We’ve all been there—a critical employee resigns in the middle of an important project, a reduction in force (RIF) requires different end dates for different groups, or a high-stakes initiative depends on the expertise of a few key individuals.
These scenarios create stress and uncertainty, making it difficult for businesses to meet their objectives. Compounding this, Gallup reported in July 2024 that engagement scores had inched up two percentage points from an 11-year low earlier that year, highlighting how low engagement can strain retention strategies.
As business leaders, it’s the responsibility of the HR and compensation functions to create strategies that support the company’s ability to execute through its people. While sometimes viewed controversially, retention bonuses can be a valuable tool to stabilize workforces during periods of change or disruption.
What is a Retention Bonus?
Retention bonuses are future payouts promised to employees who remain with the company for a specified period. The goal is to ensure key individuals stay through critical transitions or projects, protecting institutional knowledge and business continuity.
Measuring ROI: Is It Worth It?
Assessing the ROI of retention bonuses can be challenging since they are akin to insurance—mitigating potential losses, some intangible, before they occur. To determine the appropriate size and terms, consider:
- Likelihood of Turnover: How likely is it that the employee or group will leave? What’s their morale?
- Business Impact: What’s the potential cost (financial or reputational) if a project slows, stops or is of lower quality due to turnover?
- Institutional Knowledge: What knowledge or expertise would be lost? How well is it documented or shared across teams?
Proactive vs. Reactive Retention Bonuses
Retention bonuses fall into two categories:
Proactive Bonuses: Used to stabilize big organizational changes, such as:
- Winding down a business unit where “last days” need to be staggered
- Launching a critical project where retaining specialized knowledge is essential
- Navigating leadership transitions where maintaining continuity in the second layer of leadership is key
- During events like mergers and acquisitions or initial public offerings (IPO) to retain individuals critical to the success of the transition
Reactive Bonuses: Often more controversial, these “dive and save” bonuses come into play when an employee resigns, introducing risk to a project or business unit. While some organizations take a hard stance against this practice (to avoid rewarding resignation threats), smaller businesses or those with HR functions in transition may not always have the luxury of perfect succession planning or compensation structures.
Key Considerations Before Offering a Retention Bonus
When deciding whether to implement a retention bonus, proactively or reactively, consider:
- Amount: The bonus should be “sticky” enough to persuade an employee to stay, potentially delaying or turning down other job prospects. Weigh the potential costs of losing the individual to determine the cost-benefit. Industry standards and traditional survey providers generally point to these amounts being 10-40% of base pay for critical individuals and 25-100% for executives.
- Length of Commitment: Define the period the individual must stay to earn the bonus and if you will include milestone payments along the way. Retention bonuses typically “buy” time, giving the business an opportunity to document processes, cross-train, or plan for succession. It’s safe to assume that retention bonuses are not a long-term retention strategy. They’re a bandaid, not a cure.
- Morale Impact: Can the individual remain a productive team member during this period, or could their continued presence cause more disruption?
- Pay Equity: Ensure that bonuses are applied consistently across similar roles. Inconsistencies can erode trust and undo retention efforts.
- Expectations: To further reduce risk, we recommend communicating expected deliverables, project milestones or performance expectations that the bonus is contingent upon in order to align expectations.
Retention Bonuses as Part of a Broader Strategy
When used thoughtfully, retention bonuses can be a powerful tool to reduce business risk. At WOVEN HR, we believe that these transactional rewards complement, rather than replace, a well-developed ecosystem of other retention strategies in the form of skills development and structured compensation programs, manager enablement, and frameworks that facilitate individual autonomy, career advancement and purpose.
Learn more about Pave’s end-to-end compensation platform
