Compensation and Working Conditions Winter 2000 37

The Cost and Incidence of Referral, Hiring, and Retention Bonuses The Cost and Incidence of Referral, Hiring, and Retention Bonuses

THOMAS G. MOEHRLE

Signing and other bonuses can be important staffing

tools. Employment Cost Index data show that the

overall cost of these plans is relatively small.

The Cost and Incidence of The Cost and Incidence of The Cost and Incidence of

Referral, Hiring, and Referral, Hiring, and Referral, Hiring, and

Retention Bonuses Retention Bonuses Retention Bonuses

Thomas G. Moehrle is an economist in the

Division of Compensation and Estimation,

Bureau of Labor Statistics.

Telephone (202) 691-6237

E-mail: Moehrle_T@bls.gov

The tight labor market has

brought attention to compensation policies targeted to either attract or retain employees in occupations experiencing labor shortages. Some of the more touted policies

include stock options as well as lumpsum bonus payments for referral, hiring, and retention.1 In an ongoing effort to measure fully the changes in

compensation costs, the Employment

Cost Index (ECI) program has expanded

its definition of nonproduction bonuses by capturing referral and hiring

bonuses.

The impact of this expansion on the

ECI compensation and total benefit indexes is relatively small. The overall

cost of these plans amounts to no more

than 2 cents per hour for any major industry or occupational grouping. With

hourly costs for total benefits ranging

from $2 to $7, an additional 1 to 2 cents

should have virtually no impact on the

ECI rates of change or the Employer

Cost for Employee Compensation

(ECEC) hourly costs.2

This article explores the incidence

and hourly employer costs of the new

bonus plans.3 The analysis is based

on data collected from the Nonproduction Bonus Test conducted by the Bureau of Labor Statistics (BLS) during

its March 2000 ECI update.4

Some background

The ECI is a fixed-employmentweighted index that tracks quarterly

changes in hourly labor costs (wages,

salaries, and employer costs for employee benefits), free from the influence

of employment shifts among occupations and industries. ECI benefits are

grouped into 20 detailed categories,

such as holiday and vacation pay,

health and life insurance, and retirement and Social Security benefits. Also

included are nonproduction bonus

benefits.

Nonproduction bonus benefits are

cash sums not directly related to productivity that are given to employees

by the employer.5 Typical cash bonuses that would be included as nonproduction benefit costs are holiday

and yearend bonuses, profit-sharing

bonuses, and retention bonuses.

While retention bonuses have been a

part of nonproduction bonus costs

since the measurement of benefits in

the ECI began in 1979, referral and hiring bonuses were added to the ECI
38 Compensation and Working Conditions Winter 2000

nonproduction bonus measure starting

in June 2000.

Hiring bonuses, sometimes referred

to as signing bonuses, are payments

made by the employer to induce an individual to accept employment. Referral bonuses are made by the employer

to an employee for recommending an

applicant who is hired by the establishment. Retention bonuses are payments to an incumbent employee to

retain that individual within the establishment.

Nonproduction Bonus Test

To measure the incidence and hourly

cost of referral, hiring, and retention

bonuses, BLS field staff obtained separate information on these bonuses in

addition to their regular collection of

benefit costs during the ECI March 2000

quarterly collection cycle. Although

retention bonuses have been included

in the nonproduction bonus category,

data for them were collected separately

in the test to permit comparison with

the findings for referral and hiring bonuses. Having the three bonus plans

studied together gives a more robust

picture of the compensation policies

used in this tight labor market.6

There are several limitations to the

data collected during the March test.

Sample nonresponse coupled with the

low incidences of these plans are most

important. Table 1 shows the sample

response rates by sector, where the

occupational record counts and corresponding percentages are based on the

combined incidence of the three bonus

plans.7

Table 1 shows that 84 percent of the

private industry occupations were not

provided any one of these plans and

that, for an additional 6 percent, employers were unable or unwilling to provide these data—permanent nonresponse. The remaining 10 percent of

occupations were reported as having

at least one of the three plans offered,

but 63 percent of these—1,665 records—were reported as partial responses. Partial response occurs when

an establishment reports offering the

plan to its employees, but cannot report the cost outlay.

To include the partial-response records, hourly costs were imputed using

the data from the complete reporters.

The imputation method used in this

study follows a procedure similar to

that used in the ECI program, in which

sample weighted averages by detailed

industry groups—typically two-digit

SICs8—were computed for each of the

major occupational groups. These averages were then assigned to

nonresponse records for the same industry and occupation.

The 6 percent of the private industry sample coded as permanent nonresponse was dropped from the analysis. Imputation for these records is

problematic in that no information

about whether the occupation received

the benefit plan is present. Because this

study addresses the incidence of bonus

plans, the inclusion of these occupational records would bias the results.

The potential biasing effect of dropping the nonresponse records was mitigated by benchmarking the sample

weights to the March 2000 industry

employment estimates available from

the BLS Current Employment Statistics

survey.9 Applying the sample weights,

benchmarked to industry employment,

translates the sample results to universe estimates, defined here as all private industry workers.

For State and local governments, 93

percent of occupations were not offered

any one of the plans, and employers

were unable or unwilling to respond for

an additional 5 percent. For the remaining 2 percent, incidence of the plans

was reported, but not necessarily costs.

Reports for nearly one-half of the occupations did not provide the cost outlay of the plans, and were thus considered partial responses.

With government establishments

accounting for about 13 percent of the

ECI sample, the 2-percent response is

insufficient to produce any statistically

reasonable estimates, and thus these

establishments were excluded from

tabulations presented in this article.

Computation of average costs

Employer outlays for the bonus plans

are presented as costs per hour

worked, the standard benefit cost measure used in the Employer Cost for

Employee Compensation reports published by BLS.10 The hourly costs in

this study differ from the ECEC estimates, however, in that the averages

tabulated here are based on occupations in which workers were either provided or offered the bonus plans,

whereas ECEC estimates are averages

calculated from the entire sample of

occupations, regardless of whether the

sampled occupation received particular benefits. This important distinction

should be kept in mind when comparing estimates, because the employer

costs presented in this study are substantially higher than what would be

reported if averages were calculated

across all occupational records.11

TABLE 1. Sample response rates for occupational records from the Nonproduction

Bonus Test, March 2000

State and local government ............. 51 34 194 3,725 4,004

(1.3) (0.8) (4.8) (93.0) (100.0)

Private industry ................................ 976 1,665 1,570 22,208 26,419

(3.7) (6.3) (5.9) (84.1) (100.0)

 Total ................................................ 1,027 1,699 1,764 25,933 30,423

(3.4) (5.6) (5.8) (85.2) (100.0)

 NOTE: Numbers in parenthesis are percentages of total occupational records for that

row. Because of rounding, some percentages may not sum to 100.0.

Sector Reported

data No plans Total

Referral, hiring, and retention bonuses combined

Permanent

nonresponse

Partial

response
 Compensation and Working Conditions Winter 2000 39

The Cost and Incidence of Referral, Hiring, and Retention Bonuses The Cost and Incidence of Referral, Hiring, and Retention Bonuses

Table 2 shows costs per hour worked and the percentage of employees

having access to, or coverage under,

each of the bonus plans. This table

shows breakouts by establishment employment size, industry, and occupational groups. The percentages of employees having access were calculated

from weighted employment of occupations that were either provided the

bonus plan, in which case employer

costs were incurred, or were offered

the plan with no costs being incurred.

The latter will occur, for example, when

an employer offers a referral bonus,

but no employee refers an applicant.

This interpretation of the percentages

assumes that all employees within a

sampled occupation have access to the

plan, should the plan be offered.12

As with any statistical measure, the

reliability of the estimate increases with

the number of observations. Table 3

shows the number of occupational

records used in the estimates. The

record count provides a means from

which reliability of the estimates can

be gauged.13 Also presented in table 3

are the percentages of records that were

used in the estimate and that had a reported nonzero cost. These two measures provide the number of cost

records used in the computations of

the hourly averages.

Referral bonuses

Of the three ECI bonus plans, referral

bonuses were the most commonly offered, with 8 percent of occupations in

private industry covered. (See table

2.) Referral bonuses, where paid, cost

employers, on average, 8 cents per hour,

but there were notable differences

among the labor categories. By industry, as little as 1 cent per hour, on average, was paid to occupations in manufacturing and finance, insurance, and

real estate jobs, and as much as 24 cents

to occupations in wholesale trade jobs.

Occupations employed in midsize

firms—100 to 499 workers—were paid

an average referral bonus of 14 cents

per hour, while small and large firms

paid out between 4 and 6 cents per hour.

Within occupational groups, service

occupations received, by far, the highest payments per hour worked, 28

cents per hour.

The percentage of employees who

had access to referral bonuses varied

TABLE 2. Average hourly employer cost for occupations offered bonus plans and percent of employees having

access, private industry, March 2000

All private industry workers ..................................................... $0.08 8 $0.07 4 $0.11 2

 Number of workers in establishments

Under 100 workers .................................................................. .04 4 .09 2 .10 1

100 to 499 workers .................................................................. .14 11 .04 4 .09 3

500 workers or more ............................................................... .06 13 .08 8 .13 6

Goods producing ..................................................................... .02 6 .10 3 .05 2

Construction ....................................................................... .03 2 .00 0 .00 0

Manufacturing ..................................................................... .01 7 .10 4 .05 2

Service producing .................................................................... .10 8 .06 4 .12 3

Transportation, communications, and public utilities ......... .05 11 .07 8 .11 7

Wholesale trade .................................................................. .24 8 .09 3 .06 3

Retail trade .......................................................................... .06 7 .01 2 .01 2

Finance, insurance, and real estate .................................. .01 14 .21 7 .24 3

Other services .................................................................... .14 8 .02 4 .17 2

White collar ............................................................................... .03 9 .08 6 .14 4

Professional specialty ........................................................ .02 9 .06 9 .28 5

Technical ............................................................................. .05 10 .07 4 .03 2

Executive, administrative, and managerial ........................ .03 12 .19 9 .03 6

Sales ................................................................................... .01 7 .01 4 .06 2

Administrative support, including clerical ........................... .05 9 .03 4 .15 3

Blue collar ................................................................................. .03 6 .05 2 .01 1

Precision production, craft, and repair ............................... .03 4 .04 2 .00 2

Machine operators, assemblers, and inspectors ............. .01 6 .03 2 .02 1

Transportation and material moving ................................... .06 6 .11 3 (1 ) (1 )

Handlers, equipment cleaners, helpers, and laborers ...... .04 6 .02 1 .00 1

Service ..................................................................................... .28 9 .01 1 .04 1

Referral Hiring Retention

Cost Percent

Item

Cost Cost Percent Percent

Occupational group

Industry

1 Data were suppressed to protect confidentiality of respondents.
40 Compensation and Working Conditions Winter 2000

widely among the categories as well.

The differences in coverage are most

notable between small and larger size

establishments, and among the industry groups. Employees in small firms

were substantially less likely to have

referral bonuses (4 percent) than were

employees in midsize and large firms

(11 and 13 percent, respectively). By

industry, employees in construction

were the least likely to receive referral

benefits (2 percent coverage) while

employees in finance, insurance, and

real estate were the most likely (14 percent coverage). Although wholesale

occupations received substantially

higher hourly payments for referral

bonuses than did occupations in other

industries, they were no more likely to

receive such bonuses.

Among the occupational groups,

white-collar and service occupations

were more likely to have a referral plan

(9 percent of employees) than were

blue-collar employees (6 percent). Executive, administrative, and managerial

jobs had the highest incidence of any

detailed occupational group with 12

percent coverage.

Hiring bonuses

Hiring bonuses were much less prevalent than referral bonuses, with 4 percent of private industry occupations

offered the plan. The average hourly

employer cost of hiring bonuses, where

paid, across all occupations was 7

cents per hour, almost equaling the 8

cents for referral bonuses. The differences among occupations in hiringbonus costs were smaller than those

found for referral bonuses, but the differences were reversed by industry.

Per-hour hiring bonuses in goods-producing industries exceeded those in

service-producing industries by 4

cents, while referral bonuses were 8

cents higher in service-producing than

in goods-producing industries. Occupations in goods-producing industries

received 10 cents per hour from hiring

bonuses, ostensibly driven by manufacturing establishments, while occupations in service-producing industries

Table 3. Number of occupational records reporting bonus, and percent of those records reporting nonzero

costs, March 2000

 All private industry workers .................................................... 2,298 76 1,284 75 760 67

Under 100 workers .................................................................. 503 60 187 65 86 47

100 to 499 workers .................................................................. 767 72 304 84 157 72

500 workers or more ............................................................... 1,028 87 793 74 517 72

Goods producing ..................................................................... 372 70 238 92 120 87

Construction ....................................................................... 26 77 0 0 0 0

Manufacturing ..................................................................... 341 71 234 92 120 87

Service producing .................................................................... 1,926 77 1,046 71 640 63

Transportation, communications, and public utilities ......... 235 91 188 100 196 92

Wholesale trade .................................................................. 163 47 92 100 66 49

Retail trade ......................................................................... 239 77 106 84 42 26

Finance, insurance, and real estate .................................. 544 83 284 49 100 52

Other services ................................................................... 745 76 376 62 236 55

White collar ............................................................................... 1,649 76 1,067 73 625 72

Professional specialty ........................................................ 358 77 318 85 195 91

Technical ............................................................................ 141 70 74 64 40 43

Executive, administrative, and managerial ........................ 379 79 296 71 174 49

Sales ................................................................................... 217 67 126 79 54 56

Administrative support, including clerical .......................... 554 78 253 57 162 87

Blue collar ................................................................................. 339 71 126 95 81 22

Precision production, craft, and repair .............................. 125 67 66 100 47 0

Machine operators, assemblers, and inspectors ............. 85 72 25 100 17 77

Transportation and material moving .................................. 41 88 10 70 (2 ) (2 )

Handlers, equipment cleaners, helpers, and laborers ...... 88 69 25 88 12 0

Service ..................................................................................... 310 83 91 70 54 78

 1 Mining is excluded from these tables, and thus goods producing will exceed construction and manufacturing employment counts.

 2 Data were suppressed to protect confidentiality of respondents.

Referral Hiring Retention

Record

count

Percent

nonzero

Item Record

count

Record

count

Percent

nonzero

Percent

nonzero

Number of workers in establishments

Industry

Occupational group

1
 Compensation and Working Conditions Winter 2000 41

The Cost and Incidence of Referral, Hiring, and Retention Bonuses The Cost and Incidence of Referral, Hiring, and Retention Bonuses

received 6 cents.

There are some noteworthy distinctions within the service-producing industries in regard to hiring bonuses.

Occupations in the finance, insurance,

and real estate industry received the

highest hourly payments (21 cents per

hour) while occupations in retail and

service industries received the lowest

(1 and 2 cents, respectively). Occupations in the remaining service-producing industries received hiring bonuses

near the private industry average.

The referral- and hiring-bonus estimates for finance, insurance, and real

estate occupations are peculiar in that

these occupations received the highest average amount in hiring bonuses

(21 cents per hour worked) while receiving 1 cent per hour for referral bonuses. The reverse relationship occurs

for the incidence of coverage: these

same jobs were more likely to receive a

referral bonus, albeit a smaller hourly

amount, than a hiring bonus. These

results suggest that the actual hiring

bonus payment received by a new hire

is substantially higher than what is

paid for a new-employee referral.

By occupational groups, white-collar occupations received 8 cents per

hour in hiring bonuses, just above the

overall average, while service occupations received much below the average (1 cent per hour). Blue-collar occupations were paid 5 cents per hour,

which was 2 cents higher than their referral payments. Among the detailed

occupational groups, executive, administrative, and managerial jobs were the

most favored, receiving 19 cents per

hour, 12 cents above the average. The

higher-than-average costs for executive jobs contributed to the above-average costs for finance, insurance, and

real estate, because the two estimates

are closely linked; the data show that

the highest hourly costs for hiring bonuses were paid to executive, administrative, and managerial occupations in

the finance, insurance, and real estate

industry.

The frequency of hiring bonuses

was marginally higher in the serviceproducing sector (4 percent) than in

goods producing (3 percent), but with

more prevalence among employees in

transportation, communications, and

public utilities (8 percent) and in finance, insurance, and real estate (7 percent). Employees in transportation,

communications, and public utilities received hiring bonuses near the average, but the data showed a higher incidence of coverage among communication occupations in this industry

group. White-collar jobs in communications, particularly professional and

executive occupations, had a high incidence of coverage. The relationship

in hiring costs drawn between occupations in finance, insurance, and real

estate and executive, administrative,

and managerial jobs is reflected in the

incidence of coverage as well. There

is a higher-than-average incidence of

hiring bonuses for employees in finance, insurance, and real estate (7

percent) and in executive, administrative, and managerial jobs (9 percent).

Not surprisingly, the industry and

occupational groups that have some

of the lowest costs per hour have

among the lowest incidence of coverage. Two percent of employees in retail establishments and 1 percent in

service occupations have hiring bonuses offered. Blue-collar jobs also

have below-average costs and a correspondingly low incidence of coverage (2 percent). None of the major occupational groups making up the

blue-collar category have an incidence

of coverage above the private industry average.

Retention bonuses

Retention bonuses were the least prevalent incentive plan among the three,

with 2 percent of private industry occupations being offered such plans.

At 11 cents per hour, however, the cost

of retention bonuses, where paid, was

slightly higher than that of either of the

other two bonuses. Except in terms of

establishment size, there is a much

starker division in cost among the occupations in regards to retention bonuses than there is for the other two

bonus plans.

Occupations in retail trade establishments received 1 cent per hour for

retention bonuses, much lower than the

11-cent average—as were retention

bonuses for blue-collar and service

occupations (1 and 4 cents, respectively). Occupations in finance, insurance, and real estate were paid the

highest among industry groups (24

cents per hour), followed by serviceindustry occupations (17 cents per

hour).

The data show that the higher-thanaverage costs in finance, insurance,

and real estate and the service industries were attributable to professionalspecialty occupations. Retention bonuses paid to professional-specialty

jobs in finance, insurance, and real estate ranked highest among operations

researchers and attorneys. For the service industry, nurses bolstered the

average. These two industry groups

together contributed to the serviceproducing industry average of 12

cents per hour, and in turn contributed

substantially to the private industry

average. The retention benefit payments in goods-producing industries,

reported only for manufacturing establishments, were 6 cents below the 11-

cents overall average.

Incidence of retention bonus coverage varied widely as well. Large firms

were more likely to offer a retention plan

than were smaller establishments. Midsize and large establishments had incidences of coverage ranging between 3

and 6 percent, compared with 1 percent

for small firms. Transportation, communications, and public utilities employees were the most likely recipients

of retention bonuses with incidence of

7 percent, primarily attributable to the

communication industry. Like referral

and hiring bonuses, retention bonuses

were more likely to be available to

white-collar employees, with 4 percent

having coverage, than to blue-collar or

service occupations. This higher-thanaverage incidence is explained by professional-specialty and executive, administrative, and managerial jobs, for

which the incidence of coverage exceeded 5 percent.

Conclusion

Without other prior measures of costs
42 Compensation and Working Conditions Winter 2000

or incidence of bonus plans for referral, hiring, and retention, it is unclear

whether these plans have become more

common with the tightening of the labor force. What was evident from the

March Nonproduction Bonus Test,

however, was that these bonus plans

were not widely offered across industries or occupations. Only about 10

percent of private industry occupations

received any of these three plans.

Occupations in service-producing

industries, particularly white-collar

jobs, were more likely to receive these

bonus plans than were occupations in

goods-producing industries. Employment size of the establishment also

played a role, as midsize and large firms

provided more coverage and incurred

higher hourly costs for these bonus

plans. The least likely occupations to

have received a referral, hiring, or retention plan were lower technical and

old-economy-type jobs. Occupations

in retail trade, as well as blue-collar occupations, received smaller average

payments and coverage than did other

occupations.

Because of the complexity of the ECI

collection and processing systems,

there is not a straightforward means to

measure precisely the impact of the

bonus expansion on the ECI. With the

low incidence and hourly costs of these

plans, however, the impact is likely

small. Work is under way at BLS to

develop an integrated data collection

system as part of the National Compensation Survey that will allow data

for individual benefit plans to be collected and coded. Once individual plan

data are collected in this new data capture system, analysis of individual benefit plans, including their impacts on

the ECI, will be possible.

1

 See David Lebow, Louise Sheiner, Larry

Slifmann, and Martha Starr-McCluer, “Recent

Trends in Compensation Practices,” Federal

Reserve Board working paper (Washington,

Board of Governors of the Federal Reserve

System, July 15, 1999), also available on the

Internet at www.federalreserve.gov/pubs/

feds.

2

 The hourly costs of total benefits were

obtained from “Employer Costs for Employee Compensation,” USDL 00-186 (Bureau of Labor Statistics, June 29, 2000), also

available on the Internet at ftp://ftp.bls.gov/

pub/special.requests/ocwc/ect/

ececrlse.pdf. Service occupations received

$2.16 per hour in total benefit costs, the

lowest hourly benefits cost among the major

industry and occupational groups, while manufacturing workers received the highest, $7.40

per hour. 3

 As part of its ongoing research program,

the Bureau of Labor Statistics is currently

conducting research on stock option plans.

The research will be completed in stages. BLS

has begun testing the incidence of stock option plans across all industries and occupations. The prevalence of the plans, based on

test results and the potential impact on compensation costs, will determine the next stage

of research. The results of the incidence

survey will be published in late 2000. 4

 The ECI March 2000 update period ran

for 6 weeks, starting in early March 2000

and ending in mid-April 2000. During the

period, ECI sample establishments were contacted about employer costs for wages and

benefits during the pay period that included

March 12, the reference period of the ECI

March update. About 6,200 private industry

and 800 government establishments are contacted each quarter for updated compensation costs. For further information about

ECI, see Bureau of Labor Statistics Handbook of Methods, Bulletin 2490 (Bureau of

Labor Statistics, April 1997), ch. 8. 5

 Noncash bonuses, such as the free use of

company cars, are excluded from ECI. Bonus payments directly related to productivity are included as part of wages and salaries. 6

 Considering that the scope of the ECI

survey may exclude top executives in some

establishments, the full impact of these bonuses on compensation costs across all occupations cannot be captured. For example,

corporate officers who are major stockholders or members of corporate boards of directors are excluded from the ECI survey. 7 The combined status codes for the referral, hiring, and retention benefits were derived based on the following assignment rule:

If any one of the three bonus plans was

coded a permanent nonresponse, the occupational record was coded as a permanent

nonresponse.

Otherwise, if any one plan was coded as

partial nonresponse, the record was coded as

a partial response.

Otherwise, if any one plan was coded as

actual data, the record was coded as actual data.

All other records were coded as no plan.

8

 SIC is defined as the 1987 Standard Industrial Classification codes of the U.S. Office of Management and Budget. 9

 Sample-weight benchmarking is the process of apportioning employment counts

based on the assigned sample weights of the

occupational quote and the industry group in

which the quote belongs. In most instances,

private industry employment counts were

total employment estimates for two-digit

major industry groups, such as primary metal

manufacturing or food stores, as defined by

the Standard Industrial Classification (SIC)

system. In a few cases, three- and four-digit

industry employment counts were used. These

include the four-digit aircraft manufacturing

industry (3721) and the three-digit health

care and educational industries. 10 BLS has published cost levels in Employer Costs for Employee Compensation

(ECEC) dating back to 1986. These cost

levels, derived from data collected in the ECI

survey, are designed to provide a snapshot of

the average hourly costs of wages and salaries and of benefits across industry and occupational groups. ECEC is published annually

using the March quarter data from the ECI

sample and sample weights benchmarked to

the March employment counts for that year,

from the Bureau of Labor Statistics Current

Employment Statistics program. 11 If averages were based on the entire

sample of occupations, most of the labor

categories for which data are tabulated would

have shown a zero cost per hour, and no category would have exceeded 2 cents per hour. 12 The unit of analysis for ECI is an occupational quote defined as groups of employees within an establishment that have the

same narrowly defined job title, job description, and characteristics. The percentages

were calculated as a percent of weighted employment represented by the occupational

quotes. Because not all employees within a

sampled occupation having the plan will have

received the benefit, these employmentweighted percentages are estimates representing the percent of employees who have access to the benefit plan, regardless of whether

they receive it. We often refer to this percentage as the incidence of coverage. 13 Standard errors of the estimates, a common statistical measure used to gauge the reliability of an estimate, were not computed

for the cost-per-hour averages or the incidence of coverage percentages.