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Sign-On Bonus: Good or Bad?

Sign-on bonuses—also called signing bonuses or recruiting bonuses—are used by employers to recruit prospective employees and entice them away from other job opportunities. A survey by WorldatWork, a human resource association, revealed that 76 percent of employers use signing bonuses to attract key employees. These bonuses can be five to 25 percent of the base salary, depending on the company, the industry, and how desirable the applicant’s skill set.

If you’re job searching and have several offers on the table and one of them includes a sign-on bonus, is it something you should take? First things first: know how the bonus works.

How the bonus works

The goal of a signing bonus is to create a more attractive total compensation package. This can be done in other ways, too, like offering commuting reimbursement, more vacation time, or a more flexible work schedule. If a company offers a signing bonus to you, here’s how it works.

A signing bonus is a short-term financial incentive a company can pay out in several ways: in your first or second paycheck; half at the start and half midway through your first year in the new position; after you’ve worked a certain number of months at the company; or in a larger sum up front with additional payments made once you have met specific performance targets.

To help ensure you don’t take the money and run, most contracts with signing bonuses attached also include a “clawback clause.” This says you must give back any bonus money the company has already paid you, under certain conditions—like leaving the company before one year.

A sign-on bonus is taxable the same as your salary because it’s part of your total earnings for the year. Both federal and state income taxes will apply.

Four things to consider before accepting or walking away

Now that you know how this type of bonus works, here’s what you need to consider before accepting or rejecting an offer with a signing bonus.

  1. Can you afford a one-time pay increase? After your bonus has been paid out, your salary will decrease to a base salary—an amount you may have originally decided wasn’t enough. You’ll need to make sure you can pay all your bills with the smaller salary. If you use the one-time boost in income to pad your savings account or invest in a more reliable car or much-needed home repairs, just be careful you don’t also inflate your overall cost of living, which you won’t be able to maintain later.
      
    It’s important to know the bonus most likely won’t affect your salary or potential raise when it’s up for review, your suggested life insurance coverage, or your 401(k) program. This means that if you accept a salary of $100,000 and a signing bonus of $20,000, and you’re given a five percent raise next year, the raise will be $5,000—not five percent of $120,000.
      
  2. Losing out on the difference between your standard salary and the bonus can be disheartening. Even if you have budgeted and decided you can financially take the decrease in pay, you may not be as emotionally ready for the change. You may feel underappreciated, underpaid, under-valued. On the other hand, you could use the change in paycheck to motivate you to achieve other promotional bonuses or get a faster-than-expected promotion.
      
  3. If you lose out on benefits at other jobs, make sure the signing bonus allows you to make up for them. Don’t let a signing bonus blind you to other jobs that might not have a big bonus up front but come with more comprehensive benefits that will last the length of your career. These benefits could include better healthcare coverage, retirement plan/matching program, more PTO.
      
  4. It isn’t always your best option. In some cases, a signing bonus might be a good move for you, especially if it comes from a company with lots of promotion potential and other benefits.
      
    But a signing bonus isn't always your best option. If you were offered a $4,000 signing bonus but instead negotiated a $2,000 increase in your annual salary, you'd come out ahead if you stayed longer than two years since the bonus is a one-time payment.