What is a retention bonus?
A retention bonus is a lump-sum payment offered to a desirable employee in order to keep them employed with your company during times of operational upheaval. Most retention bonuses are conditional on the employee remaining with the company for a specific period of time, or else they forfeit the bonus and must pay it back. Retention bonuses are a highly effective way of preventing employee turnover but should be used as a last resort when other aspects of working for your company (such as doing rewarding work or receiving promotions or regular raises) are no longer good enough reasons for an employee to stay. Retention bonuses are taxable, and subject to your province’s payroll and income tax deductions, so be sure to consult with a financial professional to see if you have the capacity to offer them.
Should you give retention bonuses?
Whether or not you should give retention bonuses depends on a variety of factors, starting with the situation your company finds itself in. Retention bonuses are usually only used in cases where employees need a reason to stay with your company, such as a rough transition period between projects or a complicated merger or acquisition that has disrupted operations. Situations like these tend to upset even the most tenured employees if they are not handled properly, and many will start looking for a new job if they don’t trust that things will change for the better. This is obviously not an ideal situation for an employer, and you should reflect on why these feelings may be arising among employees.
Your employees should want to work for you, and that includes during the tough times. If they are looking for an exit when things get difficult, it’s a sign that something internally is not working. It could be that you’re not paying them enough, not offering them opportunities to work on exciting projects, not investing in them via skills training or simply not fostering the kind of culture where your employees feel invested in the company. Each of these issues is complex and will involve much more dedicated fixes than simply throwing money at them, as in the case of a retention bonus. Giving an employee some extra money in exchange for their loyalty will not erase any issues they are facing at work that make them want to leave to begin with.
That said, retention bonuses can often start a dialogue between you and your employee where you can explore these issues and formulate an action plan to overcome them. Since retention bonuses are often tied to a time commitment where the employee must remain with the company in order to receive the full amount, it gives you time to address their concerns. The risk you run with this is the fact that there may be larger, more systemic issues with working for your company that are too great to overcome in only a few months. In cases like this, you may end up giving a bonus only for the employee to end up leaving once the time commitment is up. It is therefore only a good idea to offer a retention bonus if you are truly dedicated to making changes to improve working conditions for the employee in question.
Benefits of offering retention bonuses
There are some benefits to offering retention bonuses to the right employees. First and foremost, it signals to them you are dedicated to keeping them and are willing to do what it takes to earn their trust again. Many companies lead with empty promises about changing company culture or improving working conditions, but it takes courage and resolve to actually follow through on these promises. Change can be slow in the world of business, especially when multiple layers of the company need changing. If an employee is willing to stay the course and see things through, a retention bonus can act as wind in their sails and motivate them to take charge and be the change they want to see in the company.
Retention bonuses can also be a sound strategic decision, especially when you operate in a highly competitive labour market. Losing top talent always hurts, but it especially hurts when you lose it to one of your competitors. You aren’t just losing a person, either: most of the time, they take what they’ve learned from your company and all of the training and investment you put into them and use it to make their new company (your competition) better. Even if they’ve signed a non-disclosure agreement as part of their employment contract with you, there are still things like presentation and software skills they may have learned from your company that are not included in a non-disclosure agreement and which may make them a standout employee at the new company.
Risks of offering retention bonuses
If you are unwilling or unable to make the kinds of changes necessary to keep an employee happy beyond the retention bonus, you may be throwing money away to temporarily prevent people from leaving your company anyway. It is always cheaper to retain employees than it is to hire new ones, so retention bonuses might end up being money-savers in the long run, but you must also be mindful of how much to offer. Giving an employee 5% of their salary as a bonus might not be enough to keep them, but offering 15% or more might be financially unrealistic, especially if they are an executive or senior employee who already earns quite a bit to begin with.
You should also take a closer look at the employee’s performance before deciding to give them a retention bonus. Are they truly irreplaceable, or is there someone internally who could step up and take on their responsibilities? Keeping an unhappy employee around, no matter how entrenched they are at your company, might negatively affect morale and lead to poorer outcomes than cutting your losses and promoting from within. In fact, promoting a deserving employee from within your organization could have a much more positive outcome than a token gesture of appreciation made to an unhappy employee in the hope they’ll change their mind about working for you.
If you are committed to turning things around, and the tough times your company is experiencing are temporary, retention bonuses can be an effective way to keep key people around. But if you’re using them to patch up more glaring issues with your internal processes and/or compensation structure, there are far more effective ways to reduce turnover and position your company for ongoing success.
