When to Pay Signing Bonuses

With many people out of work and corporate America coping with a difficult economy, one would expect that a signing bonus—a financial incentive for an individual to join a particular organization—would have gone the way of the dinosaurs.

However, many organizations still rely on such additional motivation, although they are increasingly careful about how they use signing bonuses, also known as reporting, cash, sign-on or hiring bonuses.

“Signing bonuses are not especially new, but, in the past 10 years, the market for certain types of talent has been more difficult,” says Jan Chapman, a senior manager for the Houston-based Human Capital Consulting Practice of Deloitte & Touche.

Signing bonuses “are very useful in attracting a particular candidate to your organization and may be used to offset the expenses of relocation or of long-term incentives or bonuses an applicant may lose by changing jobs,” Chapman notes. On the other hand, she adds: “Given the current general employment and economic environment these days, they are used less frequently since labor is more available and unemployment is higher.”

Susan Arneson, employment manager with Kaiser Permanente in Aurora, Colo., says Kaiser rarely uses signing bonuses for non-medical positions because, in the current job market, there are enough candidates from which to select. However, the organization still does “offer sign-on bonuses to attract a particular candidate for a hard-to-fill position.”

Arneson notes that Kaiser is open about such bonuses—the health care provider may advertise such a bonus in an ad or on its web site, although the specific amount should remain confidential between the candidate and the employer.

Use of signing bonuses increased during the 1990s but dropped as the current decade began, according to the National Association of Colleges and Employers (NACE), a Bethlehem, Pa.-based organization that publishes information about the college-educated workforce.

Research director Camille Luckenbaugh says surveys show that the use of signing bonuses among NACE’s member employers peaked in 1999, when 56.1 percent of respondents used these incentives.

By December 2002, only 31.6 percent of responding employers offered signing bonuses.

While hiring bonuses may have receded in recent years, Luckenbaugh reports that the employers who responded to questions about hiring for 2004 expected to see a 12.7 percent hiring increase. “If the market gets healthier, then we may see a resurgence of people who are offering signing bonuses,” she says.

Carole Schwartz, CEO of New Jersey-based CRS Associates LLC, a retained executive search firm, notes that after 2001, many consulting firms stopped offering hiring bonuses, “largely because hiring in that industry had stopped,” she says. “Now, however, as consulting firms have made the appropriate consolidations or cuts, and business is improving, they are beginning to hire, and offering signing bonuses is again becoming a potential enticement.”

Schwartz adds that employers may offer such bonuses when a potential hire stands to lose something by changing jobs. “It might be a case where someone said, ‘I have to stay at my current company for three months to receive my annual bonus,’ ” she notes. “If the [new] employer did not want to wait that long, it would offer a bonus to offset that loss. Or sometimes, it’s just a matter of really wanting one particular individual.”

Luckenbaugh says that, in addition to enticing particularly attractive candidates, signing bonuses also can attract employees to rural areas or offset other expenses, such as relocation costs or higher costs of living in certain cities.

Signing bonuses also can be selectively used to bridge the gap between an employer’s formal salary structure and an individual applicant’s needs. If offering a higher salary to a desired candidate will throw the company’s pay structure out of alignment, the employer could use a signing bonus to make up some of the difference between the available salary and the amount necessary to get the candidate to say yes, says Deloitte & Touche’s Chapman.

Signing bonuses might be as low as $1,000, but as one moves up the management ladder, they are likely to run anywhere from $20,000 to $100,000, Chapman says. “And at the executive level, they can be as high as $1 million,” she says.

If your organization chooses to offer signing bonuses, you’ll also need to decide whether to establish a policy regarding who receives such payments, when you’ll pay them and recipients’ subsequent obligations. You should also decide whether to ask for confidentiality, as well as how you’ll handle any morale and retention issues that may arise among current employees if word gets out. Also, be aware that signing bonuses can spark bidding wars that increase cost of hire and competition for key employees, especially in industries facing worker shortages.

Health Care Staffing Ills

One industry that is coping with a shortage of qualified workers is health care, where nurses and pharmacists are in high demand.

Kaiser’s Arneson says the company uses signing bonuses judiciously. “We’re union, which means that we have a set rate of pay that we can offer people to walk in the door,” she says. “When someone comes to Kaiser, there’s not a lot of room for negotiation, but we do try to be competitive. Because it can be challenging when it comes to starting rates of pay, signing bonuses can help us fill in the gap.”

Arneson notes that harder-to-fill health care positions are more likely to include a signing bonus. “We really wouldn’t offer a bonus for our regular positions, but we might for a nuclear medicine technician,” she says.

At Kaiser, such incentives run between $500 and $5,000.

Arneson also points to the cost and consequences involved when Kaiser is unable to fill a position and has to farm out certain services to outside vendors. “In cases like that, paying a hiring bonus is probably going to be less expensive than sending those services out of house,” she notes.

Policy Issues

When it comes to signing bonuses, flexibility remains the watchword. For example, Kaiser does not have a hard-and-fast corporate policy. “We want people to have the flexibility to use this option as needed,” Arneson says.

Deloitte & Touche’s Chapman reports that, in her experience, bonuses are generally paid after background checks have been completed and the employee is actually at work. If the bonus is significant it may be paid over time—even as much as a two-year period.

“Sometimes there are strings attached and sometimes not,” she says. “However, as the amounts get bigger, usually at middle- and upper-management positions, the strings do tend to become more numerous.”

For example, the payment of some or all of the signing bonus may be tied to the employee achieving specific goals. Chapman says many signing bonuses come with a written agreement that requires the employee to repay the bonus if he fails to meet goals or leaves the company within a specified period.

That’s how it works at Kaiser. “Typically the money is paid in one lump sum. If an employee who has received a signing bonus leaves within 12 months from the date of hire, that employee will repay the bonus, less any taxes.”

Communications Issues

At many companies, decisions regarding who receives a signing bonus—and how much it will be—are made on a case-by-case basis. The details of such arrangements usually remain private, but sometimes word gets out.

“In an ideal world it would be a private matter between the institution and the individual,” says Peg Brubaker, vice president of human resources support services at New York Presbyterian Hospital. “But when word gets out, then you have a problem with the fallout among the employees.”

At Kaiser, the need for signing bonuses to attract new hires in one field led the company to give retention bonuses to current employees in that field.

“When we faced challenges in recruiting for our nuclear medical department, we needed to be able to offer a significant sign-on bonus to attract qualified candidates,” says Arneson. “However, we needed to balance the situation with employees who were already in those positions. We did not want to create inequities that could cause morale issues. In this case, we were able to offer retention bonuses to the other nuclear medicine employees.”

Some employers have policies prohibiting employees from disclosing information about bonuses, but these policies are difficult to police, Chapman notes.

“Signing bonuses, like any form of remuneration, are based on job value, the market for talent and the organization’s needs at the time,” Chapman says. “Amounts will vary, just like pay can vary based on experience, the organization’s needs and availability of specific talent.”

There are other caveats. “Lessons learned from organizations that have offered sign-on bonuses have been that the retention of these individuals is actually worse than those employees hired without a signing bonus,” says Brubaker. “Many times employers look to a sign-on bonus as a quick fix, then that quick fix hurts because it does not yield a long-term hire. And the cost of turnover is much higher than the cost of hire.”

Employers also can find themselves dragged into a bidding war, which is precisely the situation that Kaiser faced. “A local grocery chain advertised in the newspaper that it was offering a $5,000 signing bonus for pharmacists,” says Arneson. “At that point we had no choice but to do the same in order to remain competitive.”

Chapman warns that bidding wars can drive up costs. For example, the candidate’s current employer may raise base salary or offer a bonus to retain the employee, forcing up the cost of hire, says Chapman. While it is difficult to guard against such possibilities, employers generally consider the value of a position and determine the total cost they are willing to incur. Some employers will stand firm on their offer and emphasize other advantages of making the move, such as work/life considerations, opportunities for advancement or benefits.

Arneson agrees that employers should avoid bidding wars as much as possible. “At some point, someone will lose,” she says. “An employer should be able to stand on its own merits and what kind of a company it is. You have to draw the line as to what you can afford to offer and leave it at that.”

More important, she notes, Kaiser does not want people joining it for the signing bonus, but rather because they believe the company is a good place to work. “Money is not the reason people leave jobs. They are typically unhappy about other things,” says Arneson. “We strive to be the employer of choice so that when people are ready to make a change, they make the choice based on what the company has to offer in the way of pay, benefits, work/life balance, etc., and not because of the signing bonus.”

Mary E. Medland is a freelance business writer based in Baltimore.