Before you accept a retention bonus offer from your current employer, make sure that you understand the pros and cons

The old adage about good help being hard to find is as true as it's ever been, especially in a tight labor market. Employers who have invested time and money in their workers are often reluctant to lose them to their competitors. That desire to retain talent is even stronger when it comes to experienced, upper-level employees. In fact, some companies are so eager to retain those talented individuals that they offer bonuses to entice them to stay. But is a retention bonus a good enough reason to stay at your current job?

In this post, we'll explain retention bonuses and how they work. In addition, we'll examine the pros and cons of accepting a retention bonus, to help you to better understand the factors that you'll need to consider as you decide whether this type of agreement is right for you.

What is a retention bonus?

A retention bonus is a form of one-time compensation that companies sometimes offer to certain employees to ensure that they remain in their jobs. This type of retention pay is provided as a payment over and above the employee's normal salary and usually requires that worker to agree to remain in their position for an agreed period of time. While a retention stipend is not directly related to performance, stay-on bonuses are generally offered to only the most valuable employees.

It's also important to note that companies can offer just about any retention bonus amount that they desire. The average retention bonus amount usually falls within a range of between 10-15% of the employee's annual salary. Experienced and extremely talented employees may receive offers that dwarf that amount, of course, depending on how serious the company is about keeping them on staff.

How does a retention bonus work?

When companies identify talent that they're intent on retaining, they can offer a retention bonus agreement, often in the form of a contract. That agreement will provide a bonus to the employee in exchange for their commitment to stay in their current role. The exact terms of that commitment can vary from company to company and will be dependent upon the firm's needs and plans. The actual distribution of the bonus can be one single lump-sum payment or a distribution over a set period of time.

Retention bonus agreements can contain a variety of provisions but most include language relating to the following concerns:

The employee's obligation

Every retention agreement will include some reference to the employee's obligation, in the form of a specific period of time that employment must be maintained at the company. In many instances, at least a portion of the bonus can only be received once that part of the agreement is fulfilled.

The amount of the bonus

This is the financial incentive that the company offers in exchange for the employee's promise to maintain their employment. This part of the agreement will outline how the money is paid, whether in one single sum or in distributions over time.

Conditions related to the company's financial health

Agreements often contain language that mitigates any bonus obligations in the event that the company's financial health deteriorates unexpectedly.

Reimbursement terms

Since most agreements provide the employee with at least some of the bonus amount prior to the completion of the employment obligation, terms for reimbursement are generally included as well. These terms oblige the employee to repay the bonus if they fail to maintain employment for the agreed period.

Non-disclosure language

Some form of non-disclosure agreement is common as well, since most companies want to protect this type of confidential arrangement.

Disclaimers related to employment beyond the contractual period

It's also common to include language that absolves the company of any obligation to continue the employee's employment beyond the contractual period.

Other legal niceties

Other common legal niceties can include language related to assignment of the bonus in the event of acquisition, legal signatures, and more.

What circumstances might prompt a company to offer a retention package?

Retention bonus offers are not everyday occurrences, of course, and are generally only tendered in certain defined circumstances. For example:

  • If management at a company believes that one or more key employees may be in the market for new jobs, these types of financial offers are one option that can be used to entice them to stay. In many instances, offers are made when a vital worker is considering taking a position with a rival company.

  • Major organizational changes can also prompt these types of stay-on bonus offers. Often, mergers or acquisitions may involve extending retention offers to key personnel such as executives.

  • Sometimes, retention bonuses may be offered to ensure that vital team members are locked in place during important projects or company transformation efforts.

  • A tight labor market that offers increased employment mobility can also motivate employers to do more to retain key members of their team.

Retention bonus pros and cons

If you've been offered a retention bonus, it's important to ensure that the advantages of accepting the offer outweigh potential disadvantages. Consider some of the most common pros and cons as you make that decision:

The pros of accepting a retention bonus offer

  • A bonus offers increased income. Although this is a one-time boost in your income, it can often make a serious difference for your bottom line. Though compensation should not be the only thing that you consider when you choose to stay in a job, it's still a factor that you need to weigh before you quit.

  • It's a sign that you're valued. If you needed a boost to your morale, a retention bonus offer may be just what the doctor ordered. After all, companies don't make these offers to every employee, so if you receive one then you can rest assured that your company values your employment.

  • There may be room for negotiating. For example, if you were thinking about leaving for reasons other than compensation, the tendered offer may indicate that there's an opportunity to negotiate about the things that really concern you.

The cons of accepting a retention bonus offer

  • There is no guarantee that the company will retain you beyond the determined period of time.

  • An employer who feels as though they need to bribe you to stay may come to resent that fact. That could cause lingering problems and make it more likely that they will look for ways to replace you in the future.

  • If your career plans are hindered by staying in your job, the money may not be worth that delay in reaching your goals.

Summary

One of the most challenging decisions that any valuable employee can make is to decide whether or not to accept a retention bonus offer. Ultimately, you need to balance the potential benefits of accepting the offer against any disadvantages that you might experience. Every situation is different, of course, so you're the only person who can determine whether accepting a retention bonus is the right choice for you.

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