Retention bonuses are monetary incentives companies offer to retain valuable employees and overcome problem areas at work.
This guide provides an overview of retention bonuses, how they work, and best practices around implementing them.
Background on Retention Bonuses
Retention bonuses, also known as stay bonuses, are lump sum payments made by companies to entice employees to remain with them for a specified period of time.
Retention bonuses are typically offered to employees who are considered high performers or have highly demanded skills.
Companies use retention bonuses as a strategy to retain talent and prevent turnover.
Turnover can be costly for companies in terms of recruitment, training, and loss of organizational knowledge.
Retention bonuses incentivize employees to stay, which provides continuity for the business.
10 Characteristics of Retention Bonuses at Work
- Conditional – Retention bonuses are conditional upon an employee staying for a certain period, often six months to 2 years. If the employee leaves before then, they must repay the bonus.
- Lump Sum—Retention bonuses are paid in a lump sum rather than installments, which increases the incentive to stay.
- Taxable – Retention bonuses are considered taxable income. Taxes are typically deducted upfront.
- Written Agreement—The written agreement that the employee signs outlines Details of retention bonus eligibility and repayment obligations.
- High Performers – Retention bonuses tend to target high-performing and mission-critical employees.
- In Demand Skills – Employees with skills in high demand also receive retention bonuses more frequently.
- Various Industries – Retention bonuses are offered across various industries, including tech, finance, healthcare, etc.
- All Levels – Retention bonuses may be provided to employees at all levels, not just executives.
- Temporary – Retention bonuses are temporary incentives, not permanent raises.
- Discretionary – Offering retention bonuses is at the company’s discretion based on business needs.
How to Calculate a Retention Bonus
Some factors determine the amount of a retention bonus:
- Employee base salary bonuses often range from 10% – 50%.
- Length of required retention period.
- Difficulty of replacing the employee.
- Criticality of the employee’s skills/experience.
For example, an employee with a $100,000 base salary who must stay for one year may receive a 25% retention bonus of $25,000.
5 Steps to Negotiate a Retention Bonus
- Time it strategically – negotiate when you have maximum leverage.
- Make a case for your value – quantify your contributions.
- Research typical bonuses – understand what’s reasonable.
- Present your ask – specify the bonus amount and terms.
- Be flexible – consider a counteroffer or non-monetary perks.
Features, Benefits, and Challenges of Retention Bonuses
Features: Lump sum payment, conditional on staying for a set period.
Benefits: Incentivizes talent retention, reduces turnover costs, and retains critical skills/knowledge.
Challenges: Employees may leave soon after a bonus is paid, bonuses are costly, and if not offered broadly, they can create pay inequities.
Examples of Retention Bonuses
- A software engineer receives a $50,000 retention bonus for 2 years.
- A sales director gets a 25% bonus ($35,000) to remain for 18 months.
- A nurse earning a $10,000 bonus to stay for one year amid a nursing shortage.
Conclusion
Retention bonuses and stay interviews are a strategic incentive companies can utilize to retain top talent.
Structured appropriately, they can help maintain workforce continuity and critical skills.
Employees can benefit from retention bonuses and supplemental pay by understanding how they work and negotiating effectively.
With 30+ years of experience, Catherine Fitzgerald, B.A., M.A., PGDip, founded Oak Innovation in 1995. Catherine received her Bachelor’s degree and Master’s from University College Cork. She holds qualifications in Professional Development And Training from University College Galway. She is completing a second Master’s from University College Cork. Since 1995, clients include Apple, Time Warner, and Harvard University.
