DEFINITION of ‘Signing Bonus’
A signing bonus is a financial award, often issued in one or two lump-sum payments, offered by a business to a prospective employee as an incentive to join the company. A signing bonus may consist of cash and/or stock options. Businesses offer signing bonuses to highly qualified job candidates to differentiate themselves from other businesses where an individual might consider accepting a position. Typically only salaried jobs pay signing bonuses.
BREAKING DOWN ‘Signing Bonus’
Signing bonuses are more common in certain industries and for certain positions. If the recipient of a signing bonus quits within a short time after accepting the position, he will probably have to return all or a pro-rated portion of the 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 28 percent federal tax bracket will lose $2,800 of the bonus to taxes, leaving only $7,200. In most states, state income tax would further erode the value of the $10,000 bonus.
How Signing Bonuses are Structured
A signing bonus might be as much as 10 percent or more of the potential hire’s first year base salary offered. As a means of incentive to join an organization, the signing bonus could be a way to compensate the new hire for benefits lost by leaving their old company for the new position. Signing bonuses could also be a means for the company to make up for shortcomings in the overall salary they are able to offer under their current salary 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.
The use of signing bonuses may cause internal conflict at companies as employees who are promoted from within might not have the same types of 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 where the new hire applied for the job out of their existing desire and should not need more coaxing to accept the position.