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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated February 13, 2024 Fact checked by Fact checked by Pete RathburnPete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.
A sign-on bonus is a one-time lump-sum payment offered to a prospective employee as an incentive to accept the job. A sign-on bonus may consist of a one-time payment or company stock options. In general, businesses offer sign-on bonuses to highly qualified candidates who may be considering job offers from other companies.
Companies often use incentives to hire and retain the best talent. One of these incentives is called the sign-on bonus. It's offered to prospective new hires in addition to any other compensation they may receive.
Once offered mostly to star athletes and software wizards, the sign-on 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.
So, in exchange for sign-on 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 sign-on bonus may be as much as 10% or more of the potential hire’s first-year base pay.
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 sign-on 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 sign-on 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.
Employers may offer a sign-on to a new hire as a way to make up for any benefits they may lose when they leave their old job. Sign-on 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 sign-on bonus can be used as a short-term way of granting them the type of salary they desire.
By offering a sign-on bonus, companies may also encourage candidates to accept a job offer more quickly, thereby reducing the risk of losing them to competitors or having them withdraw from the hiring process. A generous sign-on bonus can make a job offer more appealing compared to offers from other companies.
Last, starting a new job often incurs various costs for the employee such as relocation expenses. A sign-on bonus can help offset some of these costs and make the transition smoother for the new hire. Though the bonus isn't specifically for these costs, it could be presented to a candidate that the company wants to offer the upfront lump-sum to help with these costs.
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 sign-on bonus.
You can negotiate your sign-on bonus. First, it's essential to understand the market value of your skills, experience, and the industry standard for sign-on bonuses. Unfortunately, your skillset or experience may not warrant this type of benefit. However, better understanding what other people usually get may help you negotiate even a small sign-on bonus, regardless of what your position is.
Be prepared to compromise and prioritize essential aspects of the offer beyond just the sign-on bonus. For example, in lieu of a sign-on bonus, you might able to get more leverage for a higher salary or higher performance bonus.
Sign-on 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 sign-on 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. Because of this, keep in mind how other elements of your negotiation may maximize your tax benefits.
A sign-on bonus is typically offered to a new employee upon accepting a job offer or starting a new position within the company. On the other hand, a retention bonus is designed to incentivize current employees to stay with the company for a specified period.
Unlike a sign-on bonus, which is typically offered upfront, a retention bonus is contingent upon the employee remaining with the company for a predetermined duration, usually one or more years. Retention bonuses are commonly used to retain key talent, mitigate the risk of turnover, and encourage loyalty and long-term commitment among employees.
An example of a retention bonus can be seen in vesting schedules. For example, an employee may receive a 10% retention bonus equal to their initial salary. However, 20% of this bonus may pay out equally over the next five years. Therefore, if an employee leaves after the second year, they may have only received 4% instead of 10%.
Note that a sign-on bonus may or may not have a similar type of vesting agreement. For example, an employee may be required to remain with the company for at least six months; otherwise, the sign-on bonus may be pro-rated back to the company.
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.
It may not always be in your best interest to accept a sign-on bonus. Some downsides or reasons to reconsider negotiating for a sign-on bonus include:
Companies offer sign-on bonuses for various reasons, including attracting highly qualified candidates, competing with other employers in the market, mitigating the risk of candidates rejecting job offers, and compensating for lower base salaries or other benefits. Sign-on bonuses can also signal to new employees that they are valued and appreciated by the company.
Yes, sign-on bonuses are generally considered taxable income and subject to federal, state, and local income taxes. Employers typically withhold taxes from sign-on bonuses at the time of payment, similar to regular wages.
If an employee leaves the company before the end of the sign-on bonus period, they may be required to repay all or a portion of the bonus, depending on the terms outlined in the employment contract.
The amount of a sign-on bonus can vary widely depending on factors such as the industry, job level, location, and the candidate's skills and experience. There is no one-size-fits-all answer. Some positions may have a sign-on bonus of at least six figures, while entry level positions in lower cost of living areas may extend bonuses of $500.
Sign-on bonuses are financial incentives offered by companies to new employees upon accepting a job offer or starting a new position. These bonuses serve to attract top talent, offset relocation costs, and signal appreciation for the candidate's skills and experience.
