With many different factors in play, it can be difficult to find the right employees, or even any employees, depending on the industry. That’s why so many employers are now offering sign-on bonuses in the hopes of attracting workers.
What is a sign-on bonus?
In short, a sign-on bonus is extra money that an employer offers a new employee for accepting a job. Before the pandemic, sign-on bonuses mostly went to upper-level management (especially C-Suite members) and superstar employees who companies were hoping to recruit away from other employers. But today, sign-on bonuses are often the only way to hire enough employees due to continued labor shortages.
Why offer sign-on bonuses?
Employers used to offer sign-on bonuses to entice high-performing employees away from their competition, but today the story is a little different. Sign-on bonuses in today’s hiring environment are often necessary to find and retain workers, even for entry-level positions, due to a massive shortage of labor in many industries.
Sign-on bonuses can also be used to partially compensate workers for a lack of other benefits, like a 401k or health insurance, but they tend to be worth significantly less over the long term. The immediacy is still appealing to potential employees. Some new hires may not plan to stay at the company beyond the contracted period required to receive the bonus and aren’t worried about other benefits.
How much are sign-on bonuses?
Sign-on bonuses may be cash-only, which is generally the case for non-management employees or low-level managers, but they can also involve company stock or other asset incentives. They can be paid out all at once or incrementally across the course of the first year. The details will be outlined in the contract the employee signs at hiring.
These bonuses can be of any amount, really, but the general consensus is that sign-on bonuses tend to run from 5% to 20% of a new employee’s salary for the year in which they receive them. Employees with more specific or more developed skill sets tend to earn higher sign-on bonuses than those who are just starting out in their field.
Related investing topics
What are the implications of sign-on bonuses?
There are financial implications of sign-on bonuses for both the company giving them and the employee receiving them that are often overlooked. For the employee, the sign-on bonus is taxed at the same rate as the rest of their income, meaning that they don’t actually receive every dollar they’ve been given since they have to also give a cut to the government. This is important when considering just how much of a sign-on bonus it will take to lure someone away from their existing company.
For companies, there are also financial implications. First, of course, they have to pay extra to hire employees with a sign-on bonus. Not only is there the cost of training the new employee, but now you also have to pay extra simply to get them through the door. This, of course, reduces earnings, especially if companies have to offer sign-on bonuses to bring in a great number of employees across the board.
Secondly, sign-on bonuses can cause employee loss. When new employees come in with bonus money, at potentially higher salaries than existing employees, it can inadvertently start a chain reaction of turnover. Ultimately, a company could have to offer even more sign-on bonuses to be required and sink more money into training costs. Although a business can require a potential employee to sign a non-disclosure agreement, it’s very hard to keep that kind of news quiet in a workplace.
Does this mean that sign-on bonuses are universally bad? Of course not. But a business implementing them should consider increasing compensation to existing employees across the board to keep them in-house, as well.
About the Author
