The Unexpected Pros & Cons of Sign-On Bonuses

Negotiating salary with candidates can sometimes be tricky -- particularly if you're extremely excited about a potential candidate, but she's asking for salary well-above the set salary range for the role.

When this is the case, there are a number of elements of an offer outside of salary that a candidate may place significant value on, and could carry more weight when deciding to join your team. For instance, you might offer more vacation time, higher bonus potential, or commuting reimbursement.

Alternatively, you might consider offering a sign-on bonus, which is a one-time increased payment to help you reach a total compensation package that is attractive to the candidate and offers a (sometimes significant) short-term financial incentive.

Of course, like with anything, there are pros and cons to sign-on bonuses. Keep reading to figure out whether a sign-on bonus is really the best tactic for your recruitment team or HR department.

Signing bonus

A signing bonus, or sign-on bonus, is a one-time sum a company might give a new employee as incentive to join the company. Typically, you'd offer a sign-on bonus to create a more attractive total compensation package for a candidate. Additionally, a sign-on bonus could help you incentivize against competing offers to make the candidate's first year more lucrative and competitive to another offer.

Pros and Cons of Sign-On Bonuses

Pros

1. A sign-on bonus is a one time payment.

Let's say your candidate asks for 100K, but you're only able to offer 90K for the role. In a case like this, you might consider including a sign-on bonus to make the total compensation package more attractive to the candidate.

While your compensation expense as an employer in the first year is the 10K sign-on plus the prorated total salary, in subsequent years you are only paying the base salary.

This has less of a financial burden for your company in the long run.

2. A sign-on bonus can help you attract a candidate who might have competing offers.

If you know your candidate is in high demand or might be considering alternative offers, you might want to include an additional incentive to demonstrate your interest in her as a candidate. For instance, let's say you want to hire a highly-skilled engineer, but she's been given offers from other top firms in the city, as well.

The sign-on bonus could be your opportunity to persuade her to join your company -- additionally, it shows you recognize her worth and want to be considered as a serious option.

3. A sign-on bonus can help you bridge the gap between the candidate's desired compensation package and what you're able to offer.

Simply put, a sign-on bonus enables you to bridge the gap between the candidate's desired compensation package, and the compensation package your business is able to offer. While you might not be able to afford to pay her 5K more over the next couple years, you could find the funds to make the offer more appealing to her.

It's important to note, a sign-on bonus often comes with fine print that ensures a candidate will stay with your company for a certain length of time -- likely 6 months to a year, minimum.

Cons

1. Year two, the candidate might feel underpaid or under-appreciated when she returns to a base salary without the sign-on bonus.

Year two, when your candidate sees her total cash compensation comprised only of the base salary in the absence of the sign-on bonus, she might feel underpaid or under-appreciated -- or like she just received a pay cut. Even if she understood the agreement when she made it, it's difficult to mitigate feelings of frustration when that sign-on bonus goes away and the employee is making less than she was making year one.

Over the long-haul, she's likely going to seek out opportunities to close the gap and receive what she initially expected, either through a salary increase, performance bonus, or long-term compensation -- and, if she can't find that opportunity at your company, she might look elsewhere.

To ensure sustained employee satisfaction, it's critical you're able to pull other levers such as options, RSUs, bonuses, or annual compensation increases to cover the expectation.

2. You'll need to ensure your company can offer it immediately.

It might be tricky to locate the funds to offer a sign-on bonus. Additionally, a sign-on bonus is expected to be paid in-full in the candidate's first or second paychecks. So, while it might seem simple, it's worth noting -- you'll want to make sure you have the funds immediately ready to give to your candidate once she accepts your offer.

Alternatively, you might choose to pay 50/50 at the start date and then midway through the year, with a one year clawback clause.