Crucial facts to consider before signing a retention agreement, including legal ramifications, taxes, and more.
A retention bonus is a one time payment made to an employee in hopes of retaining them. This financial incentive usually comes with the expectation that, upon receiving the bonus, the employee will stay with the company for a predetermined period of time.
A retention bonus amount is usually 10-25% of an employee's base salary.
The percentage of base salary offered is determined by any number of factors, from competitor salaries to the sheer amount of funding a company has available.
While the primary goal of retention bonuses is to keep key employees on board, the motivating factors behind them may vary:
Since a retention bonus may come your way during times of prosperity or uncertainty, how do you know whether accepting one is the right move?
Before you accept a retention bonus, there are a number of factors you'll want to consider. Here are a few of them:
Companies have different motivations for giving out retention bonuses. Consider whether the company is facing a time or turmoil or prosperity (and competition). Reflect on how you feel about those motivations: do you feel flattered to be deemed a valuable employee? Or do you feel like your employer is trying to buy your loyalty rather than earn it?
If you had already planned on staying with the company for the duration of the retention agreement, accepting the bonus should be a no-brainer. It may even provide a degree of job security you didn't have before.
If you aren't happy with your position, you already started browsing for other jobs, or better opportunities are coming your way, you have to ask yourself if the retention bonus is worth sticking around for.
Retention bonuses are deemed supplemental wages and they are taxed. It's important to consider the tax rate and method before moving forward-- sometimes, you'll end up forfeiting 40% of your bonus to the IRS!
Here are the two potential taxation methods you need to be aware of. If you're unsure about which method will be used and how much tax will be taken out, consult a tax professional:
Some employers will use language in a retention bonus agreement that is designed to trap an employee. Pay attention to these clauses and conditions to avoid getting screwed over:
this condition stipulates that an employee will only receive the retention bonus if they are actively employed by a specific date. Actively employed can mean different things to different employers: for some, it simply means you're on their payroll. For others, it means you are on the job, performing your duties as normal. This meaning is the one you have to look out for-- employers could try to penalize you for being out sick, taking a leave of absence, or otherwise taking a break from your duties.
We recommend that you:
this condition stipulates that an employee's receipt of the retention bonus will be determined solely by the employer (at their "sole discretion"). It leaves room for employers to withhold bonuses for any number of reasons-- for example, they could deem performance that's only slightly worse than normal "unsatisfactory" and withhold your bonus, even if an external factor hindered your progress.
We recommend that you request language that places more power in your hands. "Reasonable discretion" can be a comfortable term, as long as "reasonable" is defined in a way you and your employer both agree with. A performance-based condition is also common, where you agree upon minimum standards of achievement.
Look out for any language that reflects an employer's commitment to keeping you on board for the duration of the bonus agreement, and how that will impact your bonus.
If this language is absent or "implied", make sure to ask your employer to clarify and incorporate the commitment into the agreement.
In an ideal situation, your employer would agree to give you the retention bonus if they choose to let you go before the retention period ends. This is also a great opportunity to request advanced notice or severance, if you are terminated while the bonus agreement is still in place.
Keep an eye out for anything else that may leave room for an employer to take advantage of you. Unfortunately, this can happen in a number of ways. Employers could make retention bonuses contingent on things you can't control (i.e. "you'll receive it when the merger goes through"), or they could begin picking away at the quality of your job after you sign (i.e. cutting other benefits, giving you more work, etc). To gain a complete understanding of your retention bonus agreement, it's best to consult a professional.
What if you already accepted a retention bonus but now you're having second thoughts? Maybe you received a better offer, or maybe you just fell out of love with your current role. Regardless, we're here to help. These tips will help you figure whether getting out of the agreement is the best decision for you.
Look out for the things we outlined above and identify any other ways an employer could come after you, should you choose to leave. More likely than not, the bonus money is the only thing at stake, but it's always good to re-familiarize yourself with the contract before proceeding.
The most important term: What happens to the money? This information should be available in your contract. There are two important factors to consider:
Here's one example of how to introduce this conversation:
Retention Bonus Questions
After submitting my resignation, it has come to my attention that we still have to account for the retention bonus you offered me earlier this year.
Since I've made significant progress towards the goals we outlined, I feel it'd be fair if (X Company) paid out the pro-rated retention bonus amount in lieu of severance as I depart. Please let me know what you think.
Is the relationship you have with this company, your bosses, and even your coworkers worth risking? Backing out of a retention bonus agreement may not be taken kindly-- you're rolling back on a promise to be loyal to an employer. Consider the potential impacts on your network and future prospects before making the decision to leave.
Are you leaving to take a once-in-a-lifetime opportunity, or are you just sick of your job? Will you have to pay back the bonus, and if so, do you have the funds to do so? There are a lot of factors to take into consideration, between the terms of the contract and the host of personal reasons that can influence this kind of decision. Take some time to reflect on how leaving will impact you and whether you should hold on to your position a little longer.
Two things are negotiable here: the dollar amount and the terms.
Here is an example email template for asking to increase the amount:
Dear (Their Name),
I am flattered by your offer of $150,000 to stay an additional two years and I wanted to explore that further.
After considering and discussing this with my mentors, I feel the amount of $180,000 is closer to what I would be looking for to stay. If that is not feasible, I would be willing to sign on for 12 months retention in exchange for a $100,000 bonus.
Let me know if you'd like to discuss this in person. Looking forward to hearing from you.
In other cases, the terms may be more pertinent. Here is an example of an email discussing terms:
Retention Bonus - Terms and Conditions Question
Dear (Their Name),
I've enjoyed my time here at (X company) and I would love to sign a retention agreement for another year. However, I was hoping we can solidify some of the expectations.
In the agreement you sent, I was hoping we could change the "sole discretion" clause to something more specific, so both you and I have reasonable metrics in mind when judging my performance.
This clause is important to me and I don't feel comfortable signing as-is. Hoping we could reach a middle ground that works for both of us.
If you have multiple issues and would like to further negotiate over email, here's how to tackle the discussion:
Thank you for the generous offer of a $50,000 retention bonus. While I would love to continue working at the company, I am hesitant to make a hard commitment unless we're able to negotiate some of the terms. In particular:
- I would like for the retention bonus to be paid out/ vested in pro-rated portions versus a lump sum payment
- The amount of $50,000 feels low, considering the increasing complexity of my contributions. I was hoping we can get closer to $90,000.
- I would like to revisit some of the clauses in the contract I don't fully understand and get more color from you.
Can we schedule a time to discuss this more in detail?
I look forward to hearing back!
The information provided herein is for general informational purposes only and is not intended to provide tax, legal, or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security by Candor, its employees and affiliates, or any third-party. Any expressions of opinion or assumptions are for illustrative purposes only and are subject to change without notice. Past performance is not a guarantee of future results and the opinions presented herein should not be viewed as an indicator of future performance. Investing in securities involves risk. Loss of principal is possible.
Third-party data has been obtained from sources we believe to be reliable; however, its accuracy, completeness, or reliability cannot be guaranteed. Candor does not receive compensation to promote or discuss any particular Company; however, Candor, its employees and affiliates, and/or its clients may hold positions in securities of the Companies discussed.