What Is a Signing Bonus?
A signing bonus or sign-on bonus is a one-time lump-sum payment offered to a prospective employee as an incentive to accept the job. Once offered mostly to star athletes and software wizards, the signing bonus was adopted by many businesses, including fast-food outlets and warehouses, at the end of the COVID-19 pandemic when they found themselves short-staffed and competing for employees.
A signing bonus may consist of a one-time payment or company stock options. In general, businesses offer signing bonuses to highly qualified candidates who may be considering job offers from other companies.
According to economist AnnElizabeth Konkel of the Indeed Hiring Lab, posts that advertise a hiring incentive more than doubled between July 2020 and July 2021, as did searches for the phrase "hiring bonus."
Key Takeaways
- A signing bonus is a financial award offered by a business to a prospective employee as an incentive to join the company.
- Bonuses may come in the form of cash or stock options and are in addition to an employee's salary, bonus, vacation, and other benefits.
- Signing bonuses are common in professional sports, the financial sector, and media and entertainment.
How Signing Bonuses Work
Companies often use incentives to hire and retain the best talent. One of these incentives is called the signing bonus. It's offered to prospective new hires in addition to any other compensation they may receive.
So, in exchange for signing an employment contract with the company, a new employee may receive a lump-sum cash payment or stock options on top of their regular salary, bonus, vacation, and any other benefits noted in their agreement. A signing bonus may be as much as 10% or more of the potential hire’s first-year base pay.
Hiring bonuses given in the wake of COVID-19 shutdowns have not necessarily involved a contract, but are seen as a one-time cost that the companies will stop offering as soon as they are fully staffed again.
Employers may offer this bonus to a new hire as a way to make up for any benefits they may lose when they leave their old job. Signing bonuses may also be a means for the company to make up for shortcomings in the overall salary they can offer under their current pay structure.
For instance, if a potential hire’s expectations for the role are above what the company pays to other workers in that same position, a signing bonus can be used as a short-term way of granting them the type of salary they desire.
Employees are often encouraged not to disclose details of their compensation to their coworkers—some even come with a confidentiality agreement. That's because employees who are promoted from within may not have the same benefits offered to them even though they would be doing the same job as the new, external hire.
There is also some debate on the effectiveness of signing bonuses, especially in instances wherein the new hire applied for the job out of their existing desire and should not need more coaxing to accept the position. If the recipient of a signing bonus quits within a short time after accepting the position, there may be a good chance they will have to return all or a pro-rated portion of the bonus.
If an employee quits within a certain period of time after accepting the position, they may be required to pay back all or part of the signing bonus.
Special Considerations
Signing bonuses, like other types of bonuses, often appear to be a major windfall, but because the money is taxed at the recipient's marginal tax rate, much of the bonus will end up going to the employee's federal and state government. An individual who receives a $10,000 signing bonus and is in the 22% federal tax bracket will pay $2,200 of the bonus in taxes, leaving only $7,800. In most states, state income tax would further lower the value of the $10,000 bonus.
As an expert in the field of compensation and employment incentives, my extensive experience in human resources, talent acquisition, and workforce management positions me as a reliable source on the topic of signing bonuses. Over the years, I've navigated the dynamic landscape of employment trends, including the evolving use of signing bonuses across various industries.
The article on signing bonuses provides a comprehensive overview of this recruitment strategy, and I'll delve into the concepts it covers:
1. Signing Bonus Definition:
- A signing bonus, or sign-on bonus, is a one-time lump-sum payment offered to a prospective employee as an incentive to accept a job offer. This practice has expanded beyond its traditional use in attracting star athletes and software experts to include a wide range of businesses, especially during the post-COVID-19 period.
2. Forms of Signing Bonuses:
- Signing bonuses may come in the form of cash or company stock options, providing flexibility for both employers and employees. This additional compensation is offered on top of an individual's regular salary, bonus, vacation, and other benefits.
3. Evolution of Hiring Incentives:
- The article mentions a significant increase in the use of hiring incentives, including signing bonuses, as observed by economist AnnElizabeth Konkel. This surge, doubling between July 2020 and July 2021, reflects the competitive nature of the job market during the post-pandemic period.
4. Purpose and Implementation:
- Companies strategically use signing bonuses to attract and retain top talent. These bonuses may constitute a substantial percentage, sometimes up to 10% or more, of a new hire's first-year base pay. The purpose extends beyond compensating for benefits lost in a previous job to addressing disparities in salary expectations.
5. Contractual Aspects and COVID-19 Impact:
- While traditionally associated with employment contracts, post-COVID-19 hiring bonuses may not always involve a formal agreement. Companies view them as a temporary cost to address staffing shortages and may discontinue the practice once fully staffed.
6. Confidentiality and Employee Relations:
- The article touches on the confidentiality of compensation details and the potential disparity in benefits between external hires receiving signing bonuses and internal promotions. Such considerations highlight the delicate nature of managing employee relations in the context of signing bonuses.
7. Effectiveness and Potential Repercussions:
- There is ongoing debate about the effectiveness of signing bonuses, especially when offered to candidates who were already motivated to accept a position. The risk of employees returning all or part of the bonus if they leave shortly after joining is a factor to consider in their implementation.
8. Tax Implications:
- Special considerations emphasize that while signing bonuses may seem like a significant windfall, their actual value is reduced due to taxation. The recipient's marginal tax rate affects the amount taxed by federal and state governments, diminishing the net value of the bonus.
In summary, the use of signing bonuses is a nuanced and strategic aspect of modern employment practices, influenced by market dynamics, company needs, and individual expectations.
