Let’s start off by defining what a retention bonus is. According to indeed.com, “A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time. Usually, retention bonuses are sizable amounts of money, ranging from 10% to 25% of an employee’s base pay. The time the employee agrees to remain in the company’s employ depends on the nature of the package.”¹
Retention bonuses tend to function as a way for larger companies to structure an employee’s compensation with the intent of encouraging their ongoing loyalty by rewarding their tenure at the company. However, as shrm.org reports, “A recent study by Hay points out that 20 percent of employees plan to look for a new job in two years and another 20 percent plan on definitely leaving their current positions in at least five years. As a result of the more tenuous nature of the employment relationship, turnover has become a more prominent aspect of organizational life. We would suggest that as with all components of rewards, pure dollars are never the ultimate driver.”²
When are retention bonuses successful? When the goal is to merely retain someone without regard to performance or engagement, they can be helpful. If this person is critical to help you through a merger, or a software implementation, a retention bonus will guarantee they’ll stay on staff for the contracted amount of time. However, if you want your employee to continue to perform at a high level, and continue to drive progress and change, additional factors that drive this individual toward success need to be factored into a retention bonus agreement.
If you aren’t driving engagement and trying to get at the root of what will get a key employee to stay, there’s nothing that says your employee will not leave once they’ve satisfied the terms of the agreement, and/ or they receive payment.
So, how do you improve employee engagement? Focus on aspects like leadership, feedback, professional development, and recognition. Regularly reinforcing the value you place on your team’s contributions, not just their tenure, is one of the best ways to improve their experience at work.
Inspiring your employees to stay for more than just money is the only way you can have any guarantee that if a competitor makes an offer with a bigger salary and a few other perks, he or she won’t be headed to the exit. Figure out how your employees want to be appreciated, what they want out of their role and company over the next year and beyond, and go to work on delivering it. If you can be successful with those plans, you’ll be able to look back at retention bonuses as “something we tried for a little while, but got mixed results.”