Is Our Proposed Retention Bonus Policy Legal and Effective for Employee Retention?

Retention Bonus Policy Proposal

To retain employees, we would like to start a Retention Bonus policy. The policy will aim to retain employees for 3 years starting from 1/4/2019. We will add Rs 3000 to their salary and deduct Rs 3000 monthly for 3 years. This Retention Bonus (R.B.) will be set aside for 3 years, and at the end, i.e., after the completion of 3 years, we will pay it out.

Legal Considerations

Is this legal? As we will not deduct PF or ESIC, will it be legal? If not, we will not proceed and will discuss with management to cancel this policy. This policy is intended for fresh engineers, diploma or graduate holders, or fresh I.T.I. employees in departments like sales, service, solar, purchase, etc. Please start the discussion in our group.

Regards, Jayant Nisal

Retention Bonus Payment Considerations

How would you or your employer account for this Retention Bonus payment component for purposes of PF deduction, Gratuity calculation, IT deduction, Professional Tax component, and any other eligibility considerations? Above all, how do you or your employers intend to make these unauthorized deductions as provided for in the Payment of Wages Act?

Employee Motivation and Retention

Workers/employees work for bread, but not all work for "bread alone." More money never motivated an employed person to continue or stay back. Actively engaged employees can't be lured; it's better to create conditions that keep them glued to your organization (culture/ethos). Employee commitment is a by-product of an incessant induced sense of belongingness not created overnight.

Kritarth Team of Org Dev Partner

7.3.2019

Dear Jayant, you can initiate the Retention Bonus policy, and it is entirely legal. Many organizations implement such practices to retain employees. You can add Rs. 3000 per month to their total compensation; however, do not show it as a deduction from earnings. This bonus is separate and additional to their regular earnings and does not attract any PF deductions.

Since this bonus will only be earned by those who complete the stipulated period in the organization, it will be taxed according to the existing Income Tax norms when disbursed. To account for this expense, your finance team needs to make provisions for it.

You should determine the maturity period (mentioned as 3 years) based on what you realistically aim to achieve with your employees.

Regards, Rahul

Dear all,

In case an employee resigns due to personal issues after completing their first or second year, will they still receive their retention bonus? What will happen in this scenario?

Retention bonus is always paid against serving a minimum number of years/months as decided by the employer and agreed upon by the employee. If the employee doesn't serve that period, he/she doesn't receive the retention bonus!

Regards,
Rahul

Dear Jayant,

It appears from your submission that the organization is interested in retaining employees by providing a Retention Allowance of Rs. 3000 per month for 3 years, totaling Rs. 1,08,000 at the end of 3 years. You have also mentioned that Rs. 3000 will be deducted from the salary every month. Your query also pertains to whether PF and ESI deductions are applicable or not.

Understanding the Retention Allowance

What seems evident to me is that Rs. 36,000 per year is built into the CTC, and you are processing payroll from the CTC. Every month, your organization is showing Rs. 3000 on the earning side and again Rs. 3000 on the deduction side. This may create confusion for statutory authorities (PF, ESI, etc.) and also for the employees. It would be better to process payroll from the monthly gross and deduct standard items such as PF, ESI, PTAX, etc.

Retention Allowance Disbursement

The Retention Allowance is an incentive that will be paid after completion of 3 years of service with the company, provided the employee remains on the company's payroll at the time of disbursement of the Retention Allowance. This practice is quite common nowadays in many organizations.

Thanks & Regards,
S. K. Bandyopadhyay (WB, Howrah)
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