What Is a Sign On Bonus, and How Do Sign On Bonuses Work?
Sign-on bonuses help businesses attract top talent, especially in competitive industries where finding qualified job seekers quickly is important. In fact, in a recent survey, 55% of employees said they would leave their jobs for such a bonus. These incentives give employers an advantage in recruiting and filling critical roles.
However, offering them means involving more than simply adding an extra payment to a new hire’s compensation package. Employers need to plan carefully, set clear terms, and follow tax and legal rules. This article talks about their meaning, how do sign on bonuses work, and key steps for creating an effective policy.
What is a sign on bonus?
A sign-on bonus is a financial incentive offered to a new hire as part of their compensation package. It is typically used to encourage them to accept a job offer and is paid out either as a one-time payment or in installments, depending on the employment contract. Employers use this type of incentive to attract top talent or fill important roles.
It is also called a hiring bonus, signing bonus, golden hello, and joining bonus.
Attracting top talent doesn't mean you need to overpay. With Real-time Job Posting Salary Data tool, you can easily find skilled candidates using its advanced features and AI-matching technology.
How do sign on bonuses work?
As mentioned, hiring bonuses may offer a lump sum payment to a new hire as a bonus. Typically paid shortly after the new employees begin their role, this bonus aims to make the job offer more appealing and competitive.
However, these bonus payments often come with conditions, such as a requirement to stay with the company for a specified period (commonly one to two years). If the employee leaves before this time, they may be required to repay the bonus.
Some companies pay signing bonuses in installments, giving part upfront and the rest after a probationary period. The remaining payments depend on the employee staying with the company for a set time, like six months or a year.
Why do companies offer a such bonus?
Now that we know how signing bonuses work, let's discuss why companies offer them to stand out in competitive job markets.
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Talent attraction
It helps attract candidates, especially in a competitive job market. It makes job offers more appealing and can be especially useful for filling tough roles or hiring people with in-demand skills.
Use Real-time Job Posting Salary Data tool to stay ahead in the job market. It shows what companies offer and the compensation they provide, reflecting current market conditions and employer needs.
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Compensation differentiation
The bonus helps companies stand out from competitors offering similar salaries or benefits. It provides extra value upfront, which can be the key factor in a candidate's decision.
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Immediate financial incentive
It gives new hires an immediate financial boost, which is helpful for those changing jobs or moving. It can help with relocation costs or the gap between jobs.
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Retention strategy
While hiring bonuses are typically used to attract talent, some companies offer them to retain employees. Employees may need to stay for a set time to receive the full bonus, either in installments or after a certain period, which helps reduce turnover and encourage loyalty.
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Negotiation tool
Such bonuses can help in negotiations when salary changes aren't possible. If a company can't raise the base salary, it may offer this bonus to meet the candidate’s expectations, staying competitive without changing the salary structure.
Challenges of offering such bonuses
While hiring bonuses have benefits, as mentioned above, they also come with challenges that companies must consider. Here are some potential drawbacks:
Hiring bonuses can be expensive upfront and may strain the company's budget.
Future candidates might expect similar bonuses, increasing hiring costs.
Bonuses attract talent but don't ensure they stay long-term.
Existing employees might feel undervalued if they don’t receive a bonus.
Money spent on bonuses could limit funds for other important areas.
Bonuses might attract people interested in short-term gains rather than long-term commitments.
How sign on bonuses taxed?
Bonuses are considered supplemental wages, and the IRS requires a 22% federal tax withholding on them. For example, if an employee receives a $15,000 signing bonus, the IRS will withhold 22% ($3,300), leaving the employee with $11,700 after taxes.
A $11,700 signing bonus isn't the same as the promised $15,000 because of the tax withholding. To ensure the employee receives the full $15,000, a tax gross-up can be applied, which increases the gross bonus amount to cover the taxes.
For example, to give a $15,000 net bonus after a 22% tax, the employer must calculate the gross bonus using this formula: Gross bonus = net bonus / (1 - tax rate)
Gross bonus = 15,000/ (1 - 0.22)
Gross bonus = 15,000 / 0.78
Gross bonus = 19,231
Here, the employer would need to pay a gross bonus of $19,231 so the employee receives $15,000 after the 22% tax withholding.
How to design a winning sign-on bonus policy
A well-structured bonus policy can help attract and retain talent. Here are the 5 key steps for creating an effective policy:
Set goals for offering the bonus: Decide what you want to achieve with the bonus, such as attracting top talent, filling positions fast, or standing out from competitors.
Research industry standards and competitor bonuses: Understand what your industry offers. This will help you create a competitive and appealing bonus. Salary.com's AI-powered tool keeps you updated on the latest hiring and pay trends.
Set a budget and choose the bonus structure: Decide on the total budget for the bonuses and choose if the bonus will be a lump sum, paid in installments, or in other forms like stock options.
Establish eligibility criteria and create a policy: Decide who qualifies for the bonus (e.g., full-time employees, specific positions, or experience levels) and create a clear employment agreement or policy with the terms and conditions.
Share the policy with candidates and track progress: Share the policy clearly during hiring and track how well the sign-on bonuses help meet your recruitment goals.
Sign-on bonus request example
If you're a candidate and the organization you applied to doesn't offer sign on bonuses, here's a sample email template to request one:
FAQs
Here are common questions about them:
Are sign on bonuses taxable?
Yes, hiring bonuses are usually taxable. They are subject to federal, state, and local income taxes. An employer typically withholds taxes from the bonus, just like regular wages.
What does a $1,000 sign-on bonus mean?
A $1,000 hiring bonus is a cash payment given to a new employee when they join a company. It can be paid all at once or in installments, such as $500 when starting and another $500 after a set period.
What is the average sign-on bonus?
The average bonus varies based on the industry standard, job role, and location, but in today's job market, a sign on bonus amounts from $10,000 to $50,000 or more.
To understand the current compensation standard, use the Real-time Job Posting Salary Data tool. A HR manager can access key data such as median salary, trends, ranges, and base salary distribution to make informed salary decisions.
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