What Is a Signing Bonus?
The term signing bonus refers to a financial award offered by a business to a prospective employee as an incentive to join the company. A signing bonus may consist of one-time or lump sum cash payments and/or stock options. Businesses offer signing bonuses to highly qualified job candidates who may be considering job offers from other companies.
- 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 and/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.
Signing bonuses are becoming fairly common. According to monster.com, roughly 76% of employers use this type of incentive to attract new employees. Some of the industries that use this type of incentive to attract new hires include:
- Professional sports
- Financial sector
- Media and entertainment
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 probably 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.
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 lose $2,200 of the bonus to taxes, leaving only $7,800. In most states, state income tax would further erode the value of the $10,000 bonus.