Retention bonus: Overview, definition, and example
What is a retention bonus?
A retention bonus is a financial incentive offered by an employer to encourage an employee to stay with the company for a specified period of time, often during a period of transition, mergers, acquisitions, or other critical times for the organization. The bonus is typically paid out after the employee has remained with the company for a pre-agreed duration, and it serves as a way to retain key employees and prevent them from leaving.
For example, a company might offer a retention bonus to an executive to stay through a merger, ensuring continuity and stability during the process.
Why is a retention bonus important?
A retention bonus is important because it helps companies retain valuable employees during periods of change or uncertainty. It is a tool often used to prevent key employees from leaving for competitors or other opportunities, particularly when their expertise and leadership are critical to the company’s success.
For employees, a retention bonus can provide additional financial security and motivation to stay with the company, even when faced with challenges or potential offers from other employers. For employers, retention bonuses can ensure that key talent remains in place, protecting the organization from potential disruption.
Understanding retention bonuses through an example
Imagine a company undergoing a merger with another firm. To ensure that key managers and employees remain with the company during the transition, the company offers a retention bonus. If the employee stays with the company for the next 18 months, they will receive a $50,000 retention bonus.
In another example, a technology company is facing high turnover in its IT department. To retain its senior engineers, the company offers a retention bonus paid over the next two years, contingent on the engineers staying with the company and continuing their work on a major new product launch.
Example of a retention bonus clause
Here’s how a retention bonus clause might appear in a contract:
"The Company agrees to pay the Employee a retention bonus of [$amount] upon the successful completion of [specified period of time or project]. The Employee must remain employed with the Company during this period and fulfill all job responsibilities in order to qualify for the retention bonus."
Conclusion
A retention bonus is a valuable tool for employers to retain key employees during times of change or uncertainty. It provides employees with additional motivation to stay with the company and ensures continuity for the organization.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.