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 period. The retention bonus is often paid as a once-off payment. 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. Payscale says the retention bonus often ranges between 10% to 15% of the base salary.
Who gets a retention bonus?
In the past, the only people who would receive a retention bonus were executives with the highest salaries and those considered "key" employees who were needed to keep the company running, especially looking at the long-term future of the company. However, a new generation of companies is offering retention bonuses to a broader set of employees. A retention bonus is an easy way to keep good employees happy and working, and it also sends a message to the rest of the workforce that their hard work is appreciated. WorldatWork says the payment of a retention bonus is on an upward trend, although evidence of the effectiveness of such schemes is mixed, as I will show later in this article.
The information available shows that the retention bonus is often reserved for the hard-to-get skills who have been with the company for a while. Others emphasize that such a retention bonus is reserved for top executives who have proven value to the organization. The common trend, though, is to target hard-to-get skills with individuals already giving value.
Retention bonus challenges
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There has been debate on whether a retention bonus is useful or not. Others have argued that a retention bonus buys temporary relief, forcing the employee to stay when they want to leave. Some thought leaders have argued that a retention bonus works well when there is a merger and the new shareholders want to keep certain staff members to see through the transaction. This article summarises people's sentiments when it comes to a retention bonus. Check more in the comments section to see how controversial the issues around a retention bonus. The tragedy of a retention bonus is that they often overlook performance issues.
This Mckinsey article points to potential pitfalls when selecting employees who should be part of the retention bonus in a merger situation. They argue that often, people who are not suitable end up being selected because leaders do not have the tools to assess the employee-value component. Consequently, paying a retention bonus to less value-adding employees ends up leading to unnecessary cost overruns for the merging entities.
Why is a retention bonus important?
Without a doubt, a retention bonus can be important to an organization's bottom line if it is based on keeping the best and high-performing employees. It helps 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 bonus schemes have received scant scrutiny, especially regarding their effectiveness.
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.
How prevalent are retention bonus schemes?
A WorldatWork survey shows that roughly 60% of organizations have invested in some form of a retention bonus. The popularity of retention bonuses seems more driven by people copying trends than assessing how effective such retention bonus schemes are. As I will show later in this article, there are mixed findings on the effectiveness of retention bonus schemes.
How effective are retention bonus schemes?
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While questions remain about the effectiveness of retention bonus schemes, it seems some companies still use them anywhere. I have looked at the scientific evidence on the effectiveness of retention bonuses, as shown below, and the results are mixed.
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 sums under such schemes 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?
In an article titled Paid Handsomely to Stay the authors suggest that retention bonus schemes are popular. Unions have also waded in the debate around retention bonus schemes, signalling the positive perception of such a bonus among employees.
Ammi Baarnard-Bahn, in a Havard Business Review article titled, "Do retention bonuses pay off," says that retention bonus schemes can work as a way to retain senior executives and hard-to-get skills.
Surprisingly, this study revealed that even a relatively small financial bonus can significantly influence the decisions of highly effective teachers in struggling public schools to stay longer. The research found that modest incentives were surprisingly effective in tipping the scales towards retention, keeping these crucial educators in the very environments where their impact is most needed. While not a silver bullet, this finding suggests that targeted bonuses can play a powerful role in stemming the tide of teacher turnover in disadvantaged schools, potentially leading to long-term benefits for both students and the education system.
In a win for financial incentives, a study of the U.S. Air Force's bonus program found that even modest payouts could significantly tip the scales for personnel, especially first-timers and those traditionally offered less. The impact went beyond "stay or go," influencing the timing of reenlistment decisions as well. While not a magical solution, the study suggests strategically targeted bonuses could be a powerful tool in the Air Force's retention toolbox, requiring flexibility to adapt to changing needs over time. More research is needed, but the initial results paint a promising picture for financially nudging talent to stay where it's needed most.
This study suggests an auction-based retention bonus could potentially improve dentist retention, but its actual impact remains unclear. The research relied on theoretical opportunity costs instead of real bids, making it difficult to quantify the exact bonus amount needed to achieve desired retention rates. Additionally, the break-even formula approach provides a rough estimate but doesn't fully account for individual preferences and other influencing factors. Therefore, more research with actual data and a broader analysis of bonus schemes is needed to assess their impact on dentist retention in the Navy.
One study shows that offering a $5,000 retention bonus to top teachers in low-performing schools increased retention and led to significant improvements in student reading scores, even after the bonus period ended. Math scores also marginally improved but showed less lasting impact.
By valuing Air Force pilots' experience through three human resource accounting models - including training costs, future contributions, and replacement impact - researchers concluded that a pilot retention bonus is economically justified. Each model, focusing on different aspects of investment and return, demonstrated that the benefits of retaining pilots outweigh the cost of the bonus, making it a sound policy decision. This highlights the value of using such methods to inform strategic resource allocation within the Air Force.
Dr. Sullivan delivers a scathing critique of retention bonuses in his ERE article, calling them costly and unreliable investments. He challenges companies to find concrete evidence of their effectiveness, raising red flags about their widespread use.
How to structure a retention bonus
Indeed, it shows that a retention bonus can range from 20 to 25% of the employee's base salary. An SHRM article notes that a mere 28% of organizations have formally defined employee retention bonus criteria. Whenever a retention bonus is necessary, careful planning and targeted application are crucial. For instance, during a merger, a retention bonus may be strategically distributed to key personnel to ensure their commitment. One-third of this bonus might be delivered even before the deal's conclusion, serving as an immediate reward. The rest, which constitutes two-thirds of the total amount, could be dispersed after a year. However, this later payment should hinge on the recipients achieving specific performance metrics.
While retention bonuses aim to attract and retain valuable talent, their effectiveness is often undermined by emotion-driven decisions. A staggering 70% of managers admit to basing these crucial rewards on subjective factors rather than clear, data-driven criteria. This lack of objectivity creates a breeding ground for inconsistency, potential bias, and, ultimately, the loss of key individuals. Imagine offering a hefty bonus to an employee with average performance and high visibility simply because they're liked while overlooking a high-performing but less vocal member of the team. By embracing data-driven processes and establishing transparent eligibility criteria, organizations can transform retention bonuses from a gamble fueled by sentiment to a strategic tool for attracting, rewarding, and retaining the talent they truly need to thrive. In addition to this, a 2023 SHRM survey reveals that 72% of organizations use manager discretion for performance-based bonus decisions, while only 28% have set retention bonus criteria.
Conclusion
The effectiveness of retention bonus remains a complex and multifaceted issue. While they are popular, research presents a mixed picture. They can be successful in specific situations, like retaining key personnel during mergers or incentivizing teachers in disadvantaged schools. However, their efficacy depends heavily on careful planning, targeted application, and data-driven decision-making.
Here are some key takeaways:
A retention bonus works best when strategically targeted: Targeting specific groups with valuable skills or crucial roles during critical periods maximizes their impact.
Data-driven criteria are crucial: Basing decisions on performance metrics and clear eligibility criteria eliminates biases and ensures fairness.
Financial incentives alone are not enough: Creating a positive work environment, fostering employee engagement, and offering development opportunities are equally important for long-term retention.
More research is needed: While existing studies offer valuable insights, a broader understanding of the long-term consequences and alternative retention strategies is required.
Ultimately, a retention bonus should be viewed as just one tool in a broader talent management strategy. Organizations must carefully consider their goals, employee needs, and the overall company culture before implementing such schemes. By combining financial incentives with strong workplace practices and a focus on employee well-being, companies can build a sustainable and effective approach to retaining their best talent.
Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.Email:mnguwi@ipcconsultants.com or visit our websites https://www.thehumancapitalhub.com/ and www.ipcconsultants.com