Everything you need to know about retention bonus agreements (downloadable template included!)

Companies today are having a hard time predicting where the next few years will take them. Global growth is projected to slow for the third consecutive year (1), and investors are exhibiting more restraint due to fewer returns. (2) Meanwhile, many employees are planning to stay put for now, (3) yet one in three team members is thinking about changing jobs within the next 12 months. (4)

Having a retention bonus agreement at the ready means you’ve got a backup plan to keep your best talent around when things get murky. 

Still, uncertainty can play a more significant role in employee departures than money. MIT Sloan says job insecurity and reorganization contribute to turnover 3.5 times as much as compensation. (5) That means if your retention agreement offers extra benefits but doesn’t get to the core of what employees want, you won’t reduce turnover. You may even push more people to resign due to a lack of transparency or lackluster incentives.

Here’s our guide to creating effective retention agreements that complement your other turnover strategies and help you build a positive work environment for your people. Discover: 

• When to use retention agreements
• What to consider before you create a retention agreement
• How to tailor the retention agreement to each employee
• Further resources on retention strategies

We also include a downloadable template you can share and customize for your own internal use!

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1. World Bank, 2024
2. Forbes, 2024
3. U.S. Bureau of Labor Statistics, 2023
4. Leapsome Workforce Trends, 2023
5. MIT Sloan Management Review, 2022

What is a retention bonus agreement?

A retention bonus agreement — also called a stay bonus agreement — is a contract that encourages staff to commit to staying with an organization for a specific time frame. Employers use them as retention tools to stop essential team members from leaving at critical moments for the business. They can include incentives like:

• A retention bonus (either as a lump sum payment of 10 to 15% of the employee’s base pay or in smaller installments)
• Stock options 
• Extra benefits
• A promotion or title change 

Under the US National Labor Relations Act, employees have the right to find new employment. However, if staff resigns before the date stipulated in their retention contract, they may be obligated to return any benefits they received in relation to the agreement. However, the contract should allow exceptions depending on the circumstances — especially if the individual left for reasons outside their control, such as sickness or injury.

Sample retention bonus agreement

A retention bonus agreement looks like a fairly standard legal document, typically outlining how much compensation someone is going to receive as part of their bonus, how long the agreement stays in effect, and what happens if the employee quits or the employer terminates their employment. 

Access our free downloadable retention bonus agreement below.

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SAMPLE RETENTION BONUS AGREEMENT

[Date]

[Employee name]

[Address]

Dear [Employee name]:

This retention bonus agreement establishes the terms of your continued employment with [company name], following the [specific scenario that led to the retention bonus].

Duration of agreement

The term of this agreement will begin on [date] and end on [date] unless your employment is terminated earlier.

Current role

You will be employed as [position title] and continue to report to [insert position title]. 

Compensation

Your annual base salary will remain [amount of salary], and you will be paid in accordance with [company name]'s normal payroll procedures. Additional raises, bonuses, equity adjustments, and merit increases may be offered as necessary.

Retention bonus terms

You will be eligible for a retention bonus of up to [amount], subject to the terms described below. Half of that amount will be paid to you only if you are still employed by [company name] on [date]. The other half of that amount will be paid to you only if you are still employed by [company name] on [date]. 

Conditions upon termination

If [company name] ends your employment before the end of the duration of this agreement, [company name] will be obligated to pay you only the retention bonus amount up to that point. 

Conditions upon resignation

If you resign from [company name] without good reason at any point before the end of the duration of this agreement, you will be obligated to repay to [company name] any part of the retention bonus paid to you up to that point within 60 days. 

If you are terminated for cause at any point before the end of this agreement, you will be obligated to reimburse any earned retention bonus.

[Here, the company will likely explain their particular conditions for “termination due to cause”]

Governing law

The validity, interpretation, and performance of this agreement shall be governed by the relevant laws of [state/country]. 

Modification and arbitration

[Here, the company will outline terms for modifying the agreement in the future, as well as the arbitration process following a claim or dispute]

Printed name: _______________________________

Signature:  __________________________________

Date: _______________________________________

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⭐ Use our editable retention bonus agreement template or use it as a reference to create your own.
👉 Download our free template
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When is a stay bonus agreement beneficial?

Generally speaking, an employee retention bonus agreement works best when your business is going through a transitional period or the job market is especially competitive. Here are some situations in which you might consider implementing a retention bonus contract:

• Internal changes — Common examples include mergers, acquisitions, and boardroom reorganizations. In these situations, you may need to retain specific team members to fulfill the conditions of a transaction or facilitate a smooth handover process.

• Critical business milestones — Some employees may be vital to the success of major business developments, like securing funding or launching a new project. Without their expertise, you may miss opportunities, delay important work, and lose your competitive edge. Consider using a stay bonus agreement to solidify staff loyalty during those pivotal moments.

• Major disruptions — Sometimes technological innovations and new popular practices can disrupt businesses while everyone adjusts to the change. Think of how the rise of online lodging forced many hospitality companies to move their operations onto websites and apps. Although these shifts can be positive in the long run, the stress and uncertainty accompanying them can prompt resignations. This is where retention incentives like a stay bonus agreement can help compensate people for the temporary extra challenges in their jobs and convince them to stay.

• Rewards and recognition — Top performers typically maintain a high-quality standard and regularly exceed their targets. Aside from delivering great results, they often empower the rest of the team by acting as leaders and raising morale. Acknowledge their good work and show them how indispensable they are to your company by offering them a retention agreement.

• ‍Getting ahead of the competition — Some employees have highly desirable skills, privileged knowledge, and close customer relationships. Losing them to a competitor can be incredibly damaging to your business: Not only would you no longer have those assets, but your competition would gain them. Retention agreements can preemptively boost employee job satisfaction and reaffirm their loyalty to your company.

• Closures — When businesses announce their closing, most staff members will search for new opportunities before the official end date, given the company can no longer provide long-term job security. One way to sidestep that situation and ensure you have colleagues to help you tie up loose ends is by offering strategic retention agreements with ‘shut down bonuses.’ Doing so might encourage employees to stay until the business has officially closed.

When is a retention bonus agreement NOT beneficial?

Despite its advantages, the stay-on bonus contract has the potential to cause problems for your company. They can drive away the top performers you’re trying to keep and increase turnover when not implemented well or at the right time. Here are some situations when you should try other retention strategies first:

• In response to high turnover rates — If you have a turnover problem, retention agreements can exacerbate it. Kearney data shows that spending your budget on small retention bonuses for many employees can result in higher attrition rates. In that case, your staff probably already noticed signs that your company was struggling and might see retention agreements as an act of desperation.
• When you offer uncompetitive salaries — Giving out retention bonuses and benefits won’t compensate for below-average salaries. Ensure your wages meet your industry standard before you consider adding other incentives. This can be done through regular benchmarking and salary increments.
• As part of a one-sided retention strategy — Retention agreements should be part of a holistic approach to reducing employee turnover. If you prioritize retention bonuses and neglect your people’s development and well-being, they may feel like you’re trying to pay them off. Some employees may stay if your offer is attractive enough, but their morale will suffer if they think their company doesn’t care about them. 

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What to consider before creating your retention agreement

Once you’ve decided an employee retention agreement would benefit your organization, it’s time to create the contract. Still, there are some critical points to consider before you begin.

The company perspective

When implemented correctly, retention bonus agreements can help strengthen team relationships and complement whatever strategic planning model you use to help you surpass your competitors. 

To create successful retention agreements and see how they can positively impact your company, ask yourself these questions:

• What are the underlying reasons staff might leave? Pinpoint the factors that may cause employees to resign because they’ll provide you with a starting point for your agreement. For instance, if you’re concerned a competitor might poach a team member with desirable skills, you know your retention bonus should be more attractive than any offers they might make.
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• Who should we offer the retention agreement to? Retention bonuses and other incentives are more effective when companies offer higher amounts to a select group of employees. So, identify staff who are at a high risk of leaving and whose departures would significantly impact your business. Let’s say you need a developer to finish a tool on schedule, and competitors have taken an interest in them — they’d be an excellent candidate for a retention agreement.
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• ‍Do we have a thorough understanding of how the retention agreement will work? Get deeply familiar with your contract, especially its legal and financial ramifications. If it isn’t airtight, you risk staff leaving or the involvement of a court or government agency. That’s why you should perform a cost-benefit analysis to check whether the expense of losing the employee would be higher than the bonus or benefits you plan to offer. Consider getting independent legal counsel if your company doesn’t have experience crafting and interpreting these kinds of contracts.

• ‍Are all terms of the retention agreement clear and unambiguous? To build trust with staff and prevent conflicts from arising in the future, make your agreement as detailed as possible. Employees need to understand your overall retention policy and know what they’re agreeing to before they sign. Define everything, especially crucial points like the retention period, bonus payment date, and staff rights if they break the contract.

The employee perspective

An effective retention bonus agreement prioritizes employee needs and benefits. They recognize top performers for their work and make them feel valued. Such contracts also show staff members that their employer envisions a future with them, so they feel more secure about their jobs.

There are scenarios, though, in which the initial retention agreement might not be satisfactory to both parties. Employees may need to suggest some modifications or reject it outright. Here are some points you should consider before asking an employee to sign a retention agreement:

‍What would motivate them to stay at the company? — If someone considers resigning, the retention agreement should address the biggest underlying causes. For example, if a team member is hoping for an internal promotion but doesn’t qualify for any open positions, the agreement could include a new job title.

🤝 If you can’t meet an employee’s needs, whether through the agreement or other retention initiatives, perhaps your priorities no longer align.

It’s better to let people move on rather than encourage them to stay in a position that doesn’t fulfill them or restricts their growth. You don’t want to retain people if it negatively affects their happiness and, consequently, their motivation to perform at their best.

• Would this person prefer to receive a retention bonus,  pay raise, or other benefits? Suppose an employee is unhappy with their current salary and doesn’t feel they’re being paid fairly. In that case, negotiating a pay raise or introducing additional benefits is often better than offering a retention bonus.
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• What is our reason for offering this employee a retention agreement? Staff will be curious about why you’re offering retention agreements and wonder if there are problems behind the scenes. It’s best to be transparent so they can make an informed decision. If you’re not upfront about your motivations, they may leave anyway when they realize the full impact of a situation on their job. For example, if someone discovers many of their colleagues are leaving due to a merger, they may not want to keep working with a new team.
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• Can staff negotiate the terms of the employee retention agreement? Employee retention bonus agreements can be the start of a discussion between you and your staff. If they’re unhappy with some of the terms, you may have to adjust the agreement to suit both parties. You can even reassess the retention bonus agreement and offer a higher amount.
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• How might tax affect the retention bonus? It’s worth checking how much of their retention bonus they can expect to receive after tax to spare your employees from disappointment. As supplemental pay, bonuses are subject to withholding taxes, so what seems like a reasonable amount during the agreement may seem less worthwhile after deductions. It’s best to present people with the net amount upfront, so they can negotiate if it’s too low. 

💡 Supplementary pay is also subject to different rates depending on whether it’s combined with regular salaries or paid as a separate sum. Check how that affects the total of your retention bonuses before you offer and pay them out.

• Does the contract clarify how the employee retention agreement will work? Staff members need to understand all terms of the agreement and how it’ll affect them. Otherwise, they may commit and later regret their decision. The continued frustration over their job situation and the added stress of breaking an employee retention agreement may even lead them to quit. So, encourage staff to read through the entire contract and ask questions if they’re unsure about anything.

Aside from these points, there are no strict rules governing retention agreements or bonuses. You can tailor them to your company and each individual employee.

Hold on to your best talent with Leapsome

An effective retention bonus contract can incentivize your team to stay at your company for longer. Still, the ultimate goal of retention is creating a place where people want to work. To achieve this, you need retention strategies that target all aspects of the employee experience.

Leapsome has the tools you need to address retention from every angle. Use Leapsome Compensation for its analytics and built-in Mercer benchmarking data to inform your retention bonus initiatives. You can also leverage Surveys and Instant Feedback to predict turnover and gauge employee sentiment so you can get ahead of retention issues before they become unmanageable. 

With Leapsome in your suite, you can more proactively address retention challenges and keep your best employees around to help you navigate a challenging business landscape. 

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