Talent shortages across industries are as acute as ever. Everyone from top-performing startups to government agencies is struggling to find enough “helping hands” to keep the business running. Some 5.5 million job openings remain unfulfilled as of April 2022.
So employers are going to great lengths to hold onto their best people. Because of this, retention bonuses are once again gaining traction.
What is a Retention Bonus?
A retention bonus is a one-time sum, paid to an employee who agrees to stay with the organization for a period of time. According to a Bureau of Labor Statistics survey, 48% of workers stated that a bonus like this would motivate them to stay with their current employer.
Retention bonuses also include cash rewards that are connected to time in service or other related milestones. Bureau of Labor Statistics also notes that 57% of companies have offered retention bonuses last year — and 30% have increased the dollar amount of their bonuses.
Yet, despite the overall increase, only 28% of companies have created formal criteria or guidelines for retention bonuses. The vast majority are leaving this up to the discretion of managers. What this means for employees is that you might be offered a retention bonus (or may get overlooked) unless you are being somewhat vocal with your demands.
Is a Retention Bonus The Same as Severance Pay?
No, a retention bonus isn’t the same as severance pay. Severance is paid to compensate a worker after they are terminated early from their position. Retention bonuses are paid to employees to get them to stay.
However, retention bonuses may be offered to employees who are about to lose their job.
This may happen when:
- Your original position was eliminated, but the organization needs you to stay during a transitional phase or shift to a new role.
- You are being replaced, but the employer offers a retention bonus to stay long enough to offer training or disseminate the knowledge they have.
The important distinction is that a retention bonus obligates the employee to stay, but severance pay does not.
3 Retention Bonus Examples
Because of the ongoing talent crunch, employers are actively refreshing their retention policies. Here are three examples of retention bonuses now being offered by larger corporations.
In May 2022, Microsoft CEO Satya Nadella announced that the company is “nearly doubling its global merit budget.” Most of that money would go towards one-time employee retention bonuses.
“Merit budgets will vary by country, based on local market data, and the most meaningful increases will be focused where the market demands and on early to mid-career levels. We are also increasing Annual Stock ranges by at least 25% for all levels 67 and below,” – the CEO said.
Apple is pulling out the stops to keep software engineers in-house and prevent them from accepting counteroffers from other major tech giants such as Facebook’s parent company, Meta, or Google’s parent company, Alphabet.
As the New York Post reported, bonuses as high as $50,000 to $180,000 came in the form of restricted stock units. The issued stock grants take four years to fully vest, giving employees a reason to stay with the company.
To survive the busy summer sales season, Walmart decided to extend cash incentives to some warehouse workers. On average, they received $1k retention bonuses over a four-week period that ended on August 13, 2021. Some were also given access to a program that increased their pay between one and five dollars per hour temporarily.
How Does a Retention Bonus Work?
The way that a retention bonus works can vary from one organization to another. Even within an organization, different employees may be offered retention bonuses that have different amounts and agreements.
In general, however, there are three types of retention bonuses:
- Short-term retention bonus agreement
- Long-term retention bonus agreement
- Company-wide retention bonus policy
We illustrate each with quick examples.
Short-Term Retention Bonus Agreement
An employee puts in their two-week notice and informs their boss of their decision to quit. In response, the organization offers them a $5K bonus to stay on for three additional months to give them time to hire and train a replacement.
Long-Term Employee Retention Bonus
As part of salary negotiations, a company agrees to hire a new CFO at a six-figure annual salary. In addition to this, they agree to pay a $200K retention bonus (as vested stocks) if the CFO stays with the company for four years. The retention will be divided into annual payments. However, there is a clawback provision if the employee quits before the four-year term has expired.
A clawback is a provision in a retention bonus agreement that allows the organization to collect bonus money they have paid out if the employee leaves before completing their retention obligation. This is more common with executives and other workers making higher salaries.
Company-Wide Retention Bonus Policy
A company agrees to pay all employees an annual bonus if they have been with the company for five, ten, or twenty years. The amount of the bonus is prorated based on the person’s seniority level and performance scores.
Is a Retention Bonus Better Than a Salary Increase?
Whether a bonus is better than a salary increase really depends on the math and the trustworthiness of an employer. Both a raise and a bonus are taxable. A salary boost increases your pay over time. A bonus gives you an immediate influx of cash, which can also be helpful. You should also consider that a company that pays a retention bonus, may not be willing to offer an annual salary increase in addition to that.
When Should I Ask For a Retention Bonus?
OK, but what if the rumor has it that others are getting offered a retention bonus and you are not? In this case, it may be worth asking directly.
Here are cases when asking for a retention bonus is appropriate:
- As part of your annual salary review or negotiations
- If you learn that new hires are being offered sign-on bonuses or high salaries
- When average market compensation for people in your role goes up
- Your employment conditions will change or be eliminated as a result of an organizational change
- You have a counteroffer at hand from another company
If either of the above is true, get prepared for negotiations.
How to Negotiate a Retention Bonus
Most organizations give retention bonuses at management’s discretion. So your direct manager probably has a lot of decision-making power on this. This leaves room for negotiation. Here are some great tips for framing the conversation.
Ask For a Meeting
Don’t hesitate to request a meeting with the person who is qualified to make a retention offer. The meeting is your opportunity to present your case. Similar to salary negotiations, you should come prepared to talk about — your performance and recent accomplishments, paired with reasons why you’d like to get a retention bonus.
Remain Flexible and Reasonable
Take time to listen to the offer you receive, and give it fair consideration. Counter that offer, if you aren’t satisfied. But, expect them to counter as well. Don’t dismiss a reasonable offer out of hand, just because it isn’t 100% of what you want.
Ask to Review The Offer in Writing
This isn’t the time for loosely defined agreements. You need the retention offer in writing along with all applicable terms. If they aren’t willing to formalize things in writing, be skeptical. Also, you need a written offer if you plan to enter into any kind of negotiation.
Be Wary of Vague or Unclear Language
Read the terms and conditions of the retention offer very carefully. Look for legalese or language that could potentially be used to deny your payment. Be suspicious of phrases like:
- At our discretion
- Active employment
- Other special conditions
These could indicate limitations to your ability to collect the bonus.
Also, some retention agreements are very short-term. For example, being asked to stay an extra month or two to train a replacement. However, other agreements may require that you stay for years, and involve very significant amounts of money. There may also be clawback provisions. When this is the case, don’t make a rash decision. Give yourself plenty of time to review the agreement. Get feedback from people you trust, and don’t be pressured into making a decision.
Be Prepared to Say No
There are many occasions where the value of moving on to another opportunity simply exceeds any retention bonus. Additionally, it may not be worth staying in a toxic workplace for a relatively small bonus that may not change your financial situation.
Final Thoughts: Should I Accept a Retention Bonus?
There are many things to consider before you say yes to a retention bonus. First, is the money worth you turning down other opportunities? What about your marketability? Will your skillset remain relevant in the future? For example, you may be able to travel extensively now, but wish to settle down in a few years. There’s also balancing the value of a bonus with potential downsides including your mental well-being, advancement opportunities missed, and delaying an important career move.
Of course, you should consider the positives as well. Accepting a retention bonus could provide you with a quick infusion of needed cash. There’s also the career goodwill you might create by sticking around to help your employer. This is important for future referrals and recommendations.