M&A: How to Write a Retention Bonus Agreement (Plus a Free Sample)
August 17, 2018 by Josh Hrala
It’s a fact that mergers and acquisitions cause a lot of turnover (a whopping 30 percent of workers can become redundant during the process). While at the same time, companies also have to make sure that they retain key talent during the move, which is where a retention bonus can come into play. And the first step is to craft a retention bonus agreement for your staff members to review and sign.
There are numerous reasons why a company would want to use a retention bonus. The main one, though, is to keep key talent onboard for as long as possible during a merger or acquisition because top talent often leaves for calmer waters during these tumultuous times (or they are poached by competing firms).
By offering them a bonus for their continued employment, you ensure that they keep performing at your company, allowing you to get back on track after the M&A and reach your business goals.
And, like we said above, the first step is to craft a great, enticing retention bonus agreement to keep on file so that you can use it when you need it.
Let’s get started with the basics.
What Is a Retention Bonus Agreement?
A retention bonus agreement is a document used to extend a retention bonus to your staff members while going through a merger or acquisition. In short, it provides an incentive in the form of a one-time (or two-time) payment sent to your top performers in exchange for them to continue working at the organization for a given amount of time after the M&A event takes place.
It’s really that simple.
Think of a retention bonus agreement as pretty much the opposite of a severance agreement. Whereas a severance agreement includes a payout if the employee agrees they were terminated fairly, the retention bonus agreement offers them a payout to stay put.
With that out of the way, let’s dive right into how you can craft one of these agreements to make sure it’s doing everything you need it to.
Writing a Retention Bonus Agreement: The Introduction
When you start to write your retention bonus agreement, you need to first understand how you want your bonus to work. Normally, companies figure out how much of a bonus to offer based on a percentage of the employee’s normal salary.
Others use different metrics – scaling bonuses based on performance, for example – to make an enticing offer.
Either way, you will need to fully understand the financial side of the bonus before offering the incentive to your staff members. However, we recommend that you craft an agreement during the early stages of the merger or acquisition, leaving areas for you to fill in later, so that you have a document on file and ready to send.
You need to make sure that the amount you are willing to spend on the retention bonus agreement is enough to entice the person to take the offer without hurting your bottom line, which might already be feeling the heat from all of the turnover that can happen during a M&A.
With that said, the first step to writing a retention bonus agreement is to actually start by making a document in ‘letter form.’ This will be, after all, sent out to your staff members, meaning it’s a good time to make the document as finished as possible so that you can easily fill in the gaps and send it off without too much effort.
Something like this:
Dear [Employee Name]:
Next, you want to move straight into what this letter is all about: offering a retention bonus agreement. We recommend getting right to the point with something like this:
“This letter is to inform you that you are eligible for a retention bonus at [Company Name] after the current [merger or acquisition of [Other Company Name] is completed. Below, you will find more details about the Retention Bonus Agreement and how to opt into the program.”
As you can see, this gets straight to the point. You need to make sure that you set up your retention bonus agreement in a way that the person knows exactly what you are talking about up top.
Writing a Retention Bonus Agreement: Establish the Details
The next part of the agreement goes into how the person’s role will change at the newly formed organization, how long the agreement lasts for, and how much they will be paid if they stay long enough.
It’s a lot of details to cover! Remember to work closely with your upper management team, executives, and legal counsel to ensure that everything you offer in this letter has been agreed upon before you send it out. Again, it helps to merely have this letter on file for you to fill in the details later.
For an example, we will look at how the Society for Human Resource Management handles it:
“The term of this Agreement will begin on the closing date and end [Insert Number] years later, unless terminated before that.
You will be employed as [position title], devoting your best professional efforts, time and skill to the performance of the duties originally undertaken under your current job description. You will continue to report to [insert supervisory position].
Your annual base salary will remain [amount of salary], and you will be paid in accordance with [Company Name]s normal payroll procedures.
You will be eligible for a retention bonus of up to [amount of bonus], subject to the terms described below. One half of that amount will be paid to you only if you are still employed by [Company Name] on the first anniversary of the closing date. The second half of that amount will be paid to you only if you are still employed by [Company Name] on the second anniversary of the closing date. Both sums will be paid to you through the next reasonable payroll cycle following the respective anniversary dates.”
SHRM quickly goes over everything and keeps the letter flowing. They cover the person’s title, management expectations, who the supervisor is, what the person’s salary will be, how long the agreement lasts, how much the bonus will be, and when the payment will be delivered.
All of these things need to be mentioned in the retention bonus letter so that your employee will fully understand what you are offering them. The last thing you want is to either have your staff member confused and unwilling to take the offer or have countless employees pop up with simple questions you could have answered in an email/agreement.
From here, you need to go into some finer details that will go over what happens if the person is terminated during the retention agreement.
Writing a Retention Bonus Agreement: Handling Termination
Since the agreement is meant to keep your employee at your organization, what happens when someone is either terminated or quits? After all, things happen.
You can handle this a bunch of different ways. Let’s start with a termination.
According to SHRM, employers typically pay out retention bonuses to terminated employees based on how long they worked their under the agreement.
For example, if your agreement states that the person will work for you for two years, but they are terminated after 15 months, the company will payout half of the bonus.
Because the bonus works on a yearly basis, meaning that the employee completed one year of the agreement, entitling them to that pay out. They will not get the bonus payment for the next year since they didn’t end up completing that segment of the agreement.
This can get confusing fast, but if you remember that the bonus is paid out on a yearly basis, it can make it a whole lot easier.
You need to specifically lay out how terminations will work in your agreement. We do not want to provide a full sample here because it really, really depends on how you structure your agreement. As always, make sure your legal team reads this policy over to ensure that you comply with all local, state, and federal laws.
Next, you need to also spell out how the bonus will work if the person quits.
SHRM states that retention bonuses are usually paid back to the organization if a person quits while under the agreement.
Here’s how they put it:
“If for any reason, other than good reason, you resign from [Company Name] at any point before the end of the duration of this agreement, you will be obligated to return to [Company Name] within 60 days any part of the retention bonus paid to you up to that point. For example, if you resign after 18 months from this agreement, you will be obligated to reimburse [Company Name] for the first half of the retention bonus you received six months earlier.”
After you make this part crystal clear, you need to also add some other legal pieces to your agreement to make sure that they hold up.
- Listing clause definitions (to make sure everything is communicated clearly)
- Explain state governing law (usually the state where the business operates)
- Modification (if something changes in the agreement, both parties must sign off to make it binding)
- Arbitration Rules: If there is a dispute, make sure that it will be handled via arbitration. Have your employee sign off on these rules.
As you can clearly see, the last part of the bonus retention agreement is heavy on legalities, meaning that they are best written by a lawyer. We can’t say it enough: work closely with your counsel to ensure your agreement is iron clad and beneficial to both parties.
When all of these details are hammered out, you can insert a place for your employee to sign the document.
The Final Say
In the end, your retention bonus agreement should benefit both you and the employees you are trying to retain. By offering a bonus, you can entice your top talent to stick around, helping you meet your business goals after a merger or acquisition. At the same time, you are rewarding your employees’ dedication.
This agreement needs to be solid and easily understandable. So make sure you talk to your legal team before offering it and even tell your staff member to have their attorney look it over as well. The last thing you want to have happen right after a major business event like a merger or acquisition is to wind up in court.
Want to learn more about retention bonus agreements? Download our sample here:
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