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Table of Contents
What Is A Signing Bonus
A signing bonus refers to financial compensation provided by one party to entice another party to sign a contract.
Typically, employers looking to hire highly skilled employees or key personnel will offer potential candidates a signing bonus to entice them to sign an employment agreement.
A signing bonus can consist of any type of compensation such as a cash payment, stock options, the gift of property, and so on.
For example, a public company can offer a highly sought after individual a signing bonus of $50,000 to become the company’s Chief Executive Officer.
Signing bonus awards are also highly prevalent in professional sports where a sports franchise will offer a lucrative signing bonus to a player to entice them to sign a contract with them and not the other teams.
For instance, in 2019, Aaron Rodgers received the highest signing bonus ever paid in the NFL at a whopping $57.5 million.
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Why Offer Signing Bonuses
The main reason why a signing bonus is offered to someone or entity is to provide that party an incentive to sign one agreement over another.
For example, in professional sports, if a player is sought after by many sports franchises and receives three similar offers, perhaps the signing bonus will be the final decisive factor for the player to choose one club over another.
Companies that offer candidates a signing bonus are potentially dealing with a market condition where it is difficult to find the right talent, the person’s skillsets are highly unique and difficult to find, to compensate the employee for leaving another job, or the company is looking to generally attract the best talent.
There are many reasons why signing bonuses are given but it all comes down to giving someone or some party a financial benefit for selecting one contract over another.
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How Signing Bonuses Are Paid
Signing bonuses are paid in a variety of ways, such as a cash payment, stock options, or gifting of property.
The most common method for paying signing bonuses is to offer a cash payout, typically in the form of a lump-sum payment.
For example, an actor will be given a $25,000 signing bonus to accept a contract to act in a specific movie.
When the actor signs the contract, within a defined period of time, the $25,000 payment will be made to the person.
In the context of an employment contract, the signing bonus can also be in stock options.
If the employer has an employee stock option plan, the employer can agree to grant a candidate a certain number of options enticing the candidate to sign an employment agreement.
The gifting of assets or transfer of property can also be considered.
In professional sports, it’s common to see a sports club offer a luxury vehicle to a player upon signing a contract.
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Are Signing Bonuses Worth Paying
The answer to this question is that it depends.
In some cases, clearly offering a signing bonus may not be to the payor’s advantage.
On the other hand, in other cases, there may be value in offering a signing bonus even if it may be more costly.
In industries where there’s a lot of supply of labor, employers will not have difficulty finding the right type of talent.
As a result, it’s pointless to offering a signing bonus, unless it’s really justified.
However, in industries where there’s a labor supply shortage or there’s a small pool of qualified individuals that may be suitable for a position, then offering a signing bonus can be more attractive to the candidate.
For example, a company looking for a software developer with very unique expertise may be tempted in offering a signing bonus to ensure the software developer signs their contract and not that of a competitor.
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Negotiating Signing Bonus
The terms of a signing bonus can be negotiated just like any other terms of a contract.
When a company offers a signing bonus, they are generally looking to entice a person to sign their contract and not that of the competition.
However, since signing bonuses can be costly to organizations, protective terms can also be included to ensure that a person does not take a signing bonus and shortly after move to the competitor.
Typically, a company will give a signing bonus in exchange for an exclusivity period.
In other words, the person accepting the signing bonus will agree that he or she will not enter into a contract with a competitor for a certain period of time.
Also, some agreements will have provisions where the signing bonus can be forfeited or lost resulting in the beneficiary having to pay the money back.
For example, if the candidate leaves the company before a certain date, the company may require the signing bonus to be reimbursed.
The higher the value of the signing bonus, the more likely it is that the beneficiary of the bonus will have to agree to various restrictive covenants.
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Signing Bonus FAQ
What is a signing bonus?
A signing bonus, as the name implies, is a bonus paid out to someone or entity upon signing of an agreement.
In the labor market, signing bonuses are used as means for an employer to financially entice a candidate to join their company and not others.
When is a signing bonus paid?
A signing bonus can be paid at any time mutually agreed by the parties in the contract.
A signing bonus does not necessarily have to be paid upfront, it can be paid at pre-determined dates after the contract is signed or when certain events occur.
For example, a signing bonus can be paid in tranches where one-third is paid upfront, one-third is paid a few months later, and a third payment a few months after.
Alternatively, the signing bonus can all be paid in lump sum upfront or at any other time agreed by the parties.
Typically, the signing bonus is paid within a year following the signing of the agreement.
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What’s the difference between a signing bonus and salary?
A signing bonus refers to a payment that is made to entice a person to sign a contract.
The payment is typically a lump sum payment and it is paid only once.
On the other hand, a salary is a payment that an employer makes for the services rendered by an employee.
The salary is regularly paid to the extent the employee is regularly performing its duties.
Takeaways
So there you have it folks!
What is a signing bonus?
In a nutshell, a “signing bonus” is compensation given to a person or entity rewarding them for signing a contract.
Employers tend to use the signing bonus mechanism to attract candidates for hard-to-fill positions.
The signing bonus can be paid in cash, stock options, property, or any other means suitable to the parties.
Many industries offer to sign bonuses to attract talents such as in health care, software, law, marketing, technology, IT, and more.
Now that you know what a signing bonus is and how it works, good luck with your research!
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