What is an Employee Retention Bonus? And Do They Still Work in 2022?

An employee retention bonus (ERB) is a financial incentive that offers an extra payment on top of the employee’s salary to keep them satisfied, with the goal of keeping them at the company longer. It is often given out during transitional times within a business, such as organization wide changes or a merger and acquisition. The average retention bonus is calculated based on various factors, such as the current financial situation of the company, the length of the retention period, the employee’s base pay and service time, and the possible impact if the employee resigns from the company. Retention bonuses are offered to key employees with specialized skills, knowledge, or experience that would hurt the business to lose. The employee must be working full-time for at least 30 hours a week and have spent some time in the business before being eligible.

Additionally, the role, experience, and skill level should also go into consideration when deciding who should be offered a retention bonus. The time period for when the retention bonus is paid out varies between companies and their internal policies, but in most cases it is paid after the transitional period written in the contract. A retention bonus is seen as taxable income by the IRS. There are two ways to apply taxes to retention bonuses: percentage method and aggregate method. Consulting a tax professional before signing the retention bonus agreement is recommended to understand the full tax implications.

Retention bonuses vs. sign-on bonuses are not paid to keep an employee at a company, but instead are financial awards as an incentive to join the company. When should employers offer a retention bonus?