Retention Bonuses: What You Need To Know

08/07/2022 7:59 AM

A retention bonus is a cash payment that an employer offers employees in exchange for their commitment to staying with the company for a certain amount of time. The purpose of a retention bonus is to encourage employees to remain with the company longer than they might otherwise have stayed. A retention bonus may be paid as an incentive for some employees to remain with the firm rather than seek employment with one of the company's rivals. Certain retention bonuses are paid in exchange for the employee staying with the company for a set time. These incentives can be offered in exchange for the employee continuing with the firm regardless of whether or not another company has offered them a higher salary. Payscale says the retention bonus often ranges between 10% to 15% of the base salary.


Retention bonuses, which companies pay to keep employees from leaving the organization, have become a much-hyped topic of late. But in a new piece for The New York Times, a behavioural economist states that they are a waste of money and may even be counterproductive to employee performance. Ariely, who has spent decades studying the human decision-making process, notes that, while retention bonuses may feel good, they don't create much value for an organization.

Some employees receive retention bonuses to keep them around — but not all. In the past, the only people who received retention bonuses were executives with the highest salaries and those considered "key" employees who were needed to keep the company running. But a new generation of companies is offering retention bonuses to a broader set of employees, from those who answer the phone to the CFO and CEO. They're an easy way to keep good employees happy and working, and they also send a message to the rest of the workforce that their hard work is appreciated.


Related: Employee retention strategies that work

Why are retention bonuses important?

Without a doubt, retention bonuses are important to an organization's bottom line. They help keep key employees from leaving the company, which helps keep it operating at peak efficiency. They also provide employees with a sense of appreciation for their hard work, which helps keep them motivated to continue working. But despite their popularity among employers, retention bonuses have received much scrutiny of late.


Because retention bonuses are structured, they also allow employers to be transparent with their employees about how much they're being paid and why. When employees know that their employer cares about their well-being enough to offer them a bonus for staying with the company, it builds confidence in their decisions to keep working. It also shows the employees that their hard work is appreciated, motivating them to continue working.


Are retention bonuses effective?

The effectiveness of retention bonuses is an ongoing topic in the workplace. Some managers believe that offering a bonus to employees who stay with the company is an effective way of retaining talent. Others argue that providing large bonuses is a poor use of company resources, as it does not prove much to prospective employees compared to the salaries of other companies in the same industry. Which side of the debate is closer to the truth?


The current body of research suggests retention bonuses are an effective tool for retaining employees. In a study conducted by researchers at Yale University, it was found that offering employees a retention bonus was effective at reducing turnover among low-skilled employees. In addition, a study by researchers at the University of California, Davis, found that offering a retention bonus was effective at retaining employees who were close to being offered a job by a competing company. In other words, retention bonuses prevent employees from leaving for better opportunities.


A recent study by the Harvard Business School found that offering large retention bonuses to employees is the most effective strategy for reducing turnover in a given department or organization. This finding is supported by other studies, which found that retention bonuses can increase employee satisfaction and productivity while decreasing the time employees spend searching for jobs in their free time. This has the added benefit of reducing the amount of money an organization spends on finding and training new employees.


The best way to determine the effectiveness of retention bonuses is to experiment. In this case, a manufacturing company decided to offer a retention bonus to employees who had been with the company for five years or more. The company then compared retention rates among employees who were offered a retention bonus and those who were not. The experiment indicated that employees with a retention incentive stayed with the firm at a greater rate than those not granted a bonus. This was the case in comparison to employees who were not awarded a bonus.


However, it is important to note that the effectiveness of retention bonuses depends on various factors. For example, offering employees an extremely large retention bonus is likely to increase the strategy's effectiveness. In addition, offering a small retention bonus to many employees is likely less effective than providing a large amount of money to a small number of employees. Finally, retention bonuses' effectiveness depends on the industry and market in which an organization operates.


A study by Yale University found that, on average, offering bonuses can increase an employee's likelihood of staying by 8%, while larger bonuses can have a greater impact. The researchers surveyed over 10,000 employees at various companies and found that the company's size also significantly impacts the effectiveness of retention bonuses. Smaller companies with fewer resources tend to have less impactful retention bonuses on average.


Related: Employee retention


How popular are retention bonuses?

Based on the average amount of money being offered by employers as retention bonuses, retention bonuses seem to be a more popular strategy to curb the talent shortage. However, a recent Glassdoor survey shows that more than half of employers say they don't use retention bonuses and prefer to offer salary increases to retain employees. This would imply that retention bonuses are not often used, but the data shows otherwise. The average retention bonus has been increasing.


According to the data, retention bonuses have been increasing in average size. The average retention bonus in 2018 was $3,700, a 12% increase from the previous year. The average amount offered by employers has increased from $2,000 in 2016 to $2,700 in 2018. This suggests that more employers are using retention bonuses to retain employees.


According to data from PayScale, the average retention bonus has grown significantly. In 2016, the average retention bonus was about $2,500. Today, the average retention bonus is over $4,000.


The average retention bonus offered by employers has been increasing for years. According to the job search platform Jobfox, the average retention bonus is now $10,000, significantly higher than the retention bonuses just a few years ago. This increase in the average amount offered shows that employers are investing more in their retention strategies to keep employees and are willing to pay more. The increase in retention bonuses is likely due to the increased demand for talent and the rising labour cost. The increasing amount of money being offered as a retention bonus reflects the higher value organizations place on retaining employees.


Several companies have been offering increasingly large retention bonuses to keep employees from leaving. For example, Google offers employees up to seven years of salary if they sign a contract to stay for at least five years. In other cases, companies such as Facebook and Salesforce offer retention bonuses of up to $1,000,000 to employees who have been with the company for some time. The increasing amounts offered as retention bonuses indicate that they are becoming a more popular retention strategy.



As a result, the competition for good employees is fierce. The best way for managers to increase their chances of retaining their best employees is to offer them bonuses and other incentives. While some may argue that providing retention bonuses is a waste of money, the data shows that offering bonuses can significantly impact employee retention.


Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.


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Memory Nguwi
Super User
This article was written by Memory a Super User at Industrial Psychology Consultants (Pvt) Ltd

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