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Retention bonuses: What you need to know


A RETENTION bonus is a cash payment that an employer offers employees in exchange for their commitment to staying with the company for a certain amount of time.

The purpose of a retention bonus is to encourage employees to remain with the company longer than they might otherwise have stayed. A retention bonus may be paid as an incentive for some employees to remain with the firm rather than seek employment with one of the company's rivals. Certain retention bonuses are paid in exchange for the employee staying with the company for a set time.

These incentives can be offered in exchange for the employee continuing with the firm regardless of whether or not another company has offered them a higher salary. Payscale says the retention bonus often ranges between 10% to 15% of the base salary.

Retention bonuses, which companies pay to keep employees from leaving the organisation, have become a much-hyped topic of late. But in a new piece for The New York Times, a behavioural economist states that they are a waste of money and may even be counterproductive to employee performance.

Ariely, who has spent decades studying the human decision-making process, notes that, while retention bonuses may feel good, they do not create much value for an organisation. Some employees receive retention bonuses to keep them around — but not all. In the past, the only people who received retention bonuses were executives with the highest salaries and those considered "key" employees who were needed to keep the company running.

But a new generation of companies is offering retention bonuses to a broader set of employees, from those who answer the phone to the chief finane officer (CFO) and chief executive officer (CEO). They are an easy way to keep good employees happy and working, and they also send a message to the rest of the workforce that their hard work is appreciated.

Why retention bonuses important?

Without a doubt, retention bonuses are important to an organisation's bottom line. They help keep key employees from leaving the company, which helps keep it operating at peak efficiency.

They also provide employees with a sense of appreciation for their hard work, which helps keep them motivated to continue working. But despite their popularity among employers, retention bonuses have received much scrutiny of late.

Because retention bonuses are structured, they also allow employers to be transparent with their employees about how much they're being paid and why. When employees know that their employer cares about their well-being enough to offer them a bonus for staying with the company, it builds confidence in their decisions to keep working.

It also shows the employees that their hard work is appreciated, motivating them to continue working.

Are retention bonuses effective?

The effectiveness of retention bonuses is an ongoing topic in the workplace. Some managers believe that offering a bonus to employees who stay with the company is an effective way of retaining talent.

Others argue that providing large bonuses is a poor use of company resources, as it does not prove much to prospective employees compared to the salaries of other companies in the same industry. Which side of the debate is closer to the truth?

The current body of research suggests retention bonuses are an effective tool for retaining employees.

In a study conducted by researchers at Yale University, it was found that offering employees a retention bonus was effective at reducing turnover among low-skilled employees. In addition, a study by researchers at the University of California, Davis, found that offering a retention bonus was effective at retaining employees who were close to being offered a job by a competing company. In other words, retention bonuses prevent employees from leaving for better opportunities.

A recent study by the Harvard Business School found that offering large retention bonuses to employees is the most effective strategy for reducing turnover in a given department or organisation.

This finding is supported by other studies, which found that retention bonuses can increase employee satisfaction and productivity while decreasing the time employees spend searching for jobs in their free time.

This has the added benefit of reducing the amount of money an organisation spends on finding and training new employees.

To be continued next week

Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 24 248 1 946-48/ 2290 0276, cell number +263 772 356 361 or e-mail: mnguwi@ipcconsultants.com or visit ipcconsultants.com.

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