learn more about retention incentives
Sep 05, 2023

Understanding Retention Incentives

The competition to attract and keep talented workers is fierce out there, and that’s why retention incentives can be the key to successfully doing business. A retention incentive, or retention bonus, is a way of investing in your employees. With a retention incentive, you’re giving them a tangible bonus and concrete motivation to stay in their current roles and keep doing great work for you.

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What Are Retention Incentives?

A retention incentive—sometimes also called a “retention bonus”—is a financial hook you offer your employees in addition to their normal pay if they commit to staying with the company for a certain period of time. Retention incentives come with a caveat that they need to be paid back if the employee leaves before that retention period is over.

Note that a retention incentive is typically a large amount—10–25% of an employee’s base salary. Employees who leave a job to secure an increase in pay usually expect to make at least 20% more. If you want to keep an employee from going on the job hunt, you need to offer them an amount worth staying for.

How Do Retention Incentives Work?

Most people leave their jobs for one main reason: money. Companies that are slow to award meaningful raises and growth opportunities systematically drive employees to look for new, higher-paying positions elsewhere. Retention incentives take that financial lure out of the equation with a tangible offer of money in exchange for staying put.

Retention incentives are especially effective during transitional periods, like mergers or the end of a major project. These are often times of uncertainty for employees and a moment for them to check out what the job market looks like with their newest skills and experience on their resumes. A retention bonus shows employees that you value them and their work enough to pay them for ongoing loyalty.

The Benefits of Retention Incentives

Benefits for Employers

For employers, retention bonuses are a way to buy loyalty and certainty. If a project is coming up where being shorthanded is absolutely not an option, retention incentives are one way to make sure your staff isn’t job hunting and about to leave. If the loss of key employees would be devastating for the company during a merger or slow period, a retention bonus could be a great option to ensure the company will still be operational with their expert knowledge on-board. Retention incentives reduce turnover, and broadly speaking, low turnover saves management a ton of time and money.

Benefits for Employees

The first and most obvious benefit for employees when they receive a retention bonus is money. As employees grow in skills and experience, they often become more valuable than their current salary reflects. In many jobs that insist on giving only small cost-of-living raises—if any raises at all—the only way for employees to continue to grow their income is to look for new employment. A retention incentive gives them a new way to earn more money.

Retention incentives are also great for employee morale, as they are a tangible investment that their company is making in them. They will feel more valuable and more appreciated as the recipients of a large retention incentive.

Types of Retention Incentives

Monetary Incentives

The only incentive that can be really effective for employee retention purposes is a monetary incentive. After all, what you’re doing is buying an employee’s loyalty and securing them from your competitors. The only way to reasonably do that for a set time period—for example, during a critical project or period of intense deadlines—is to offer monetary payment in exchange for their continued loyalty.

Non-Monetary Incentives

Non-monetary incentives are not effective at securing employee loyalty for a set time period. There are, of course, many non-monetary incentives you can do to reduce employee turnover. Offering flexible schedules or work-from-home arrangements, ping-pong tables and free coffee all contribute to a happier workforce. Retention incentives, however, offer money in exchange for loyalty over a set time period. Offering a ping-pong table in the office in exchange for a year’s worth of loyalty doesn’t mechanically make sense. Unfortunately, this kind of bonus is something that simply needs to be paid for with money and come with very clear parameters.

Retention Incentive FAQs

How Are Retention Incentives Taxed?

Retention incentives are seen as income by the IRS, so they are taxed. Employees should be warned that their retention incentive is subject to taxes so they don’t get hit with a nasty surprise come tax season. It’s common for companies to add a standard 25% tax rate on top of the intended retention bonus so the employees will get the full benefit of the extra payment.

Should I Accept a Retention Incentive?

For employees, a retention incentive might not always be a good thing. There are many reasons why employees leave a job, and money is just one of them. A toxic company culture, micromanaging bosses, a lack of general appreciation, and a whole host of other reasons might be driving employees to leave. For some employees, a truly toxic, unpleasant job won’t be worth showing up for at any price.

As an employer, it’s your duty to understand the sources of your turnover rates. Are people leaving regretfully for higher paychecks as higher costs of living force their hands? In that case, retention incentives could work wonders. If the problem goes beyond money, however, money alone won’t be able to solve it.

Do Employees Have to Pay Back Retention Bonuses?

There’s only one reason why employees would have to pay back their retention incentive, and that’s if they decide to leave the company before the agreed-upon time period is over. Remember, retention bonuses are a contractual agreement: in exchange for a one-time payment, the employee agrees not to leave their position until after a specific date. If they leave before that date, yes, they will need to pay back that retention bonus.

This is why retention bonuses should come with very clear terms that agreed to in writing. The exact terms and timelines should be clear to everyone involved.