Retention Bonus: Definition and Example

retention bonus money

Have you ever heard of the retention bonus? You may have come across this term as an employee, employer, or just in everyday life. But do you know what it is?

What is a retention bonus?

According to the Cambridge Dictionary website, the retention bonus is:

  • A bonus given to an employee as a way of persuading them to stay with the company, especially at a time when the company is undergoing major changes.

Also known as a hold or hold package, this can be a surefire way to keep an employee.

Now here’s what’s important to understand. The retention bonus is not related to employee performance, but rather is an incentive to keep the employee at work. The retention premium is typically around 10-25% of an employee’s salary. When an employee agrees to withhold a bonus, this also determines the amount of the bonus.

The retention premium is not part of every job and is usually reserved for large businesses with more than 20,000 employees. Also, a retention bonus is typically reserved for high-profile or high-profile employees. As stated earlier, a retention bonus is usually given when a company goes through a change, such as a merger or company purchase. Or perhaps it was for a big project. But many also give these bonuses out of fear that their best employees will be poached by competitors.

How does the retention bonus work?

Companies usually create a contract to inform the employee how long he will be working for him. Then, as part of the deal, the employee will work for the company for a retention bonus. Of course, how long an employee stays there depends on the job and the needs of the company. The employee will also receive the bonus either all at once or in installments.

The amount of the bonus is determined by details such as competition rewards, company funding, and other factors. The employer should be the one who comes up with the amount of the bonus and why he gives him the bonus. Elements such as competitors, project value, etc. give the employer more information.

Is it taxable?

The retention bonus, if accepted, is taxable. The retention bonus is known as something called additional salary. These types of wages, as you know, are the type of wages of the employee.

The retention bonus is not part of the employee’s salary, but is still part of the income they receive. Thus, the employee must mention this when filing taxes for the IRS.

The withholding bonus can be used with either the interest tax or the cumulative tax method. With the cumulative method, it can increase the tax rate, not the other method. However, it all depends on the amount received. It would be a good idea to contact a professional in the tax world for any help on this matter.

Bonus Benefits

Retention bonus is a smart tool to keep the most important employees of the company in their jobs. It can also be a win-win situation. An employer withholds their worker and the worker may receive the following:

  • Increasing labor productivity. Employees will work harder because they received a bonus, even though retention bonuses are not related to employee performance.
  • This is a sure way to keep an employee, hence the name. This can help the employee stay longer due to loyalty.
  • Boosting morale due to the employee feeling valued in the business.
  • A retention bonus is useful when a company is going through a drastic change. This reassures shareholders that people are not leaving the ship and that there is a loyal workforce. Remember, consistency is key.
  • Although this is usually a one-time payment, it helps employees. You see, when an employee receives a bonus, he wants to stay and work for the company. This is an important crutch when a business is in transition.
  • Finally, while the bonus makes employees happy and motivated, it also helps the business. Why? because then the company would have to worry less about new hires and they would be able to retain their already well-trained employees.


All in all, a retention bonus is an important tool to have in your arsenal as an entrepreneur and boss. The retention bonus provides many benefits for both parties. The company is able to retain highly qualified and well-trained employees who will work harder with good morale. Whereas the employee is happy to take home a nice bonus for their family and use it on themselves while feeling valued.


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