What is a retention bonus?
If you want to make sure that an employee stays with your company for the foreseeable future, you may provide a retention bonus to entice them. These are large payments that companies offer employees who hold key positions inside their organization. A retention package can be considered a form of golden handcuffs because it comes with an agreement that the employee will fulfill the terms of the bonus.
Most retention bonuses provide significant compensation, so you should consider your offer carefully before making it. Common factors that influence the amount of the bonus include the employee ’s existing compensation and their role in your company. Executives are given larger retention bonuses, for example, because they usually already make a lot of money or bonuses by meeting performance goals.
Why would a company offer retention bonuses?
There are several reasons you may wish to offer retention bonuses to key employees at your company.
To recognize solid performance
Rather than giving a pay raise, you could offer a retention package to employees who consistently exceed your expectations. Employees want to be recognized for the work they do, and a retention bonus can make them feel they have a purpose within your business. Bonuses also communicate that you want them to be a part of your organization for a long time and that they have job security.
To retain key staff members during a transition
If you’re about to make significant changes to your organizational structure, you want to retain people at key positions first. Retention bonuses are a great way to keep the people you need to remain with your business when things are changing rapidly. For example, if you’re going to recruit more employees and want to make sure the right people are there to mentor them, you could offer those workers retention bonuses.
To compete with other employers
If the job market favors employees or you work in a highly competitive industry, talent may be rare and valuable. You can use retention bonuses to keep your employees on your team and away from competitors who may attempt to lure them with job offers. When an employee accepts a retention package, they need to agree to remain with you for a set period of time, so they’ll be forced to turn down other employers.
To foster loyalty
Giving back to your employees is a good way to keep them loyal to your company and vision. If they feel they’re valuable and you treat them well, they won’t want to entertain any job offers from outside companies because they’re happy to work with you.
To maintain consistency
If customers or other employees witness a lot of turnover within your organization, it can harm their confidence in your business. They may wonder why you’re having trouble keeping people in vital roles within your company. Even when this negative perception is unwarranted, it can have far-reaching consequences.
To save money
The cost of recruiting new employees is almost always greater than providing bonuses and benefits to your existing employees. During the onboarding " data-mce-lingo="en_us">onboarding process, you need to train your employees and help them acclimate to your corporate culture and goals. New employees aren’t as productive as existing employees who know what you expect from them and deliver consistently.
Retention packages vs. pay raises
A retention bonus is a lump sum payment compared with a regular increase in pay. Most companies provide retention packages as a percentage of the employee’s annual pay but don’t need to pay anything else. While it costs more upfront to offer a retention package, you continue paying the employee at the same rate. Some businesses use retention bonuses instead of pay raises because it’d be less expensive in the long run to take this strategy.
Keep in mind that some employees would prefer a pay raise over a retention bonus. They may also want assurances that they have upward mobility within your company and won’t be limited to staying in their current position. If you’re negotiating a retention package, listen to your employee ’s concerns to determine whether it’s the appropriate incentive to keep them on your team.
The disadvantages of retention packages
Retention packages do come with some downsides.
They’re expensive
Paying an employee to stay for a predetermined period of time isn’t cheap, and most retention bonuses can be cost-prohibitive. You’re taking a risk when offering this type of bonus because it won’t guarantee your employee continues to perform at the same level and provide an adequate return on your investment.
They can be disruptive
Other employees are bound to get wind of the fact you’re giving retention to key employees and begin to wonder why. This can sink the morale of your company as the employees that didn’t receive an offer feel less secure in their positions. You could see some employees leave your company in response.
They might be unnecessary
If the employee you want to stay with your company has no intention of leaving, it’s wasteful to give them a retention package. It can be difficult to accurately estimate which employees are at the most risk of departing. Your employee could also become alarmed that you’re offering the bonus and feel there’s something you’re not communicating.
Alternatives to retention bonuses
While retention packages can be effective, there are other ways to keep employees working for your business. Consider all of your options before you decide what works best for your business.
Performance-related bonuses
Offering bonuses based on clear milestones and metrics can motivate workers to complete projects and hit goals well before deadline. Just make sure you’re clear on what the requirements for the bonus are and when your employee becomes eligible.
Competitive benefits packages
One way to reduce the turnover in your company from an organizational standpoint is to determine how your benefits package stands up to your competition. Many people consider their benefits as a part of their compensation and may prefer better benefits to higher salaries. Health insurance, 401(k) matching and other benefits may cost you less than offering retention bonuses as well.
Stock options
Instead of offering a cash bonus, you could give your employees a chance to receive stock in your company. If you structure stock options to be vested after a specified period, it means your employees need to remain with your company for a set period before they can claim the stock.
The bottom line
Whether you’re worried about a key employee leaving your company or want to reduce turnover rates, retention bonuses are one of many ways you can motivate workers to stay. You can save a lot of money by providing a bonus compared with the cost of recruiting and training a new staff member. If you’re going to offer a retention package to an employee, it’s a good idea to first determine if that’s the option that’s most likely to keep them around.
