Retention Bonus

What Is a Retention Bonus?

A retention bonus is a targeted payment or reward outside of an employee's customary salary that is offered as an incentive to keep a key employee at work during an especially urgent business cycle, like a merger or acquisition, or during a critical production period. This payment, intended to keep an employee from leaving their position, is commonly a one-time payment.

In recent years, retention bonuses have become progressively well known as corporate poaching has increased.

Grasping Retention Bonuses

When an organization is going through a disruptive period of organizational change, it offers financial incentives to senior executives and key employees to convince them to remain with the company until it becomes stable. The financial incentive is alluded to as a retention bonus.

During a merger, restructure, or reorganization, a company will endeavor to hold its best employees to verify that it has an adequate number of individuals working in the company during the difficult times. For instance, a business that is closing down a department or project will offer retention bonuses to its best performers to guarantee that it has the truly necessary employees to own the project as far as possible.

Blasting Economies and Liquid Labor Markets

In a flourishing economy in which employees are being offered and sold alluring job benefits from different companies, the likelihood of a business losing its significant employees to contenders is high. With the corporate scene changing practically daily and a liquid labor market allowing workers to move from one job to another all the more effectively, retention bonuses have given a great way to companies to keep key employees.

Furthermore, employees who have gotten new skills or completed training that is imperative to the operations of a business might be offered retention bonuses to guarantee that they don't take their skills elsewhere.

A retention bonus is commonly a one-time payment made to an employee. Companies for the most part really like to offer a retention bonus rather than a salary increase since they might not have the essential finances in place to focus on a permanent salary raise.

Contingent upon the company, the value of an employee's retention bonus might be tied to the employee's help out with the firm. The bonus is paid toward the finish of a period as either a percentage of the employee's current salary or a lump sum of money. For instance, assuming a project will require 12 months to be totally closed down, the employee retention bonus will be paid following 15 months to guarantee that the employee stays for the leftover life of the project.

Special Considerations: Tax Treatment of Retention Bonuses

The IRS treats all bonuses, including retention bonuses, as supplemental wages. Supplemental wage is defined essentially as compensation paid notwithstanding the employee's customary wages. Taxes are normally applied to a retention bonus utilizing either the aggregate method or the percentage method.

Under the percentage method, bonuses are separated from the employee's salary and taxed a flat rate of 22% straightforwardly. On the off chance that the bonus amount is more than $1 million, it will be taxed 37% (or the highest income tax rate for that year). In the event that an employee received $1.2 million as a retention bonus in 2021, $200,000 would be taxed at 37%, and $1 million would be taxed the customary 22% rate.

The aggregate method is utilized when the employer withholds tax by consolidating the retention bonus with the employee's standard salary into a single payment. The tax rate utilized is found in the withholding table, which depends on information submitted in the employee's IRS W-4 Form.

Highlights

• A retention bonus is a targeted one-time payment or reward outside of an employee's standard salary that is offered as an incentive to keep a key employee at work.
• When an organization is going through a disruptive period of organizational change, it offers financial incentives to senior executives and key employees to convince them to remain with the company until it becomes stable.
• Key employees may likewise be offered a retention bonus in the event that their employer suspects they might be hoping to leave to a rival to keep them.