when an organization is going through a disruptive period of organizational change it may offer financial incentives to senior executives and key employees to persuade them to stay with the company through the rough times the financial incentive is referred to as a retention bonus 1
retention bonuses may also be extended to preserve company specific skills and information during a project or technical knowledge that may be difficult to replace during a merger restructuring or reorganization a company will attempt to retain its best employees to make certain that it has enough people on site during challenging times 2 for example a business that is shutting down a department or a project may offer retention bonuses to its best performers to ensure that the project gets done booming economies and liquid labor marketsin a booming economy with a strong job market the probability of a business losing its most valuable employees to its competitors is high with a liquid labor market allowing workers to move from job to job more easily retention bonuses provide a way for companies to keep key employees in addition employees who have obtained new skills or completed training that is vital to the operations of a business may be offered retention bonuses to ensure that they do not take their skills elsewhere in addition to losing an employee with an advanced skillset a company runs the risk of the employee joining a competitor a retention bonus is typically a one time payment companies may prefer to offer a retention bonus rather than a raise that commits them to a long term salary increase depending on the company the value of an employee s retention bonus may be tied to the employee s length of service with the firm the bonus may be paid out at periodic intervals or at the end of a period as either a percentage of the employee s current salary or a lump sum of money 3for example if a project will take 12 months to complete the employee retention bonus may be paid after 15 months to ensure that the employee stays not all employment agreements contain a retention bonus and retention bonuses may be included as a financial incentive at any time during an employee s term common criteria of retention bonus agreementsretention bonus agreements differ in the details however they all touch these same points tax treatment of retention bonusesthe irs treats all bonuses including retention bonuses as supplemental wages a supplemental wage is defined simply as compensation paid in addition to the employee s regular wages taxes are usually applied to a retention bonus using either the aggregate method or the percentage method 4under the percentage method bonuses are separated from the employee s salary and taxed at a flat rate of 22 directly if the bonus amount is over 1 million it will be taxed at 37 or the highest income tax rate for that year 4the aggregate method is used when the employer withholds tax by combining the retention bonus with the employee s regular salary into a single payment the tax rate used is found in the withholding table which is based on information submitted in the employee s irs w 4 form 4retention bonuses are often subject to withholding taxes the retention bonus agreement will stipulate the terms of withholding benefits of a retention bonusthe obvious primary benefit for employers offering a retention bonus is the retention of the employee by keeping a specific employee for longer a company may employers who offer generous retention bonuses become known for it this can enhance their recruiting efforts current employees may feel motivated to work harder and gain specialized knowledge in hopes of receiving a retention bonus in the end companies may find that paying a retention bonus is less expensive than hiring a new employee the obvious benefit for a retained employee is the financial incentive which can be up to 15 of their annual base compensation agreeing to a retention bonus arrangement also has a positive impact on the relationship between an employee and a company though the employee is being incentivized to stay they may also gain the trust of prospective employers down the road by staying with one company through the retention period this demonstrates that the employee was a critical part of a company s success 