No employer wants to lose out on their best people, right? That is why retention bonuses will remain a significant part of talent management solutions. Companies have used retention bonuses to retain their best people per their roles, skills, and experience. Today, organizations may still have ample talent in technology skills like robotic process automation, artificial intelligence, machine learning, or cybersecurity. But earlier, this talent pool was limited. About three years back, IT companies in India, such as Wipro, Tech Mahindra, and Cognizant, were offering retention bonuses to employees with expertise in robotics, machine learning, cognitive tools, artificial intelligence, blockchain, and augmented reality. Things have not changed much in recent times as well. The post-pandemic era brought the challenge of the Great Resignation, which was felt by Indian employers too.
Last year, Infosys was offering salary hikes between 12-24%, including retention bonus to their employees. The company wanted to retain cloud computing and data science skills in different geographies. Offering retention bonuses was very popular in the BFSI sector, specifically the banking industry. Large banks offered big retention incentives, which could range between 12-15% of the base salary. The banks did not wish to lose their key talent to their competitors; hence, retention bonuses helped. But now, the practice has slowly moved to telecommunication, IT services, and the FMCG sector. With the emergence of new-age businesses and startups, the challenge of talent poaching has increased manifold.
Retention bonuses
How does a retention bonus work?
Generally, retention bonuses are given above and over an employee’s salary. Moreover, it is a one-time payment made to the employee with a lump sum amount. At times, the amount is also given in installments in a specific period.
Employment duration
When a retention bonus is given, a formal agreement is prepared that states all the policies related to the bonus given to the employee. Since the bonus is given to the employee for retention, it holds some mutual agreements. As per the employment period, if the employee accepts the retention bonus, they will need to serve the agreed duration mutually agreed upon.
Amount
The amount of the retention bonus depends on the criticality of the role and skills of the employee. The more value they would hold, the higher the amount will be. As per industry standards, the retention bonus comes around 12-15% of the employee’s base salary. It can also go up to 30%. If the employee moves out to join a competitor, it is benchmarked with the competitor’s offer.
Financial status
All agreements state that the company needs to be solvent and meet specific liquidity requirements for issuing the bonus. The bonus cannot be given if the company becomes insolvent and is not operating.
Reimbursement agreement
If the employee agrees to accept the retention bonus, as mentioned above, he/she needs to serve the agreed amount of duration. This is called the vesting period. In case the employee leaves the company before completing the vesting period, he/she will have to repay the retention bonus amount in full to the company.
Non-disclosure agreement
By accepting the retention bonus, the employee cannot reveal details regarding the retention bonus to other colleagues or competitors.
Other legal terms
It also includes other legal terms such as what happens in case of an M&A or the company takes no guarantee for employment as the vesting period ends.
Taxation
As per the law in India, like any other bonus, a retention bonus is also taxable. The company includes the retention bonus with the salary, and the TDS is calculated on the culminated amount of the salary and the retention bonus.
Does a retention bonus work?
The practice of giving retention bonuses is very common. Retention bonuses are still relevant. But to make it more impactful, organizations must make the proposition more promising. Last year, IT services firms gave skill development opportunities, salary hikes, and promotions. Experts say a retention bonus alone is of no value if the organizations have cultural and work environment issues. So, companies will have to couple other benefits and create a positive work environment to make retention bonus more successful in retaining their best talent. An Advantage Club report says it would be a great idea to include non-monetary rewards, which can reduce attrition by 70%. Moreover, companies will have to couple other benefits with a retention bonus since it also binds the employee to take up other exciting opportunities outside the organization.
Which non-monetary benefits can organizations offer?
There are a number of non-monetary rewards that can help an organization create a further positive culture where employees feel welcomed, valued, and a sense of belongingness.
- Appreciation: It is best to drive a culture of appreciation in the organization. The best way to do this is to encourage employees and managers to recognize and appreciate hard work through positive gestures and words. Let's say you worked continuously through the night to for a client's product launch. Your manager allows you to come comfortably the next morning and appreciates your work commitment. How would you feel? Similarly, digital recognition solutions like Advantage Club can also be used for peer-to-peer recognition through digital badges.
- Building a community: Building communities is essential to drive belongingness and camaraderie amongst employees. Employees can build groups and hobby clubs as per their hobbies and interests, such as a cooking club or an art club where like-minded people can interact and build a stronger bond.
- Social recognition: Peer-to-peer recognition is an important part of building a positive culture. Most companies appreciate an employee for their good work through an internal post sharing his/her achievements where everyone knows the internal stars and recognizes their value.
Retention bonuses can also backfire
Though many studies and surveys have shown that monetary benefits are supreme when it comes to retaining employees, the R&R trends study by Advantage Club also states that monetary rewards reduce attrition by more than 90%. But monetary retention bonuses can also backfire at times.
- Sense of loyalty buying : When an employee resigns, a retention bonus policy will message that the company only values an employee when he/she decides to leave the company. In such a case, when a valuable employee resigns, the first approach should not be fishing out extra money and retaining the talent. As HR professionals, one should know the root cause of the problem and why the employee is leaving and come to a solution.
- Conflict amongst employees : Retention bonuses can lead to internal conflicts between employees and team members. Moreover, it also risks leading to a behavior where employees can resort to putting in papers for a short-term bonus or pay raise.
- May not address the root cause : Retention bonuses can help retain good talent. Moreover, employees will also accept it to get some more money. However, it does not solve cultural issues or eradicate a toxic environment.
The relevance of retention bonuses may keep increasing since employees have a far greater number of opportunities to work. Further, the new workforce wants to take on new and exciting opportunities, and retaining them will become more challenging in the future. So, companies must make retention bonuses more impactful by incorporating non-monetary benefits, which can help promote a healthy culture. This combined approach to increasing retention in the organization will give better results.
Frequently Asked Questions (FAQs)
What is a retention bonus?
A retention bonus is a one-time payout to employees to retain key and important talent. The retention bonus is given over and above the salary of an employee. It is given in case of an important business cycle such as a merger & acquisition or if an employee is in the middle of an important project and the company does not want him/her to leave.
1) How much is a retention bonus typically?
A retention bonus typically ranges between 12–15% of an employee’s base salary, though it can go up to 30% depending on the criticality of the role and the value the employee brings. In competitive scenarios, it may be benchmarked against a rival employer’s offer.
2) What is a vesting period in a retention bonus agreement?
The vesting period is the minimum duration an employee must remain with the company after accepting a retention bonus. If the employee exits before this period ends, they are typically required to repay the full bonus amount to the employer.
3) What happens if an employee leaves during the retention bonus period?
If an employee leaves before completing the agreed vesting period, they are legally obligated to return the full retention bonus amount to the company. This clause is part of the formal retention agreement signed at the time of accepting the bonus.
4) Do retention bonuses actually work?
Retention bonuses can be effective short-term but lose impact without supporting factors. Research shows that monetary rewards can reduce attrition by over 90%, but they must be paired with a positive work culture, growth opportunities, and non-monetary benefits for sustained employee retention.
5) What is the difference between a retention bonus and a sign-on bonus?
A retention bonus is paid to existing employees to encourage them to stay with the organization, while a sign-on bonus is offered to new hires as an incentive to join. Both are one-time payments, but they serve opposite ends of the employee lifecycle.
6) Can a retention bonus backfire?
Yes. A retention bonus can create a sense of “loyalty buying,” foster resentment among colleagues who don’t receive one, or trigger a behavior where employees quit and re-accept roles purely for the bonus payout. It doesn’t resolve underlying cultural or management issues.
7) What are alternatives to a retention bonus for keeping employees?
Beyond financial incentives, organizations can offer peer-to-peer recognition, skill development programs, community building, social recognition, flexible benefits, and career growth opportunities. Non-monetary rewards, combined with a positive work environment, can reduce attrition by up to 70%, according to AdvantageClub.ai data.
