Popular Courses. What Is a Retention Bonus? Key Takeaways A retention bonus is a targeted one-time payment or reward outside of an employee's regular salary that is offered as an incentive to keep a key employee on the job.
Key employees may also be offered a retention bonus if their employer suspects they may be looking to leave to a competitor in order to keep them. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Introduction to the Signing Bonus A signing bonus is a financial award offered by a company to a prospective hire to accept a position.
The Ins and Outs of Bonuses A bonus is a financial reward beyond what was expected by the recipient. Learn how companies reward employees with incentive and performance bonuses. Cash Bonus Definition A cash bonus is a lump sum of money typically awarded as in incentive for an employee's superior performance. What Is Efficiency Wage Theory?
Efficiency wages occur when employers pay higher than the minimum to attract skilled workers, boost productivity, and increase loyalty. What Is an Aguinaldo? An aguinaldo is an annual Christmas bonus that businesses in Mexico and other Latin American nations are required to pay to their employees. What Is a Stipend? Retention bonuses are not tied directly to work performance. Instead, they are an incentive to remain with the company. Generally, companies create a contract specifying how long the employee will remain with the company in exchange for the amount of the bonus.
The amount of time an employee is expected to stay depends on the needs of the company, but it is rarely an indefinite amount of time. Employees receive the bonus as either a lump sum or divided over the period indicated in the contract. The amount of the retention bonus depends on several factors, such as the reason for the retention bonus, competitor's salaries and the company's finances.
Employers must consider why they are giving the retention bonus to determine the amount given. If the goal is to keep the employee from going to work for a competitor, then the competitor's salary will contribute to the amount of the retention bonus. If a company wants to keep an employee on for the duration of a challenging project, they should consider the amount of extra time an employee will be expected to work as well as the overall value of the project.
Additionally, a company must consider how much money they have available to offer the employee a lump sum. Related: Gross Pay vs. Net Pay: Definitions and Examples. As an employee, accepting a retention bonus comes with tax implications. Retention bonuses are considered supplemental wages. Supplemental wages are any compensation in addition to an employee's regular pay. While a retention bonus is not considered part of an employee's salary, it is still considered income and part of total gross pay by the IRS.
As such, it must be reported as income on your yearly taxes. Retention bonuses can be taxed using the aggregate tax method or the percentage tax method. Usually, the aggregate tax method produces a higher tax rate than the percentage tax method, but that is dependent on the actual figures involved.
It is best to consult a tax professional when determining the best way to manage your retention bonus. The aggregate tax method combines the retention bonus total with your yearly salary.
The tax rate is then figured using this total. The tax rate is calculated on your W-4 form. When retention bonuses are paid out of your proceeds, buyers can afford to pay a higher purchase price. Stay bonus agreements a. Actual timing normally varies by employee and circumstances. Offering a stay bonus early on arises when an employee is critical to future performance and would be difficult to replace e. Or when you need to involve them in the selling process.
It may be compensation for the extra work involved. A third situation is when the employee is aware that you plan to sell the company, and you need them to stay put.
When employees become aware that their employer is for sale, they understandably get nervous and may begin seeking alternative employment or become more open to offers of employment. When competitors find out that a company is for sale, key employees are likely to be approached and offered signing bonuses to jump ship. You can mitigate that risk by putting a retention bonus in place early on. Stay bonuses should be paid out a specified number of months AFTER your deal has closed, not before and not at closing.
Remember, you need them to stay on with the new owner. Most retention incentive bonuses are payable within 3 to 12 months after a deal closes. For key-employees who are critical to long-term success, it may be 24 to 36 months. Stay bonus agreements can also have an acceleration provision where they become payable if employment is terminated by the buyer.
The budget for stay bonuses will depend on several facts and circumstances. As a general rule, the larger the company, the smaller this budget is relative to the sale price. Unfortunately for small service businesses with few employees, it can be a significant percentage of the sale price.
Clearly stay bonuses have limitations as a long term retention tool. Ultimately the buyer will need to provide rewarding work, a desirable culture, competitive compensation, growth opportunities and strong leadership.
They do however enable transactions by reducing business risk during the critical months before and after an acquisition or merger.
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