Learn What Retention Bonus Agreements Are and When to Use Them

October 17, 2022 Workhuman Editorial Team
Retention Bonus Agreement

In 2021, a survey by WorldatWork recorded a general increase in retention bonuses. 38% of the organizations surveyed revealed that they already use retention bonuses. Why is that? And what’s a retention bonus agreement?

Also known as a stay bonus, a retention bonus agreement can help push your company through the bottleneck during unpredictable periods. The fact is that no company can move forward without its employees, so it’s fair to plan for a bonus to help employees stick around during such tough times.

In this article, we highlight the ins and outs of the stay bonus agreement and how to use them for achieving your specific goals, as well as respond to some of the most commonly asked questions.

What Is a Stay Bonus Agreement?

A stay bonus agreement is a percentage raise in compensation that a company pays an employee if they agree to stay for a defined period of time. 

In general, organizations offer the stay bonus agreement as an incentive for employees to stay when the turnover rate is expected to increase.

The turnover rate may be on the rise due to internal factors, such as a change in the organization’s management, or due to external factors, such as a recession. In all cases, companies will likely offer bonuses to their best talents, who are costly to replace.

What is a key employee retention agreement?

A key employee retention agreement is a contract, including benefits or bonuses, set between key employees and their organization. Usually, the key employee retention agreement is offered to high-profile employees who offer exceptional value to the organization.

Is a retention bonus the same as severance pay?

A retention bonus isn’t the same as severance pay. Regardless of leadership position, retention bonuses are offered to employees to stay for the employer’s benefit, and they usually expire after a certain period (retention period).

Both agreements encourage employees to commit to the organization; however, retention bonus agreements generally provide a better compromise between shareholder interests. This is because severance pay will be paid upon contract termination whether the employee stayed based on the agreed-upon tenure or not. 

On the other hand, retention agreements can divide the same severance pay amount over months or years, and the employer will only have to pay them if they choose to extend the contract.

Although severance agreements aren’t required by law, companies offer them as proof of goodwill and to remain competitive in attracting the best talent. 

In severance pay negotiations, employers are pressured because they don’t want the employees to hurt their reputation or share their company’s secrets with competitors.

When should you use a retention bonus agreement?

As an employer, you should use a retention bonus if you foresee a stressful period for your organization. Similarly, you can expect your employees to negotiate a retention agreement to secure themselves in such scenarios. 

Here are some of the scenarios requiring retention bonus agreements.

  • Changes in leadership and management
  • Merger or acquisition of the company
  • Economic recession
  • Undertaking different projects
  • Fierce competition from companies attracting your employees

person contemplating continued employment at current company

Responding to a retention bonus offer

A retention bonus promises unexpected money, so you might be excited to accept the offer immediately. However, there’s an opportunity for more benefits through negotiation.

Still, navigating a stay bonus agreements as an employee might be tricky. In all cases, you need to start by reading the retention bonus agreement.

Next, consider both payment and duration. If you want to leave before the mentioned period ends, try negotiating for a shorter stay. Likewise, you can negotiate for a higher retention bonus if there are more promising opportunities in the market.

Additionally, request that your employer explains vague terms like “sole discretion” and “actively employed.” In the same way, ask your employer to elaborate on their commitment to you in case you get dismissed before the period in the agreement ends.

Should you accept the offer?

I’d feel appreciated as an employee if I received a retention bonus offer. However, before accepting a retention bonus offer, you must consider the following factors.

Your current assessment of the company

Think about your expectations of the current position. For example, were you planning to stay in the company for the coming period? If so, accepting the retention agreement would be to your advantage as it will offer extra job security, especially during economic hardship.

Otherwise, you may reject a retention agreement if you are already on the job hunt. This rejection might make more sense if your current role is undermining your skills or if you’re underpaid compared to the market average. 

Besides, if there’s a promising position out there, it wouldn’t be wise to leave it behind.

Your employer’s motivation

Think about the reason behind your employer’s offer. The company is going through a major transition, but is it positive or negative?

For instance, a positive transition can be an opportunity to prosper by accepting a challenging project. In that case, it might be better to stay as there’s a chance to develop your skills with advanced tasks.

In other cases, you might feel like your employer is trying to buy your loyalty instead of dealing with major problems in the company. If so, consider the severity of other problems in the company compared to the opportunities out there.

Taxation of the retention bonus

Unfortunately, retention bonuses are legally considered supplemental wages, so they’re not tax-exempt and are subject to applicable withholding taxes. You need to consider the taxation method before accepting an agreement. 

Since a lump sum payment can get a higher tax rate, it might be better to request to break down your retention bonus over an extended period of time. You might also need to check whether your agreement is eligible for employee retention credit.

employee reading entire agreement on laptop

How to Write a Retention Bonus Agreement – Examples and Templates

Why write a retention bonus agreement from scratch when others have done the hard work for you? Here are some retention bonus agreement templates to start working from.


Who is eligible for the retention bonus?

A retention bonus is eligible to employees after they sign an agreement with their employers. Employees who stay for the period specified in the agreement are eligible for the retention bonus. Some employers clearly state further requirements, such as satisfactory performance. Others can use vague terms, like “sole discretion,” which you need to discuss beforehand.

Are retention bonuses taxable?

Retention bonuses are taxable, but they differ from annual salaries because they’re considered supplemental wages. For this reason, you need to assess the tax rate and method before accepting a retention bonus agreement.

What is a typical retention bonus agreement?

Typical retention bonuses can be anywhere from 10% to 25% of the base salary, depending on the industry. Your employer might also choose to pay a flat rate, such as $5000. A retention bonus is commonly paid as a lump sum amount, but some employers may break it down to ensure their benefits in case you’re dismissed.

Can you decline a retention bonus?

You can initially delay responding to a retention offer till you negotiate more benefits. If the offer doesn’t seem promising altogether, you can decline it and request a higher fixed compensation for staying. Otherwise, you’re free to start a job hunt.

Wrapping Up

In conclusion, retention bonus agreements are a great way to keep key employees on board during difficult times. They can also be used to incentivize employees to stay with a company during a period of transition or change. When used correctly, stay bonuses can be an effective tool to help a company retain its best talent.