Retention Bonus – Definition, Steps, Advantages, Disadvantages

Definition 

A retention bonus is defined as a one-time payment that is used as a financial incentive to keep a valuable employee in the organization. It is generally offered during stressful times in an organization when the chance of an employee leaving the firm is very high.

The employer prefers the retention bonus as opposed to a raise in salary because it will be a one-time payment, whereas the rise in wage will have to be paid every month until the employee leaves the firm.

Understanding retention bonus

Business organizations offer retention bonuses as a reward besides the regular salary to keep key players within the organization during a vital business cycle like acquisition, merger, restructure or reorganization or a critical production period. This targeted payment has gained immense popularity in recent years because of the rise in corporate poaching.

The retention bonus in simple terms is the financial incentive offered to senior executives and key employees as a persuasive tactic to keep them on board until the company becomes stable once again.

In booming economies, the probability of losing valuable employees to rival companies is very high. In these circumstances, the retention bonus acts as an active agent to retain employees in the firm.

Some employees are incredibly talented with additional skills and know-how. They have become valuable resources that have a high hand in the growth and development of the company. These employees are also offered a retention bonus to ensure that they do not use their expert skills and know-how anywhere else.

The value of the retention bonus is dependent on the length of the service of an employee in his firm. It is paid as either a lump sum amount or as a percentage of the current salary at the end of a specific period so that the employee stays till that particular time.

The right person for the retention bonus

Take the following steps if you want to choose the right person for the retention bonus –

• Select talented employees – Look at the past performances and find out which employees have contributed most in the growth and development of the company and whose efforts have made a difference in the whole scenario. Look at the individuals from critical areas and shortlist them
• Identify the employees – Identify the employees as early as possible because you do not want them to shift their allegiance in any condition
• Recognize that the retention bonus amount might not be enough – If an employee wants to negotiate the amount be receptive and listen to him. Recognize that the amount might not be enough and participate in healthy negotiation to retain his services

Tax treatment of retention bonus

The IRS department has declared that every bonus of any kind will be taxable under its policies. The retention bonus is treated as supplemental wages, which is a sort of compensation paid along with the regular payments of an employee. The tax is levied on the retention bonus through percentage method or by the aggregate method.

• Percentage method – In this type of taxation, the retention bonus is kept separated from the salary of the employee and is taxed at 25% flat. In case the retention bonus amount exceeds the figures of one million dollars, then the taxation rate is 39.6% flat. In case the amount is supposed 1.4 million dollars later, the first 1 million dollars will be taxed at 25% and the other 400,000 dollars at a 39.6% flat rate.
• Aggregate method – The aggregate taxation method is used in case the employer has withheld the tax. He, in this case, combines both the regular salary and the retention bonus of the employee and pays it as a single payment. The tax rate that the amount will be subjected is based on the information that has been submitted in the IRS

W-4 Form of the employee.

Should an employee accept retention bonus?

If an employee receives the offer of retention bonus to stay with the organization, then it becomes imperative to think about it twice before signing a related agreement. It is actually a personal choice and if the employee were already thinking of continuing with his employment then the best thing would be to take it and if he was considering a changeover then he should look at the pros and cons and then come to a viable decision.

Read the fine print of the offer and take legal help because in some cases, it is not possible to understand all the related clauses that can allow the employer to apply subjective rules in his favor.

Advantages 

The advantages of a retention bonus are-

• Acts as a strategy to retain skilled employees in the firm
• It is a show of appreciation and is appreciated by the employee

Disadvantages 

The disadvantages of a retention bonus are-

• Considered a paid servitude where the employer is buying the services rather than earning the loyalty of an employee
• Offered only to selected few, and this can cause harmful consequences because other employees will not like or appreciate this gesture

Reasons why retention bonus do not work

There are several reasons why retention bonuses might not work for an employee. The reasons are –

• In worst-case scenarios, the employee will leave the firm soon after getting the retention bonus. Hence it is not a guarantee that his loyalty remains with the firm after the specific period is over
• When the employee is a top performer his sign-in bonus in another company will surpass the amount of the retention bonus, and he might not wait for it if he receives a better offer in the interim period
• Besides the money, there can be several other factors that have a say in the employees working or leaving the existing firm. If the payment fails to be the primary motivator, the employee might leave the firm and the idea of retention bonus will not work
• Offering retention bonus might look like an act of desperation to the employees, and this might cause a panic resulting in massive employee turnover
• In some cases, it is seen that the employees who are offered a retention bonus develop an entitlement attitude. They start feeling irreplaceable, and this leads to a drop in their efficiency and productivity levels.
• Sometimes the employees who are offered retention bonus prove disruptive in the workplace and can harm the workplace ambiance with their suggestive remarks
• The co-workers who are not provided the retention bonus will feel jealous, and this can damage the workplace environment
• The employees who have not been selected for retention bonus will feel bad, and this will harm their self-confidence, morale, and engagement in the workplace

Steps to take when an employee is offered a retention bonus

An employee should take the following steps if he is offered a retention bonus –

1. Actively-employed condition 

A legal agreement can be tricky and subjective to interpretation; hence it is vital to make the wording clear before you think of signing a retention bonus agreement. Look out for the phrase actively-employed and if it is written as if the employee will be offered retention bonus only if he is actively-employed by a specific date then change the wording to receive the bonus if the employee does not resign by the particular time.

This will make the words clear and keep an employee safe from any misuse of the agreement

2. Some-discretion term 

The term sole-discretion can be used as a trap by the employer because the power rests in his hands and it is up to him to decide whether or not the employee should be paid the retention bonus.

Change the words sole-discretion to reasonable discretion or remove it from the contract and rewrite as per his performance so that the balance is equalized.

3. Conditions that the employee cannot control 

There are some conditions that an employee cannot control as the decision-making power is not in his hands. Suppose a retention bonus agreement specifies that the employee will be given a retention bonus three months after the acquisition of a particular company. What happens of the supposed acquisition plan falls through. The chances are that the employer will not pay the said amount to the employee in these circumstances.

Why should the employee suffer for something that is not in his control? Remove such lines from the agreement if you want to save yourself from any unforeseen conditions

4. Cause 

The word cause is subjective and has often proved detrimental to the career of an employee. His employment can be terminated for cause, and in such a case, he will not be offered the retention bo us that was promised to him.

If the agreement has the word clause, then specify the terms of the clause so that you cannot be fired for something that was not your fault and your retention bonus remains safe.

5. Make a request or more significant bonus 

Nothing is free in this world and you have to ask for it if you want to have it. The same is the case in the retention bonus amount. When the employer offers you the retention bonus, he will quote a figure and now it is your prerogative that you accept or reject it. If you are in two minds or think that the amount is less, you can sit at the negotiation table and ask for an increase in it.

The worst-case scenario is that the employer will refuse it, but even in such a case, you have nothing to lose. Hence why not make an effort at it at least you will not regret later on

6. Ask for a return commitment 

In a retention agreement, the offer might say that the employee will be paid a certain amount if he stays with the company until a specific date. In such scenarios, the employer has the right to terminate the employment in the interim period if he wants to.

Ask for a return commitment that specifies that the employer cannot terminate the employment until a specific period and until the employee is paid his retention bonus. In such a case, both the employment and the bonus amount will be safe until the end of the particular period.

7. Ask for severance, and advance notice 

A reasonable request for an employee to make is asking for both severance pay and advance notice if his job is terminated without cause within six months of paying retention bonus. This measure will give him a sense of security to face the incoming days

8. Keep the retention bonus if you leave the firm 

In case an employee has to go from the company for a genuine reason. What happens if he has been suddenly demoted or his benefits have been reduced? Will he stay and wait for the retention bonus or make plans beforehand. Specify in the agreement in such a scenario he is eligible for the retention bonus even if he leaves the firm

9. Customize the agreement 

Every employee is an individual and you cannot generalize them. Customize your retention bonus agreement as per your requirements if you want to keep yourself safe from any unforeseen difficulties.