It’s bonus season. Here’s what you should know

The power of a sign-on bonus is huge when attracting new candidates, and this power becomes even more profound during year-end hiring.

So far in Q4 of 2022, ~75 percent of offers extended by our clients included a sign-on bonus, as opposed to ~25 percent in Q1 and Q2. This increase is to be expected in the back half of the year, but so far in this quarter we’ve also seen a 27 percent increase in the number of sign-on bonuses being extended compared to the same time in 2021.

With this spike in the amount of bonuses being extended to our candidates, we thought it timely to share a few important reminders for anyone thinking about accepting an offer that includes a sign-on bonus:

Timing: There are three common payout timelines for sign-on bonuses every candidate should be aware of. An immediate payout means your bonus will be paid out within the first one to six months after signing. This timeline makes up over three quarters of the types of payouts we see. The second most common is a 12-month payout, which makes up around 16 percent of the payouts we encounter. The third and most uncommon model is a 24-month payout which takes up to two years to fully disperse.

Taxes: While bonus payouts are not considered regular income by the federal government, they are subject to taxes. Referred to as “supplementary wages” in the tax code, bonus payouts in 2022 will likely be taxed at a flat rate of 22 percent, as long as the total amount is less than $1M. If your bonus is over $1M, the first million will be taxed at 22 percent and every dollar over that will be taxed at 37 percent.

Negotiations: There are two facts you should be aware of when discussing a sign-on with a potential employer. The first is that we rarely see organizations recoup an entire annual bonus with a sign-on bonus. If you’re interviewing with another company in Q4, you should be prepared to leave part of your annual bonus on the table (i.e., “cost of doing business”). The second is that most private equity backed businesses prefer utilizing sign-on bonuses to alleviate compensation gaps (followed by changing the bonus, changing the base and extending more equity) regardless of the time of year as it’s a single expense instead of a recurring expense.

The takeaway: If you’re thinking about how to negotiate your compensation, remember that sign-on bonuses are generally a useful solution and can be an important lever to satisfy both parties’ compensation expectations.