Retention Bonus

What a retention bonus is

A retention bonus, sometimes called a stay bonus, is an amount an employer commits to in advance and that an employee earns by remaining in post until a stated date or until a stated piece of work is complete. It is paid for staying, not for a result. The employee does not have to reach a target or take on extra work to earn it; what the employer is paying for is the continued employment itself.

Three elements define it, and all three must be present. There is a prior commitment, written down before the period begins. There is a specific date or event on which entitlement depends. And there is a single condition: that the employment relationship continues until that point. Remove the first and the payment becomes a discretionary award made after the fact. Add a performance condition to the third and it becomes a different instrument.

Where a retention bonus sits between a spot award and variable pay

Two neighbouring forms of pay help to locate it. A spot award is given for something that has already happened and was not anticipated, and the employee has no claim to it. Variable pay works through a written calculation rule, and the employee can claim the amount once the target is reached. A retention bonus sits between the two, and differs from each on a particular axis:

• The direction of time. A spot award looks back at something that has happened. A retention bonus looks forward to a period that has not yet passed.
• What entitlement depends on. Variable pay depends on a result the employee produces. A retention bonus depends on the employee being there, and on nothing else. An employee who stayed but did not perform well still earns it. That follows from the definition; it is not a flaw in how the bonus was applied.
• Whether it can be claimed. Like variable pay, and unlike a spot award, a retention bonus can be claimed once its condition is met. That is why the condition is the part of a retention bonus whose wording calls for precision.

A retention bonus under Article 2 of the Labor Law

Article 2 of the Saudi Labor Law (نظام العمل), in listing what makes up the actual wage (الأجر الفعلي), includes a grant or bonus. It does not include every such payment. A grant or bonus counts only on one of two conditions: that it is provided for in the employment contract or in the work regulation (لائحة تنظيم العمل), or that it has been granted by custom to the point where workers have come to regard it as part of the wage and not as a gratuity.

A retention bonus is, by definition, set out in a prior commitment. Where that commitment is written into the contract or into the approved work regulation, the first of the two conditions is met, and under Article 2 of the Labor Law the bonus enters the actual wage.

Placing a retention bonus within the actual wage describes what kind of payment it is. It does not answer every question that might be built on that description. The end of service award under Article 84 of the Labor Law is computed on the last wage, and we found no provision in the sources we reviewed that settles how an amount paid once enters that last wage. So we state no rule on it. Recovering a retention bonus from an employee who leaves before the date after having been paid it is a separate question again. It has its own sources: the Labor Law’s provisions on deductions from wages, covered in our guide to wage deductions, and whatever the contract or the approved work regulation states. The definition of a retention bonus does not settle it, and no rule on recovery should be borrowed from the definition.

The calculation that decides whether to offer a retention bonus

Take an employee on a monthly wage of SAR 14,000, in a role the organisation needs them to stay in for 9 months until a piece of work that nobody else can do is finished. The bonus on offer is three months’ wage, which is SAR 42,000.

Against that stands what the organisation would expect to spend if the employee left. There are three items:

• The cost of hiring a replacement, whose components are set out under cost per hire. Assume SAR 20,000.
• The vacancy. If the time to fill the post is about 76 days, which is roughly 2.5 months on an average month of 30.4 days, and the loss during the vacancy is estimated at half the value of the post, the cost is 1.25 multiplied by 14,000, which is SAR 17,500.
• The time the replacement takes to reach normal output. Estimated at three months at half productivity, it costs 1.5 multiplied by 14,000, which is SAR 21,000.

The total is SAR 58,500 against SAR 42,000, so the bonus looks cheaper by SAR 16,500. But the comparison is flawed. The bonus is paid with certainty, whereas the replacement cost is incurred only if the employee actually leaves.

So bring in the probability of leaving. If the probability that the employee leaves without a bonus is put at 40%, the expected cost is 0.4 multiplied by 58,500, which is SAR 23,400. That is SAR 18,600 less than the 42,000 bonus, and the bonus loses. Put the probability at 80% instead, and the expected cost becomes SAR 46,800, which exceeds the bonus by SAR 4,800, and the bonus wins. The two sides are equal at a probability of about 71.8%, which is 42,000 divided by 58,500.

The figure that decides the matter, then, is neither the size of the bonus nor the cost of replacement. It is the probability of leaving. That figure is estimated, not known, and the estimate rests on signs: whether the employee has been offered another job, how long they have been in the role, and what they said the last time anyone spoke with them about it. An organisation that grants the bonus to everyone in a department pays a certain cost for each person, including those whose probability of leaving is low.

The figures in this example are assumptions, chosen to show the structure of the comparison. They are not a benchmark for the size of a retention bonus or for its proportion of the wage, and they are not taken from any source.

The retention bonus cliff, and what happens the day after

Entitlement that depends on a single date creates a cliff. The employee stays until that day because they do not want to lose a whole amount, and once it is paid, what was holding them is gone. Departures can therefore cluster in the weeks after the payment date.

Splitting the amount into two instalments does not remove the cliff; it creates two. Two arrangements can soften it. The first is to tie part of the bonus to a completed handover rather than to a date, so that the employee earns it when the work they were kept for is done, not when time has passed. The second is to hold back a final part until some time after the work ends, so that any departure comes after the handover rather than a week before it.

Above all, a retention bonus buys a known period of time. It does not buy lasting commitment. An organisation that wants people to stay has to address the reasons they would leave, which a single payment does not do. Whether retention bonuses raise retention at all is a separate question: we found no published measurement of their effect on the retention rate for the Saudi market on which to base an answer.

What a retention bonus agreement should state

Writing the terms down is not only good administration. The first of the two conditions in Article 2 of the Labor Law is that the bonus is provided for in the contract or in the work regulation, and a clear document is what makes that condition verifiable if a dispute arises. At the least, the document should state:

• The amount, in riyals, rather than as a percentage of a wage that may change during the period.
• When the bonus is earned, by a date or by an event with a documented marker showing that it has occurred.
• When it is paid. The payment date can differ from the date on which the bonus is earned, and leaving it unspecified can open the way to a dispute.
• What happens if the relationship ends before the date for reasons outside the employee’s control. This is a case that can go unwritten even though nothing prevents it from occurring.
• Where the other elements of pay stand, so that the bonus is not taken as a substitute for a pay rise that is due or for an existing item of pay.

The document is kept in the employee file, because the commitment runs for months, and the manager who made the offer may change in that time.

What a retention bonus offer tells the employee

The calculation above assumes that the probability of leaving is fixed and unaffected by the offer. That need not hold. A bonus conditional on staying for nine months tells the employee something they may not have known: that there is a date, and that the organisation expects them to want to leave before it.

The employee may also take a different message from it: that the role ends when the work ends, and that nothing after the date is assured. They may then start looking in the first month instead of the ninth, and the offer will have brought forward the departure it was meant to delay.

So the offer should come with a plain statement of what follows: whether the role continues after the date, and what will be expected of the employee after it. If the role is ending, being candid about it serves better than leaving it vague, because the employee will find out in any case. The only difference is when they find out, and from whom.

How a retention bonus differs from a counteroffer, a pay rise and pay in lieu of notice

• A counteroffer. It is made after the employee has resigned; a retention bonus is committed to before the employee has thought of leaving. The difference is practical as well as one of timing. A counteroffer can tell the team that resigning is a route to having pay reviewed, whereas a retention bonus announced together with its condition carries no such message.
• A pay rise. It is permanent and enters everything calculated on the wage from then on, whereas a retention bonus is a single conditional amount. Using a retention bonus to address a lasting gap in pay postpones the gap by nine months and adds an expectation on top of it.
• Pay in lieu of notice. What is due in respect of the notice period arises from ending the relationship, as set out in our guide to the notice period. A retention bonus is a commitment that exists while the relationship continues. Neither is counted as part of the other.

What undermines a retention bonus

• A vague condition. Until the project ends is a condition whose day of fulfilment nobody can identify, so entitlement becomes a matter of dispute. The condition should name a date, or an event with a documented marker.
• Extension. Moving the date later when the employee is close to reaching it undoes the basis on which they made their decision, and shows everyone in the organisation that the condition can move.
• Granting it across the board. Giving it to everyone in a department turns it into an expected seasonal payment. It then loses what defined it, and only its cost remains.
• Secrecy that does not hold. Different amounts for people at the same level, once known, can be taken as favouritism rather than as a response to a specific risk, unless the reason for the difference is one that can be stated.
• Relying on it alone. Nine months of staying with nothing done about the reason the employee wanted to leave can end in a departure that has only been postponed, and the reason then surfaces too late, in the exit interview.

Before a retention bonus is offered

A retention bonus is an instrument for a situation with an end date: a system migration, the closure of a branch, or the handover of work that only one particular person knows how to do, the kind of situation associated with a critical role. Outside situations of that kind, it is money paid for a postponement.

Two questions should be settled before the offer is made. On what date does the organisation stop needing what it needs from this employee? And what is the probability that they would leave if nothing were offered? If the need has no date, the retention bonus is the wrong instrument. If the probability is low, the bonus is a certain payment made against something that would not have happened.

The provisions relied on are those of the Saudi Labor Law as published by the Ministry of Human Resources and Social Development: Article 2 (the grant or bonus as an item of the actual wage, and the two conditions on which it counts) and Article 84 (the last wage as the base of the end of service award, cited to show where the open question lies). Royal Decree M/44 of 1446H, in force since 19 February 2025, added other definitions to Article 2 of the Labor Law and left the actual wage definition worded as before, and it did not amend Article 84 of the Labor Law.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.

Related terms

• Retention Rate
• Exit Interview
• Attrition
• Salary Review
• Cost per Hire