What are Retention Bonuses & How They Work? (Pros and Cons)

What are Retention Bonuses & How They Work?

Every successful business has a highly motivated workforce working behind-the-scenes day in and day out. Also, these successful businesses do an excellent job of encouraging the workforce by developing a great employee experience.

Indeed, building on this give-and-take relationship may take significant effort and time. But, business owners can speed things up by bringing in pay and benefits like a retention bonus.

This is extremely helpful as most industries across the world are affected by the post-pandemic Great Resignation period where workers are considering leaving their jobs to pursue healthier lives.

In this extensive guide, we will learn how businesses can maintain a full staff and generate more revenue by offering a retention bonus.

Let’s cut to the chase and get started!

Table of contents
What is a retention bonus?
How do retention bonuses work?
What is the importance of an employee retention bonus?
What are the benefits of retention bonuses?
What are the cons of retention bonuses?
When to offer employee retention bonuses?

What is a retention bonus?

Companies need employees that can stay with them for a long time.

However, a company’s mission, vision, goals, and objectives can only do so much to motivate the workforce and keep them working at the same organization.

Businesses need to double down on external factors, tools, or incentives that can function as a major encouragement and reason for employees to go on and on and on.

These lump sum incentives to increase retention period are called retention bonuses. The retention package is in the form of retention bonus contracts and is generally a significant amount (10-25 percent) of the employee’s base pay.

Let’s find out more about them, shall we?

How do retention bonuses work?

Contrary to what most employers and employees believe, a retention bonus is not based on an employee’s performance at the workplace.

Instead of using employee performance as a determining factor, companies use retention bonuses or incentives to hold or retain employees for a set period.

However, organizations will have to come up with reasons and share them while providing employees with retention bonuses.

The process will help them determine the right amount of retention bonus, which we will discuss later in the post.

The idea is to make a retention bonus offer that is compelling enough to keep employees from switching to another organization.

retention pay, retention bonus agreements, retention bonus package

What is the importance of an employee retention bonus?

Employee Retention Bonuses or ERBs function as a significant tool to improve the overall employee experience at an organization.

It directly impacts the Intent to Stay or ITS — an employee experience indicator that should be tracked to learn how willing or committed employees are to staying with an organization.

In other words, offering a financial incentive or stay bonus is very important to the functioning of a company. Here’s why it is important to offer a retention bonus:

1. Make employees feel more valued

When employers at a company make an effort to hold key staff members and senior executives in their companies, it shows that they understand how valuable the workforce is to companies success.

The retention bonus makes the employees feel appreciated as it also validates their skills and experience.

2. Increase sales and turnover

The appreciated employees or the employees that are offered retention bonuses tend to work harder. Some employees also work hard in anticipation of the retention bonus.

As a result, employees perform better, sales increase, and the company generates more revenue.

3. Boost employee loyalty

Employee Retention Bonus can easily make an employee happy. Happier employees show more loyalty to their companies and might even end up recommending the company to their friends and family members.

Not just that, such happy employees will bring in potential new recruits to add more value to your company.

4. Significant increase in productivity

Monetary incentives tend to encourage hard work, which often results in greater productivity. Employee Retention Bonus helps improve employee engagement at work and makes them more involved in operations.

When employees know that delivering excellent work and performing well will create an opportunity to receive monetary incentives, they will intentionally work to increase productivity.

bonus amount, financial reward, retention payment

What are the benefits of retention bonuses?

Along with the benefits mentioned above, there are several pros to offering retention bonuses to employees. Here are some of the benefits of a retention bonus you should know:

1. Improves employee motivation

Offering a retention bonus is a sure-shot way to improve employee morale and job satisfaction. The morale can go down due to many reasons, including mergers, internal conflicts, or when the organization is going through a crisis or disruptive period.

Retention bonuses motivate employees and show that employees are valued at the firm.

2. Increases consistency

When a company goes out of its way to retain workers, key employees, and leaders during a crisis or transition, it shows the organization prioritizes stability and consistency. This is a positive indicator for investors looking to put their money into the company.

3. Development of a reliable workforce

Every company wants a reliable group of employees that can perform during crises or challenging situations, like a high production push. Retention bonus pushes employees to work harder and boost overall profits.

4. ERB is a one-time payment or lump sum payment

One of the major benefits of Employee Retention Bonuses is that these have to be offered only once.

ERB is a one-time or lump sum payment that incentivizes employees to stay with an organization without having to raise their overall annual salary and other overhead costs.

5. Helps retain highly-trained or key employee

Training the employees takes time and money. As an employer, you don’t want the trained employees to leave the company and benefit your competitors. Employee Retention Bonuses help retain such highly-trained and experienced employees.

typical retention bonus, bonus agreement, tax professional

What are the cons of retention bonuses?

Now that you know the ins and outs of retention bonuses, let’s discuss the potential disadvantages of offering ERBs in the workplace. Here are the cons of retention bonuses you should consider:

1. Blatant attempt to buy loyalty

Some employees in your company might feel that Employee Retention Bonuses are a way to buy their loyalty and they are only valued when they hand over their resignation.

2. Might cause internal conflicts

Employees that don’t receive the ERBs will feel like they missed out on an opportunity to pocket more money while other employees are receiving the incentives or supplemental wages.

3. Fails to address correct problems

Offering Employee Retention Bonuses isn’t a solution to all problems. Leaders that offer retention bonuses without investigating the reason why employees want to leave will end up creating a toxic work culture.

4. Act as a temporary boost

Employee Retention Bonuses are only temporary boosts. ERB-driven motivation and encouragement don’t last for a long time.

When to offer employee retention bonuses?

When should a company offer employees ERBs? We have shortlisted some of the most probable conditions and circumstances under which companies will consider offering retention bonuses.

1. During a merger or acquisition

Mergers and acquisitions bring along many uncertainties, at least in the minds of employees. The uncertainties about the future of the company might make them look elsewhere. In this case, an employee retention bonus will act as a reassurance.

2. Prevent employee poaching

The marketplace is getting increasingly competitive. The competition is always looking to lure in exceptional talent working in your company, which is also called employee poaching. A retention bonus will help keep excellent employees in the company.

3. To keep vital core operations healthy

The leaders, managers, and other prime executives in a company are responsible to run the vital core operations smoothly. These employees play a very important role to restore stability in an organization in times of disruption or major change.

4. To reassure investors

What do investors at a company want? They want reassurance that everything at the company is running fine despite the problems and changes. Offering ERBs to employees leaving the organization helps restore stability and ensure further investments.

5. Low morale levels

Companies should offer Employee Retention Bonus when the overall employee morale in the organization is low. This is a perfect opportunity to show you care and want employees to have a healthy relationship with the company and with each other.

6. Cost-effective solution to increase retention period

If you are looking for a cost-effective solution to retain employees, then you should go for Employee Retention Bonuses (retention package) as these are generally 15-20 percent of the basic employee’s salary.

7. Helps with negotiation

Are you looking to attract employees to your company? You may offer a retention bonus as a sign-in bonus to strengthen your argument during a negotiation.

8. To keep skillful people in the company

Lastly, a retention bonus helps keep the skillful people and the best talent in your company. This is important because finding skillful people and training them is quite a challenge.

Final thoughts!

Indeed, employees hold the power to accept or reject retention bonuses. But, employers should always be willing to offer them while keeping in mind that a retention bonus isn’t a silver bullet that will overcome the challenges of Great Resignation.

Business owners should consider the different factors and situations mentioned in the guide before developing a retention bonus policy, most importantly an employer’s thought process as it helps understand an employee’s perspective towards retention bonuses.

So, will you be offering retention bonuses to the employees willing to leave your organization? Also, don’t forget to check out other informative posts on the blog!

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