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Signing Bonuses Promote Trust, Raise Expectations

Employers that offer them expect greater effort in return, study finds

To close the deal with job candidates, employers are more likely to offer signing bonuses in boom times than during a recession. But the payoff in employee attitudes and effort was found to be considerably greater with a tepid economy—when candidates far outnumber open positions and the bonus is viewed as having real meaning—a new study suggests.

The study paper "Can Offering a Signing Bonus Motivate Effort?" (abstract here) was published in the March/April 2014 issue of The Accounting Review, a journal of the American Accounting Association, a nonprofit devoted to accounting education, research and practice.

Study author Jongwoon “Willie” Choi, assistant professor of business administration at the University of Pittsburgh, writes that "A signing bonus more positively affects worker effort when there is an excess supply of labor" (that is, during a weak economy) "than when there is an excess demand for labor" (a strong economy with robust hiring). And driving this outcome, the study finds, is that workers in a weak economy "attribute a signing-bonus offer to the employer's trust in them to a greater extent."

The study found that recipients of signing bonuses who were hired in times of surplus labor supply gave their employer a score of 85 for trust on a scale of 0 to 100, while those hired in a tight labor market bestowed a score of 53.

And on a scale of 1 to 10, a signing bonus brought forth an effort rating of 5.5 during times of worker surplus compared to 4.07 when workers were scarce.

Greater Expectations

Both findings are statistically significant, according to Choi, who adds a caveat: the initial effects of signing bonuses may not persist over time.

"When there is an excess supply of labor, employers who offer a signing bonus expect greater effort from their workers than they do when either no signing bonus is offered or when there is an excess demand for labor," he noted. "Workers receiving a signing bonus [when there is excess labor supply] are less likely to fulfill their employer’s greater effort expectations." And this failure, Choi writes, can compromise the employees’ employment over the long term, as "fulfilling employers' effort expectations [is] an important factor for retention."

Because "both employers' and workers' expectations may affect whether and how trust and reciprocity develop over time," there is a need to manage expectations so they remain reasonable and appropriate, building on the strong foundation of trust that the signing bonus initially creates and the corresponding higher levels of effort typically shown by bonus recipients.

The new paper is not the first to find signing bonuses correlated with strong subsequent job performance. One earlier study Choi cites saw signing bonuses as motivating talent development, while another linked their use to employers' ability to assess job-seekers' potential to be a good match for the company.

The new study, however, is the first to examine the role of trust and to probe how bonus recipients' sense of being trusted is affected by the broader market environment in which the bonuses are offered.

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Amazon Offers 'Pay to Quit' Bonuses
to Disgruntled Workers will pay unhappy employees a bonus—up to $5,000—to leave, in a program that the online retail behemoth calls “Pay to Quit.”

Unlike traditional severance, the departure bonuses are not linked with firings or layoffs. Instead, they can be thought of as the opposite of signing bonuses. As Amazon CEO Jeff Bezos explained in an April 10, 2014, letter to shareholders:

“Pay to Quit is pretty simple. Once a year, we offer to pay our associates to quit. The first year the offer is made, it’s for $2,000. Then it goes up one thousand dollars a year until it reaches $5,000. ... The goal is to encourage folks to take a moment and think about what they really want. In the long-run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.”

But is $5,000 enough of an incentive to embolden disengaged employees to depart? Read more about this question here.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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