Retention Bonus

Employee retention bonus: factors and checklist for success
An employee retention bonus can be a panacea for retaining the best employees on your team. Rather, they are a tool that can help keep employee satisfaction high (and away from competition). In this article we will give you an overview of what they are and how you can introduce these types of rewards.

The most important facts
– Loyalty bonuses are lump sums that are added to an employee’s base salary and provide an incentive to stay with the company.

– Employee participation shows how much you value top performers.

– You can also offer a range of alternatives that have the same effect as a retention bonus.

What is a retention bonus?
An employee retention bonus (ERB) is a lump sum paid in addition to an employee’s normal salary to thank them for staying with the company. A retention bonus is often 10% to 25% of an employee’s base salary.

When should you consider a retention bonus?
A retention bonus is intended to mitigate disruptions in your workforce, so it is often used during transition periods, e.g. granted in the event of a merger or takeover. It’s also a good idea to consider whether employee longevity is a priority for your company, as the financial incentive may persuade someone to stay.

Why should you offer an employee retention bonus?
There are several reasons why you should consider introducing loyalty rewards for your employees.

Retain key employees in your company
Some roles require hard-to-find skills, making it difficult to replace an employee in that role if they leave. Companies often offer additional incentives to retain these types of employees long-term and discourage them from taking these valuable skills to a competitor. Additionally, offering ERBs can help retain employees to deliver large projects, ensuring continuity and a more reliable standard of work.

Building institutional knowledge
A higher employee retention rate promotes a comprehensive wealth of company knowledge through the constant presence of older employees. This institutional knowledge is of great benefit to the company as it provides insight into efficient processes and a deep understanding of the relationships between individual departments.

Show appreciation
ERBs are also a meaningful reward for your top performers. While there are several ways to show your company’s appreciation for an employee’s contribution to the company, additional money is one of the most effective. For this purpose, it makes sense to offer bonuses for employee retention even beyond the transition period. For example, your company might offer a bonus for top talent after a performance review.

Benefits of employee retention bonuses
Retention bonuses can have a positive impact on the success of your company by motivating high-performing employees from outside to stay with the company.

Benefits for employees
– Stronger negotiating position. A solid employee retention strategy allows employees to negotiate bonuses and other benefits if they consider leaving. This measure prevents valuable employees from leaving the company without first lobbying for higher compensation.

– Improved workforce morale. Employee retention rewards are designed to show your best employees that they are an asset to the company and help nurture employee relationships. This creates a stronger bond between employees and your company, motivating them to work more thoughtfully and achieve better results.

– A token of appreciation. ERBs are a way to show an employee how valuable they are to their team and the company as a whole.

Benefits for organizations
– Increased employee engagement. Loyalty rewards provide stability during times of stability and during times of significant internal change such as mergers. The additional incentive to stay in key positions strengthens productivity and stability throughout the company.

– Better business resilience. If you pay bonuses over a longer period of time, your employees are more likely to stay with the company. A loyal workforce is a guarantee of stability, which is essential for smooth operations.

Disadvantages of employee retention bonuses
Despite the numerous advantages of employee retention bonuses, there are also disadvantages that you should consider before incorporating them into your business strategy.

Disadvantages for employees
– Does not contribute to job satisfaction. While extra money is a fairly reliable motivator, it only works to a certain extent. If an employee’s job satisfaction is particularly low, a bonus won’t do much to increase it.

– May cause tension in the workplace. Retention bonuses are not always distributed evenly or offered to all employees at all levels of the company. This may cause resentment among some employees who may perceive this as unfair.

– The underlying problems are not addressed. Using ERBs to reduce employee turnover is not a permanent solution. Treating you like one could mean that a deeper problem becomes entrenched and causes further harm to your company’s workforce.

Disadvantages for organizations
– Can be interpreted negatively. Depending on the context in which the reward is offered, it may be seen as your company’s attempt to buy loyalty.

– It avoids dealing with major problems. ERBs can help mitigate the impact of high turnover, but only for a time. If you don’t ask why employees are leaving or want to leave, you’re avoiding getting to the heart of the matter.

Checklist: What to consider when offering employee retention bonuses
Even after deciding to implement ERBs as part of your retention strategy, there are still a few factors to consider before implementing the program. These factors include:

• The situation on the labor market. Are companies in your area currently hiring new employees? In a lean or fluctuating job market, it can be difficult to find employees for more complex tasks. If you have employees in roles that you feel will be difficult to replace, offering a retention bonus can help retain your best employees.
• Seniority of the employee. How long has the employee been working for you? Long-term employees are often a treasure trove of knowledge about company processes. Keeping them in the company for as long as possible is usually a win.
• Corporate finances. Does your company have the means to offer – and enforce – extensive employee retention bonuses? ERBs are often cost-effective compared to finding and training new employees. But they can also be an prohibitive expense if your company hasn’t factored in these costs.
• The cost of losing an employee. How much would it cost to replace a departing employee? As a rule of thumb, replacing an employee costs about three to four times their annual salary, so ERBs are typically the more cost-effective option. If a departing employee earns £60,000, finding and training a new employee would cost around £180,000 to £240,000. In comparison, retention bonuses typically amount to around 15% of an employee’s salary, which is just an extra £9,000 on a salary of £60,000.
• Salary comparison. How much does the employee earn compared to the average industry salary? If he’s below the typical market value for employees in his position, a retention bonus can help make up the difference.
• Overall performance. How well did the employee work in his position? If they’ve done exemplary work, a promotion and raise could show them that their contributions are valued more than a lump sum added to their salary.

Are employee retention bonuses taxable income?
Under UK tax law, bonuses are considered taxable income. As an employer, you must add the bonus amount to the employee’s other income and report the total amount to the UK tax authorities. You will also need to deduct income tax and National Insurance Contributions (NICs) from the employee’s regular wages and bonus.

What alternatives are there for a loyalty bonus?
The purpose of a loyalty reward is to incentivize key employees to stay with your company by showing their value through financial rewards. However, there are other types of incentives that work in a different context but can achieve the same results. Some of these alternative bonuses are:

– Spot bonuses. These are small rewards that employees receive for completing a specific task. They provide an incentive for continued performance while also being a more cost-effective option.

– Task rewards. Also known as milestone bonuses, these bonuses are offered by companies when a team or individual employee achieves a project goal. Task rewards can motivate team members for the rest of the project.

– Profit sharing. A percentage of the profit the company made in a certain period is paid out to employees. The higher the profit, the higher the bonus, so the company’s workforce is motivated to achieve high-quality results.

– Sign-on bonuses. A flat-rate financial incentive added to a new employee’s first salary. The amount is revealed during the onboarding process and helps create a positive connection between them and the company.

Use employee retention bonuses to build a motivated workforce
The job market is almost constantly changing and competition for highly qualified talent is fierce. But finding these exemplary candidates isn’t as important as retaining your potential employees. Losing even one of them can have a negative impact on the success of your business, and they are often difficult to replace.

When you offer rewards as part of your employee retention strategy, you help create a positive work environment that curbs employee turnover and keeps your workforce strong.

Frequently asked questions about retention bonuses
What is a typical employee retention bonus?
Typically, the bonus is 10% to 25% of an employee’s base salary.

Who can receive a retention bonus?
Anyone can receive a retention bonus, but it is typically reserved for employees with complex or demanding tasks for whom it would be difficult to find a replacement. They are also often used to retain long-standing employees with in-depth institutional knowledge.

Are retention bonuses negotiable?
Yes. Strong employee retention strategies include a formal negotiation process that allows valuable employees to demand a higher bonus or other benefits.

How can you earn a retention bonus?
Employees earn a retention bonus by making themselves invaluable to the company’s continued success through good work or exceptional skills.