Charlotte Grainger 
Here's a breakdown of how and why these schemes work!
Paying a staff member to stay in their role may sound like a bizarre move. However, that's exactly what a retention bonus is all about. But does it actually work and why should employers bother splashing their cash? In the following guide, we answer your questions.
What is a retention bonus, anyway?
Retention bonuses are lump sums of money that a business pays to an employee on the agreement that they stay in the role for a certain period. For example, a company may pay an employee 20% of their base-rate salary when they stay in the role for five years.
A job retention scheme bonus may be called different things, such as stay pay, retention bonus, employee retention bonus, or simply retention pay. Whatever the title, the rules are generally the same. The employee agrees to remain in the job - or at the same company - for a predetermined amount of time, usually a matter of years. As an incentive, their package will include a retention bonus clause, which comes to fruition when they stay.
There's no mystery surrounding the use of these bonuses. Businesses compete for the best talent, especially for higher-level roles. And it costs around £6,125 to fill each new vacancy. If staff members are up and quitting every year or so, the rehiring tab soon adds up. So, paying new staff members a one-off retention bonus is a cost-effective option. It's no wonder that around 60% of organisations now use this retention strategy.
When is a retention bonus paid out?
Unlike other types of bonus schemes, retention bonuses are not related to how well an employee performs. Instead, the main criteria a staff member has to fulfil to get the lump sum is staying put. Most of the time, the employee's initial contract will specify the terms of the retention pay and include any extra clauses that apply to the bonus scheme.
So, when does the employee get their cash? That depends on the agreement that's in place. In many cases, the retention pay will come as one lump sum at the end of the agreed term. For instance, the staff member may get their full bonus after they've completed a four-year period with the business. However, this is not the only option.
Other employers space their bonuses out over time. That may mean that an employee gets a small bonus at the end of their first year with the business, a slightly larger bonus at the end of the second year, and so on until the agreed period is over.
Are retention bonuses taxed in the UK?
As a side note, it's important to remember that all bonuses - cash or non-cash - are taxed in the UK. If you're an employer, you need to make sure that you go down the correct route when offering any form of bonus to your staff members. That means following the “tax, National Insurance and reporting obligations” outlined by HMRC.
If you're an employee, it may pay to work out how much tax you'll pay on each bonus. There are plenty of things to consider here, such as whether this one-time payment will push you into a new tax band. Doing the maths ahead of time means that there will be no nasty surprises when your paycheck comes through. If in doubt, use a tax calculator.
The true value of retention bonuses
Offering retention bonuses is a snappy way to add value to a business. If you're not sure what the benefits of retention pay are, you've come to the right place. Here's a quick breakdown of the advantages that employers can expect when offering these bonuses:
Staff retention
Let's start with the most obvious advantage and the primary reason that employers offer these bonuses. The aim is to incentivise high-value workers to stay with the business. According to a 2020 study, bonuses and incremental pay rises do increase staff retention.
Increased motivation
Motivating staff to perform well is one of the biggest challenges that employers face. There is some research to suggest that employees' motivation and productivity rise with financial incentives, such as an employee retention bonus. Of course, it's important to remember that other factors impact how motivated employees are in their job, too.
Dopamine boosts
When employees gain a reward - or even a promised reward - it increases their dopamine levels. Dopamine is a neurotransmitter and hormone associated with pleasure and motivation. So, by offering employees a bonus, employers can boost their happiness and commitment. Put simply, these bonuses give employees a “boost” of joy.
However, bonuses may not work for everyone. Research suggests that the promise of a bonus may have an unexpected effect on some people. The study found that the idea of bonuses sent these people's reward centres into overdrive. The shift was overwhelming and interfered with the way that they processed information, making it harder than before.
Less stressed-out workers
Money might not equal happiness… but, let's be honest, it helps. With the cost of living soaring in Britain, having a few extra pounds in the bank is never going to be a bad thing. Giving employees financial incentives may lead to higher levels of satisfaction and lower levels of stress. That unique combination could lead to better overall performance too.
The takeaway
Retention bonuses often do what they say they do. However, employers should not rely solely on a job retention bonus scheme to keep their employees in one place. Factors such as the company culture and job satisfaction play a role. So, these bonuses are a tool, not a solution.
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