not directly dependent on the performance of the employee but still it’s a great way to hold the employees.

2. Time with the company

Employee’s current level and their tenure with the organization is a major factor that directly affects their retention pay. The amount of the retention bonus is related to their tenure.

3. The impact of losing an employee

Hiring fresh talent proves to be costly for the organization. So a company opts to pay retention bonuses to existing employees to motivate them to stay long with the organization.

4. The company’s business performance and financial stability

The performance of an organization and financial stability in the industry is a key factor that decides whether they will pay a retention bonus or not. Retention bonus proves to be a better alternative to losing a dedicated employee.

5. Current projects

When an employee is planning to leave the organization in the middle of a project, providing him with a retention bonus is a better choice rather than letting him leave.

Retention Bonus Agreement

Every retention bonus follows a certain set of criteria or agreement.

Some of the common criteria for retention bonus are:

Financial Terms- This includes the mode in which retention bonuses are provided to employees. It can be paid in lump-sum amount, quarterly or in the form of ESOPS( Employee stock option plan).
Employment Status- This means an employee must be retained or employed in the organization on a specific day or period. This period of time is called vesting period.
Financial Health- The financial condition include the financial position of the organization or the firm should be solvent
Continued Employment Disclaimer- It means there is no guarantee of continued employment after the vesting period ends.
Non-disclosure agreement- It ensures that employees must not disclose any information to external parties or competitors during the course of the retention period.
Bonus Assignment- It confirms that if the company will be merged or acquired during the retention period the retention bonus will be assigned to the new entity.
Signature- The retention bonus must include the signature of the authorized person to ensure its authenticity.

Retention bonus policy

Objective

The purpose of the retention bonus policy is to retain certain valuable employees for a long time in the organization. The ………(company name) has announced a retention policy to motivate employees to stay long with ……..(company name).

Eligibility

Employees who are eligible for retention bonuses are selected by management and HRs on an unbiased basis in continued business operations.

Other casual employees are ineligible this time for a retention bonus.

Bonus

Each employee eligible for a retention bonus will receive ……. Amount in this quarter along with their monthly salary.

No amount will be paid to employees who will terminate their employment with the organization before the distribution of the retention bonus.

Tax Considerations

Retention bonuses are fully taxable in the year in which it is provided. In addition, the company will bear the whole amount of tax on retention bonuses so that employees will receive a full amount of retention bonus.

Alternatives of employee retention

In order to retain employees in the organization, a retention bonus is not only the solution. There are various alternatives to employee retention bonus:

1. Performance Bonuses- The company can provide performance bonuses to their employees when they meet certain targets or goals.

2. Merit increases- A merit increase is a strictly performance based financial incentive that boosts employee performance and retention rate. Merit pay depends on certain factors such as seniority, number of years with organization and promotion.

3. Employee Promotion- When an employee is promoted it moves the employee to a higher position and results in their salary increase which motivates them to stay long with the organization.