11 min read How do you motivate your employees to stay with your business? It’s all about encouraging a great employee experience. Of which, pay and benefits play a key role. Find out how retention bonuses work and how to use them.

Hiring Bonuses or Retention Bonuses: What are they and which is best?

How does an employee retention bonus work?

Retention bonuses are not tied to work performance but rather 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 bonus amount. The length of time stay depends on the companys needs, 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 ERB depends on factors such as the reason for the bonus, competitors salaries and the companys finances. The average retention bonus is between 10% to 15% of an employees base income, but the amount can go up to 25%.

Employers must consider why they are giving the retention bonus to determine the amount given. If the goal is to keep an employee from working for a competitor, then the competitors salary will contribute to the bonus amount. If the company wants to keep an employee on for 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.

What is a retention bonus?

A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time. Usually, retention bonuses are sizable amounts of money, ranging from 10% to 25% of an employees base pay. The time the employee agrees to remain in the companys employ depends on the nature of the package.

Retention bonuses are most common in large companies with over 20,000 employees. Companies across all industries may offer these bonuses usually to top-level or key employees. They generally offer retention bonuses during a stressful time for the company, such as a merger, acquisition, during a large project or a critical period of production. Increasingly, companies offer these bonuses to keep competitors from poaching valuable employees.

Is a retention bonus taxable income?

While an ERB is not considered part of an employees salary, it is still considered income and part of total gross pay by the IRS. As such, it must be reported as income on yearly taxes.

Retention bonuses can be taxed using the aggregate or the percentage tax method. Usually, the aggregate tax method produces a higher tax rate than the percentage tax method, but it depends on the actual figures involved. It is best to consult a tax professional when determining the best way to report your retention bonus.

Benefits of retention bonuses

Retention bonuses can be a useful tool for companies looking to keep key individuals or top-level workers in their employ. There are many possible benefits of offering ERBs:


What is a typical retention bonus?

A retention bonus can be delivered as a lump sum or divided over a period determined in the contract. As for the amount, this varies; the average retention bonus is between 10-15% of an employee’s base income.

Who gets a retention bonus?

A retention bonus is a targeted payment or reward outside of an employee’s regular salary that is offered as an incentive to keep a key employee on the job during a particularly crucial business cycle, such as a merger or acquisition, or during a crucial production period.

Is a retention bonus a good thing?

Their productivity won’t improve because the money is “for staying” — retention bonuses are essentially “pay for staying, but doing nothing.” This is because the employee got the money for “staying” and not for being more productive, and as a result, there is no real incentive for them to do more than a minimum level …

How are retention bonuses paid?

The retention bonus contract states the amount of the bonus offered, a determined time period the employee agrees to remain with the company, and how the company will pay the funds. Typically, the bonus is paid in one large sum or spread out in smaller amounts throughout the duration of the contract.

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