In the not-too-distant past, hiring bonuses — also called signing bonuses or sign-on bonuses — were only mentioned in reference to elite professional athletes or corporate CEOs. As the labor market has tightened, however, businesses ranging from fast-food restaurants to manufacturing companies and others have started using this type of bonus to attract entry-level workers and lower tier managers.

In fact, I recently read about a company in a particularly tight job market that offered a $5,000 hiring bonus. Could this tactic work for your company? Here are some things to consider before putting up big reward to recruit workers.

Proceed With Caution

There are two ways to use a hiring bonus. An employer can announce a signing bonus when first advertising a job opening. The lure of extra cash should boost the total number of job applications submitted. Only do this if you’re willing to sift through a lot of applications, many from unqualified applicants who see applying for a job with a sign-on bonus like buying a lottery ticket. Mixed in with the few promising candidates will be some whose attitude is, “Hey, somebody’s going to get that money. Why not me?”

The other strategy for using a sign-on bonus is to be selective and use as needed. Holding back the option of offering a hiring bonus leaves you a trick up your sleeve to pull out to use if you’re close to hiring the perfect job candidate, but they need a little extra convincing to lure them from their current job, commute farther to work, or lose the vacation time they’ve accrued with another employer. In this way, it serves as a negotiating tool.

If you offer a signing bonus upfront, keep in mind that you are establishing a precedent. Going forward, new hires may expect it. That can drive more prospective employees to your company, but if a sign-on bonus is a given, it reduces your negotiating power somewhat. An in-demand employee who already knows you’re paying a sign-on bonus may want to know what else you’ve got to offer, and you may have nothing else planned.

Strings Attached?

In addition to being an incentive to hire on, a signing bonus can be tied to a time commitment with the goal of retaining the employee. This means a new employee must agree to stay at your company for a predetermined period of time in order to receive the entire bonus. If you pay the entire bonus upon hiring because the new employee incurs immediate expenses by taking the job, like moving costs or having to upgrade their commuting vehicle, but you still want to use it as a tool to keep the employee around, you can add what is called a clawback provision or repayment agreement. This lays out rules for how the employee will pay back the bonus if requirements aren’t met. The clawback provision might, for example, say if the employee quits or is fired within two years of being hired, a prorated portion of the bonus must be repaid. If you’re going to have strings attached to your hiring bonus, it’s best to consult a lawyer to make sure the requirements are spelled out properly.

How Much Money?

To determine the appropriate size of a hiring bonus, consider what you can afford and what other companies in the area are offering. Based on the local economy and pool of available workers, figure out what amount will grab someone’s attention. For an entry-level job, the hiring bonus is often a fixed sum. For more advanced positions, it may be calculated as a percentage of the offered annual base salary from 5 percent to as much as 20 percent. Since the bonus is sometimes intended to help a new employee make up for any bonuses or benefits they will forfeit by leaving their current job, consider the costs a particular candidate will incur by taking the job at your company before tossing out a number.  

When to Pay

A hiring bonus can be paid all at once or in installments. It is sometimes referred to as “stay-pay” if it isn’t distributed until the employee has been on the job for a while. If your problem is more about keeping people than finding people, stay-pay may be a way to improve staff stability. Dole out the promised bonus only after the employee has completed six months or a year on the job and met job expectations. Don’t promise something you can’t or won’t deliver, though, or you’ll be known as the company that cried bonus and no one will want to work for you. 

Paying a hiring bonus can be an affordable recruitment tool because chances are hiring is an infrequent occurrence and paying a one-time hiring bonus won’t add a lot to your company’s overall annual expenses. In fact, it could save you money in certain circumstances if the bonus makes up for not being able to meet the job candidate’s wage demand. If paying a $2,000 hiring bonus allows you to save $1,000 per year on the new hire’s wages, in the long run, you’ll save money. The person on the receiving end of the bonus should be informed, however, that the bonus is fully taxable as regular income.

Bonus Won't Fix Everything

Offering a hiring bonus does not guarantee you will attract and retain good employees. It’s one of many tools in your recruitment toolbox. It can never make up for low starting wages or poor working conditions. A sign-on bonus won’t be enough to attract and keep good employees if your company has a reputation for treating employees unfairly. But all things being equal, it could make the difference between a promising young worker joining your team or a competing company. It’s important to note that a worker may come for the bonus, but he or she will stay only if the company takes care of its employees in the long run.