Sign-on bonuses have become increasingly common in recent years. The tighter job market likely plays a role in their newfound popularity. These bonuses sometimes occur more often in some fields than others. But job market demand often fuels them. Here’s what a sign-on bonus is and who gets one.
A financial advisor can help you create a financial plan for your financial needs and goals.
Why a Sign-On Bonus?
A 2016 survey by World at Work found 65% of companies polled offered sign-on bonuses. That continues an upward trend from a low of 54% in 2010 as the economy was recovering from recession.
Sign-on bonuses are most likely to go to top executives and to workers with particularly in-demand skills. A specifically recruited candidate is more likely to get a bonus than one who applied for an opening. For example, nurses, accountants and engineers are more likely to get sign-on bonuses than other employees.
Candidates who are entertaining offers from multiple employers are more likely to get sign-on bonus offers. And large companies are more likely to offer bonuses than smaller employees.
Purpose of a Sign-On Bonus
The purpose of a sign-on bonus is to attract an employee who might go elsewhere without the added inducement. A bonus can also help retention, at least in the short term.
A one-time sign-on bonus may let an employer avoid a preset salary level for a particular position. Say the top salary for a software engineer is $100,000. A desirable candidate has a $105,000 offer from a competing firm. A $10,000 sign-on bonus could let a prospective employer beat the competition without breaking salary restrictions.
Sign-on bonuses can also help employers make up for benefits the employee may be losing by taking the job. For instance, the employee in question may be about to get a promotion or sales commission at his or her current position. The prospective employer may compensate the employee to make up for the foregone benefit.
Size of a Sign-On Bonus
A sign-on bonus can be any size the employer deems necessary and has the funds to budget for. Another World at Work survey found senior executives got the most. Forty-one percent of those receiving sign-on bonuses got $50,000 or more. Bonuses for middle managers and professionals are likely to be between 5% and 10% of starting base salary.
Sometimes employers will offer other benefits in lieu of or in combination with cash sign-on bonuses to help lure attractive employees. Alternatives may include increased vacation time, tuition reimbursement or payments to cover commuting costs. Over time, alternatives may be worth more financially than the bonus.
Sign-On Bonus Terms
It is typical for sign-on bonuses to require some time commitment from the employee in return for the cash. One year is the usual term an employee has to agree to work before receiving a sign-on bonus.
If there is a time requirement, the sign-on paperwork will usually describe a claw back provision. This lets the employer recover the cost of the sign-on bonus if the employee does not stay on a specified time period. Typically, that time period spans a full year.
The bonus may be added in a lump sum to the first or second paychecks. However, sometimes a sign-on bonus will not be paid in full immediately or even soon after going to work. Instead the employee may get half the bonus at signing and half after six months on the job.
When a sign-on bonus is paid in a lump sum with the first paycheck, it may have significant tax impacts. The payment may push an employee temporarily into a higher tax bracket. This could cause too much income tax to be withheld on later paychecks. Employees may need to adjust the number of exemptions claimed to avoid excess withholding.
A sign-on bonus is an increasingly common way employees try to attract and retain particularly desirable employees. Hiring paperwork should carefully describe the size and terms of signing bonuses when an employee first arrives. It’s advisable to scrutinize the terms of a sign-on deal to make sure you know what you’re getting into.
- Consider talking to a financial advisor about how to handle a sign-up bonus. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before accepting employment in return for a sign-on bonus, an employee should read the agreement carefully A candidate should fully understand terms of claw backs and similar provisions. Bear in mind, a one-time bonus won’t affect future raises or benefits figured as a percentage of salary. Over the long term, a higher salary may be worth more than a one-shot sign-on business.
Photo credit: ©iStock.com/fizkes, ©iStock.com/nortonrsx, ©iStock.com/PeopleImages