Accounting for Retention Bonus
A retention bonus is a type of performance-based bonus that is paid to an employee in order to incentivize them to stay with a company for a predetermined period of time.
These bonuses are typically used when an organization is facing high levels of turnover, or when they are trying to retain key employees during times of transition or change. Retention bonuses can be paid out in lump sum payments, or they can be structured as periodic payments over the course of the retention period.
In order to qualify for a retention bonus, employees typically have to meet certain performance benchmarks, and they may also be required to sign a contract agreeing to stay with the company for a set period of time. While retention bonuses can be an effective way to keep talented employees on board, they can also be costly, and they may not always achieve the desired results.
Retention bonuses are often used when there is a risk of the employee leaving, such as during a merger or acquisition, or when there is a need to retain key personnel. When accounting for a retention bonus, it is important to carefully consider the terms of the agreement.
For example, if the bonus is paid in installments, each payment should be recorded as it is made. If the bonus is contingent on the employee remaining employed for a certain period of time, it should be accrued over that period. Careful accounting for retention bonuses will ensure that they are properly reported on financial statements.
Journal Entry for Retention Bonus
The retention bonus will be recorded as the expense on the company income statement. It is part of the payroll expense. The payment does not qualify as the assets on the balance sheet.
The journal entry is debiting retention bonus expense and credit cash paid.
| Account | Debit | Credit |
|---|---|---|
| Retention bonus | 000 | |
| Cash | 000 |
The retention bonus
Example
Company ABC has paid $ 140,000 as the retention bonus for the key management. They want to prevent the management team to resign and join the competitors. Please prepare a journal entry for the retention bonus.
The company has paid $ 140,000 for the retention bonus which is the expense on the income statement.
The journal entry is debiting retention bonus $ 140,000 and credit cash $ 140,000.
| Account | Debit | Credit |
|---|---|---|
| Retention bonus | 140,000 | |
| Cash | 140,000 |
Important of retention bonus
In today’s competitive job market, employers often use retention bonuses as a way to keep valued employees from leaving their company. While the size of the bonus can vary depending on the employer, the general idea is that it is an extra financial incentive given to the employee in addition to their regular salary.
This bonus is usually paid out in installments over a period of time, and is contingent on the employee remaining with the company for a specified period of time. For example, an employer may offer a retention bonus to an employee who agrees to stay with the company for two years after receiving the bonus.
While retention bonuses can be a significant financial investment for employers, they can also be very effective in preventing key employees from leaving. In a tight labor market, retaining experienced and talented workers is essential for companies to maintain a competitive edge. Therefore, retention bonuses can play an important role in helping businesses to succeed.
