Use of sign-on, spot and retention bonuses on the rise

Having clear ground rules can help ensure programs used fairly and wisely

By Claudine Kapel

Competition for talent is heating up – and organizations are responding by increasing their use of special bonus plans.

New research from WorldatWork indicates the use of sign-on, spot, and retention bonuses are on the rise – and “significantly more common” in 2014 than they were in 2010. The survey covered responses from 811 WorldatWork members, predominantly in North America.

The growing use of these additional types of plans or bonuses isn’t really surprising. An improved economic climate and concerns about skill shortages have made the attraction and retention of talent a higher priority for many organizations.

At the same time, budgets for salary and wage increases continue to be lean, leading organizations to look for alternate ways of leveraging dollars to help achieve talent objectives.

“Employers are using the sign-on and retention bonuses to attract and retain the talent that they need,” reports WorldatWork. In addition, “they are targeting spot bonuses as an additional means to recognize employees that are excelling when other forms of cash compensation have been restricted.”

Specifically, the research found:

  • 74 per cent of respondents offer sign-on bonuses
  • 60 per cent report provide spot bonuses, and
  • 51 per cent report use retention bonuses.

All three types of programs are being used at statistically significant higher rates in 2014 than in previous years of the survey (2010, 2008, and 2005).

Sign-on bonuses have not only become more prevalent – they’re also paying out at higher rates, reports WorldatWork. Not surprisingly, executives are paid the most, with 41 per cent of respondents with such a plan paying more than $50,000 for roles at these levels.

Of respondents providing spot bonuses, a significant majority reported providing such awards to employees at middle management levels or below. Respondents indicated the top reasons for awarding such bonuses included:

  • Special recognition (90 per cent)
  • Going above and beyond (85 per cent), and
  • Project completion (72 per cent).

The survey results showed that the maximum value of spot bonuses varied by role and organization level:

  • 31 per cent set the maximum value at more than $5,000 for middle management roles
  • Close to 30 per cent set the maximum value at between $2,500 and $5,000 for sales roles (29 per cent), supervisors (28 per cent), and professional staff (26 per cent).

With respect to retention bonuses, 73 per cent of respondents with such plans administered their plan based on management discretion.

Given the growing use of additional cash bonuses, it’s noteworthy that many organizations are managing these plans in a fairly discretionary manner. For example, only 27 per cent reported having formal eligibility criteria and guidelines to help govern the allocation of retention bonuses.

Meanwhile, only 53 per cent maintain a budget for spot bonuses. And, not surprising, even fewer organizations have budgets for sign-on bonuses (27 per cent) and retention bonuses (31 per cent).

Given the potentially large number of employees covered by one or more of these types of plans, these findings should raise a few red flags. Even if the dollars aren’t significant on a per employee basis – and they sometimes can be – the expenditures can really add up on an aggregate basis.

So, as with any type of compensation plan, it helps to have clear guidelines governing plan use to achieve more consistent decision-making, more effective cost management, and greater levels of internal fairness. Some key questions to address include:

  • Who is covered by a plan?
  • What factors influence how much can be spent? Is the type of role or the level of the role among the key considerations?
  • Who needs to approve specific expenditures?
  • What steps will be taken to ensure the consistent application of the plan over time? How will decisions and levels of expenditure be monitored over time?

Without adequate ground rules, even the simplest bonus plan can evolve into a runaway expense over time. Attention to the details will help ensure such plans deliver the intended value – without unintended consequences.

Claudine Kapel

Claudine Kapel is principal of Kapel and Associates Inc., a human resources consulting firm specializing in compensation design, performance management, and employee communications. Claudine is also the co-author of The HR Manager’s Guide to Total Rewards and Straight Talk on Managing Human Resources.
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