by Chuck Csizmar - Dec 13, 2009
Of course you do. I'd like one too. But is it a good idea? Is it money well spent, or a needless expense providing little benefit? Clients and colleagues often ask, should we? How much? For who?I'm talking about a one-time cash payment granted as part of the employment offer, often considered a bonus for accepting the company's offer.
How it is used
A sign-on bonus is like wallpaper; it can cover a lot of ugly cracks in the employment offer, and is sometimes used to avoid back-and-forth negotiations by cutting a check to call things "square."
A company offers a sign-on bonus as a replacement for some element of the overall package that the candidate finds lacking, or as an inducement to pump up the candidate's first year earnings. It is usually because the candidate is walking away from some element that the hiring manager wishes to replace in-kind.
A sign-on is not common practice, or required as part of an employment offer. Candidates may routinely ask for one (why not?), but at most levels companies are reluctant to agree. It is simply one of the negotiating tools used, generally in concert with others, when negotiating complex or challenging employment offers - most commonly with the senior staff. That is because those candidates are more likely to be leaving something on the table with their former employer.
Some common scenarios:
- When the offered salary is lower than the candidate wants.
- When the candidate is not eligible for this year's annual incentive.
- When some benefit or perk with the present employer is not part of the offered package.
- When some portion of either current bonus payment eligibility or stock option vesting is lost to the candidate.
- When there are no viable alternate candidates and an acceptance is critical.
A good idea?
Offering a one-time check to allay a candidate's concerns can be an effective strategy to smooth over the bumps of a less-than-perfect employment offer, but like any additive cost it should be used with care and with a view toward a ROI. Offering extra money when not necessary or not targeted to achieve a specific aim is a waste of that money.
If considering a sign-on bonus for a candidate, you should know why. Hopefully it is to resolve a perceived gap within your offer package, not simply because the candidate asked for one - and certainly not because "at this level we always provide a sign-on."
How much? Awards are usually in discrete amounts like $10,000 or $15,000, versus a percentage of base salary, as in-between amounts suggest a formulaic approach and may create the illusion of precision. The offer letter should also state "gross" after the amount, as payroll taxes should remain the candidate's responsibility.
Caution: Remember that sign-on bonuses only address 1st year earnings. If the offered reward package has significant downsides for the candidate, the issues will resurface again after the first anniversary - but then it will be an employee problem.
Points to ponder
Like most effective company policies / practices, it is best to write things down, to establish standards of uniform practice. Managers need guidance to keep from making expensive mistakes. Here are a few Sign-On Bonus considerations:
- Eligibility: Is every position eligible to receive an offer, or does the practice begin at certain hierarchical levels? Can circumstances allow for exceptions?
- Amount of award: Do you use discrete amounts (i.e., $5,000, $10,000, $15,000 etc.) or a percentage of base salary? Or is it completely discretionary?
- Administration: Is the award a net amount, or grossed up for taxes? Is a portion of the award recoverable in case of early resignation? Senior management approval should be required.
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