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What is a Retention Bonus?

Malcolm Tatum
Updated May 16, 2024
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Retention bonuses are a form of financial incentive utilized by many different businesses. The bonus is usually issued to key employees as a strategy to motivate the individual to remain in the employ of the company. A retention bonus is usually extended when circumstances indicate the employee may be considering resignation, an action that will result in an undesirable loss to the ability of the business to function at optimum levels.

The retention bonus is an incentive that is offered above any beyond any other salary, wage, or other benefits currently extended to the employee via his or her compensation package. Considered a one-time transaction, the bonus is often a show of appreciation for the talents and expertise that the employee provides to the employer. In turn, it is hoped that the employee will reconsider any other employment options that may have come about and stay with the employer for at least a little longer.

It is not unusual for a retention bonus to be issued to key employees when a business is going through some type of major change, such as a merger or acquisition situation. The idea is to entice the employee to remain in his or her position at least until the current set of circumstances has been resolved. Since increasing salaries or issuing other types of permanent benefits may not be feasible during a period of transition, the bonus allows employers to retain employees at least until the acquisition or other major shift is complete.

Since this bonus is given freely, there are no contractual obligations that an employee must agree to in order to receive the bonus. However, acceptance of the bonus is considered a tacit agreement to remain in the current position at least temporarily. Businesses tend to issue the bonuses with the hope that the extra incentive will compensate the valuable employee for any discomfort or inconvenience that is resulting from the current set of circumstances, and retain his or her services for later times when the crisis has passed.

Just as there is no contractual obligation on the part of the employee to remain after accepting a retention bonus, the issuing of the bonus does not in any way commit the employer to any long-term guarantee of employment for the individual. For example, if the bonus were issued while a company was fighting off a hostile takeover attempt, the employee may still be terminated if new management assumes control of the company without violating any terms of employment that were put in place by the former management.

For this reason, employees may choose to evaluate the situation carefully, especially in terms of continued employment after the acquisition is complete. They may choose to accept the retention bonus while understanding that employment is only likely to continue until the takeover is successful, and will proceed with seeking out career opportunities elsewhere.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By anon308589 — On Dec 11, 2012

I got a retention bonus to retain within a role for 12 months. Will I get taxed on it?

By anon176829 — On May 16, 2011

I was given a 10K retention bonus back in Dec 2010 on the condition that I stay with the company for 18 months. But last Friday I was laid off, and now the company wants their 10K back. My position is that since I did not voluntarily quit, I should not have to give back the money.

By anon147844 — On Jan 30, 2011

OK a good chunk of the company is for sale - the other half may be relocated. I was offered a bonus to be paid next year if I stay for one year, but I cannot discuss it with anyone. I can't move. I support the family. the money would be great but long term a job would be best.

It's killing me since my husband says don't worry and I can't talk to anyone.

If they didn't plan on relocating, they probably would not have to offer a bonus - well maybe. How would this get taxed? What if they let me go in a year will the bonus be considered with unemployment?

By anon144336 — On Jan 19, 2011

@anon35682: that would be a great idea if we were robots. As to where we could work optimally each and every day, but there are factors that make workers' performance levels fluctuate.

In the event of an employee's fluctuation from outstanding to "eh" what then? Pay them less, when the day prior they made quite a bit more for their efforts? This attempt probably wouldn't work, long-term but it seems like a good short-term idea. What are your thoughts?

By anon53728 — On Nov 24, 2009

I feel that if you have done above and beyond your job, that you should be rewarded and it would be nice to hear you are doing a good job and keep up the great work.

By anon43934 — On Sep 03, 2009

I was wondering how your Retention Bonus is taxed? Is it regarded as Lump Sum D, or an ETP Payment?

By anon35682 — On Jul 07, 2009

you should be given a good salary if you do a good job.we should not give "extra cash" just to keep you. if you have not done a good job why not the other way round? that should be the incentive.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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