A key executive retention bonus agreement is an agreement entered into between a key employee of an organization and the employer offering him a retention bonus, preventing him from leaving the organization. It is also known as a key employee retention agreement. It is a legally enforceable document used to extend a retention bonus to the key executives while going through a merger or acquisition.
A retention bonus is a monetary incentive given to an employee to persuade and encourage him/her to stay with the company. Typically, these are one time payments as the organization may not have the necessary finances to commit to a permanent salary raise. These agreements are mostly entered into with the key personnel of an organization, such as CEOs, CMOs, CSOs, and CTOs, to retain the key talent of an organization.
Purpose of a Key Executive Retention Bonus Agreement
The main purpose of a key executive retention bonus agreement is to retain the key talent on board for as long as possible during the merger and acquisition. In a turbulent business environment, Key executives are often lured to more attractive business opportunities. By offering retention bonuses, the organization ensures their continued employment allowing the organization to become stable after M&A. A retention bonus also acts as a targeted payment or reward outside the employee’s regular salary offered as an incentive to a key executive during a crucial business cycle. This payment is meant to retain the key executive by means of a one-time payment as the organization may not have the necessary finances to commit to a permanent salary raise.
Key Terms of a Key Executive Retention Bonus Agreement
- Role of the key executive: As this contract seeks to retain key personnel for the purpose of absorbing them post the mergers and acquisitions, it should clearly mention the role at which such key executives would be employed in the new business arrangement.
- Term of the agreement: A retention bonus cannot be paid permanently; it is paid only to retain the key executives. Hence, it is imperative to establish a fixed duration agreement.
- Amount of retention bonus and payout formula: The amount of retention bonus to be given and the payout formula, if any, is there should be included in the agreement.
- Conditions for forfeiture: Conditions which would disentitle the key executive from claiming the retention bonus should also be mentioned.
- Payment timeline: Typically, the retention bonus is paid after the key executive renders a stipulated period of service. Such a period and a timeline should be mentioned.
Inclusions in a Key Executive Retention Bonus Agreement
The following inclusions need to be in a key employee retention agreement:
- Standard boilerplate clauses such as dispute resolution, waiver, severability.
- Names of parties, effective date.
- Timeline of payment of bonus.
- Termination and jurisdiction clauses.
- Duration of the agreement
- References to the business arrangement.
How to Draft the Key Executive Retention Bonus Agreement?
The following guidelines need to be followed for drafting a key employee retention agreement:
- The first step in drafting a key executive retention bonus agreement is figuring out the calculation of the bonus -whether it is to be based on a percentage of the employer’s normal salary or other metrics such as performance of the executive. It is important to understand the financial nature of the bonus being offered fully.
- A retention agreement is usually preceded with a letter to the employee that indicates the eligibility of an employee to a retention bonus.
- The agreement firstly covers how the position of the executive will be affected by the proposed business arrangement.
- The purpose of the merger/acquisition should also be mentioned.
- References to the employment agreement of the key executives may be made.
- Calculations should typically be based on formulae.
Advantages of a Key Executive Retention Bonus Agreement
Following are the benefits of a key employee retention agreement:
- It is always in the best interest of an organization to retain the key executives as it helps in saving costs, which may have to be otherwise incurred on hiring new employees.
- When experienced employees leave the business, they take with them the expertise acquired by them over a period of years. Hence, retaining them is beneficial.
- Strong employee retention policies in an organization ensure the loyalty of employees.
- When a key executive leaves an organization, the business flow is disrupted, which also has an impact on the company’s relationship with its clients.
Disadvantages of a Key Executive Retention Bonus Agreement
The following are the disadvantages of such a contract:
- The most difficult aspect of retaining is deciding which executives are to be retained. Nonperforming executives, if retained, results in loss and adverse impacts on business.
- Retention at times may lead to the transfer of power into a few hands, which in turn impacts the quality and flow of work.
- Employees tend to demand more than they deserve, especially at crucial business times, leaving the organization with no option. In such situations, the organization retains the executives due to their talent and expertise.
A retention bonus agreement should benefit both the employee and the employer and hence should be drafted accordingly. By offering a bonus, key executives are often enticed to stay in the business organization and stabilize the business after M&A. At the same time, the executives are rewarded for their dedication and talent.
These agreements are generally simple to understand and precise in nature to avoid any sort of court proceedings after a major event like M&A.
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