What is a sign-on bonus? What employers should know before offering one

What is a sign-on bonus?

So, what exactly is the meaning of a sign-on bonus, and what are its obligations and value? The bonus pay is a one-off gift, usually cash or stock options. It is strictly an incentive to sweeten a prospective hire’s job offer.

The bonus is in addition to other benefits and compensation negotiations. Sometimes, employers may restrict compensation and benefit negotiations when offering a signing bonus. Employees should also understand that bonuses are subject to taxes, and in most cases, it is in the best interest of the employer (you) to deduct taxes from any bonus payments.

The value of a bonus typically involves recruiting. If you’re on the hunt for new employees but the talent pool is running dry, offering something to encourage applicants can make a difference. That said, bonuses are mostly helpful under specific circumstances.

Key factors influencing sign-on bonuses

Only you can determine whether a sign-on bonus is right for your company and its recruiting efforts. Typically, businesses use the bonuses to remain competitive in the marketplace. This is especially true in high-skill fields, such as tech or finance. However, financial incentives have become more common in a post-COVID society, even in restaurant and retail spaces.

Talent shortages are widespread. People demand more for their time and commitment to employers, which forces employers to change pay structures and employment incentives. The number of fast food and retail companies increasing minimum wages is evidence of this.

Traditionally, signing bonuses were recruiting tools for mid to large-sized businesses for high-demand skills, allowing businesses to compete with similar-sized rivals. Now, they help companies of all sizes mitigate the risk of losing candidates of any skill level to the competition.

Still, beyond competing with rivals and luring highly competent talent, signing bonuses can help smaller businesses offset salary limitations and speed up the onboarding process. Sometimes, a budget doesn’t allow for competitive salary packages, but it might allow for a one-time payment to make the compensation look more appealing. A bonus can also encourage candidates to make quick decisions on a job offer, enabling you to fill vacancies quickly.

Now that we understand why you might offer a sign-on bonus, let’s discuss the steps to take before offering one to an applicant.

Steps for employers to offer a sign-on bonus

Offering a bonus is not something you want to do all willy-nilly. You should evaluate the need and purpose of the offer. It is best to consider the below six steps of a bonus offer:

1. Determining need: Before making a bonus offer, decide whether it’s necessary. Is there competition for the role, or are the skills needed in high demand? You should also assess your current hiring challenges and weigh the pros and cons of offering a financial incentive.
2. Setting a budget and eligibility: A standard sign-on bonus is roughly 5 percent to 20 percent of the base salary. It varies based on a role’s responsibilities and skills. Beyond determining a fair bonus amount, you must decide which job titles or skills deserve the incentive. Finally, figure out how long a new hire must stay with the company to receive the entire bonus (usually between six months and one year).
3. Structuring the payment: How do you want to pay the bonus — in one lump sum or phased payments? You may want to include a performance-based component to reward initial performance further.
4. Communicating the offer: To avoid confusion, provide details about bonuses in job postings and initial candidate conversations. Explain how much a new hire receives, when, and how. It’s important to point out that employees are likely responsible for taxes on payment. They can use a bonus tax calculator to learn more.
5. Providing written details: The offer letter and employment contract should include details about the bonus offer. Both documents should address the amount, eligibility requirements, payment schedule, and any conditions that may cause the bonus to be forfeited, such as early termination or resignation.
6. Monitoring the bonus’s effectiveness: It is crucial to monitor the new hire to determine the efficacy of a bonus. You want to determine if the bonus results in employee retention and improved performance. By reviewing hiring metrics, you can adjust the bonus policy as needed.

Understanding how to brainstorm a sign-on bonus offer and program is only part of the process. Moving on, it’s time to focus on structuring the payments.

How sign-on bonuses are structured

Sign-on bonuses are usually one-time payments, meaning they don’t have a complex structure. That said, some employers pay the bonus in installments, with conditions (a retention clause or bonus), over a set period. For example, you might offer a bonus paid over six monthly installments with the condition that the new hire remains with your business.

Conditions can also include penalties. If the new hire quits or you terminate them before the six months are over, they may have to pay back the portion of the bonus they already received. How you structure the payment is ultimately up to you.

Pros and cons of sign-on bonuses

As with anything, offering a signing bonus has many pros and cons. The potential pros include:

• Attracting top talent
• Competitive advantage
• Filling critical roles

Despite the advantages, bonuses can come with drawbacks. The most notable are:

• Cost
• Employee resentment
• Short-term loyalty

That said, offering bonuses is still worthwhile in many situations, especially for small business owners competing against larger enterprises. If you want to try offering bonuses to improve your recruiting efforts, it’s important to find a way to manage and monitor the process.