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Retention Bonus



Definition

A retention bonus is a financial incentive offered by a company to a valuable employee to remain with the company, especially during a critical business period or during a period of transition such as a merger or acquisition. It is typically a one-time payment, given at the end of a specified period, if the employee continues with the company. This strategy is used when replacing the employee would be difficult or costly.

Phonetic

The phonetic pronunciation of “Retention Bonus” is: rɪˈtɛnʃən ˈboʊnəs

Key Takeaways

  1. A Retention Bonus is a financial incentive offered by an employer to a valuable employee to retain them during a critical business period. This could be during a company restructuring, a merger, or a significant project where their skill set is critical.
  2. The bonus, which may be a lump sum amount or an ongoing payment, is usually dependent on the employee remaining with the company for a set period of time or until a project is completed. This encourages employee loyalty and commitment during potentially uncertain times.
  3. This type of bonus may also be tied to performance metrics. It is important to note that a retention bonus is subject to all regular employment taxes and should be included in any financial planning or budgeting.

Importance

A retention bonus is crucial as it is a strategic tool utilized by businesses to maintain key employees and ensure continuity especially during crucial periods like during a merger, acquisition, or a significant project. It is a form of financial incentive given to a valuable employee to encourage them to stay with the company for a certain period of time. Retention bonuses are beneficial as they help reduce staff turnover, retain talent, and consequently, ensure a business’s longevity and successful operation. However, they also maintain morale and productivity, as losing vital employees can negatively impact the business climate. Therefore, a retention bonus is considered as an essential element in the finance/business sector.

Explanation

A retention bonus serves as a strategic tool used by businesses, particularly during times of organizational change or instability, to ensure the retention of key employees. The main purpose of a retention bonus is to incentivize valuable employees to stay with the company for a longer period, especially those whose skills or experience are critical to the company’s performance, during merger or acquisition, or even during rough times when the company could face a severe turnover. For instance, when a company is in the process of being sold, it may use retention bonuses to keep important staff until the sale is complete.A retention bonus is not just practical for retaining high-quality employees, it can also be utilized to maintain a level of consistency and continuity within the business operations which is critical, especially during transitional periods. Typically, a retention bonus is a lump sum payment or package given to an employee after spending a certain length of time with the company or after completing significant projects. The amount of the bonus varies but it is often significant enough to motivate retention. The value of a retention bonus can far exceed its cost, considering the cost savings from avoiding the loss of an important employee, reduced disruption, and maintaining operational excellence.

Examples

1. Steve Jobs Retention Bonus: When Steve Jobs returned to Apple after his previous departure, the board of directors offered him a retention bonus to ensure he would stay with the company for a significant period of time. This included a large stock option grant that would vest over time. The result was that Jobs stayed and lead Apple to become one of the most valuable companies in the world.2. Investment Banking Industry: Retention bonuses are common in the investment banking industry. In 2008, during the financial crisis, Merrill Lynch was taken over by Bank of America. The latter decided to issue $3.6 billion in retention bonuses to Merrill Lynch employees. This was done to prevent them from leaving during the merger and to keep the firm’s operations running smoothly.3. Healthcare and Pharmaceutical Industry: There are numerous cases where pharmaceutical and healthcare companies have provided retention bonuses to key employees during times of merger and acquisition. For instance, when Actavis acquired Allergan in 2015, they offered retention bonuses to keep top performing scientists and researchers from leaving the company. This helped the newly created company maintain its competitive edge in the pharmaceutical industry.

Frequently Asked Questions(FAQ)

What is a Retention Bonus?

A retention bonus is a financial incentive offered by an employer to a valuable employee to stay with the company, especially during a difficult period or during a buyout or merger.

When is a retention bonus typically paid?

The retention bonus is typically paid after a specified period of time, usually after the critical event has passed or over the course of several months or years.

Why would a company choose to pay a retention bonus?

Retention bonuses are used to keep key employees on board during uncertain or delicate times within the company. This could be during mergers, acquisitions, or during pivotal projects. It acts as an incentive for the employee to remain with the company.

Will a retention bonus bind an employee legally to the company?

Not usually. Even though retention bonuses are intended to incentivize employees to stay, the employee is generally free to leave the job. However, if the employee leaves before a specified time, they may have to return the bonus.

How is a retention bonus different from a signing bonus?

A retention bonus is paid to keep an employee with the company during a critical time period, while a signing bonus is a one-time bonus provided when an employee accepts a new job offer.

Are retention bonuses taxable?

Yes, retention bonuses are typically treated as income and are subject to income taxes.

Can all employees receive a retention bonus?

Not necessarily. It often depends on the company’s policy. Typically, retention bonuses are targeted at key employees whose departure would significantly affect the company’s operations or success.

How is the amount of the retention bonus determined?

The amount of a retention bonus varies depending on many factors like the employer’s resources, the perceived value of the employee, and the circumstances necessitating the bonus. In some cases, it could be a percentage of the employee’s standard salary.

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