When a company is considering a merger or acquisition, business continuity is a primary concern. As a result, retaining top performers and key employees is essential. The use of retention contracts and bonuses are becoming the primary way companies are guaranteeing this type of protection during the transition.
The amount of a stay bonus can vary greatly, but it largely depends upon the key employee’s annual compensation in comparison to the detriment the company will suffer by losing them. Generally speaking, a retention bonus ranges from 25-95% of the employee’s base salary. The company must offer an amount that is meaningful to the employee for it to properly incentivize him/her to sign the retention contract.
Many people think the acquiring company is the party that offers the retention bonus but isn’t typically true. The selling company proves its value to the acquiring entity by demonstrating the expectation of future profits. Reducing any risk to future success of your company will allow you to gain a higher purchase price. The retention bonus can be made by the acquiring entity as well, or even by both parties to the deal.
The timing for offering a retention bonus can vary, but usually negotiations with the key employee begin when the owner is preparing to sell the company. If the employee is important to the due diligence process, the company will want to ensure their participation. Additionally, if the employee is crucial to meeting certain goals or future performance, the stay bonus should be offered early in the process. Once employees learn of the sale or merger, they begin to worry about their job security, so providing assurances to the key employees is important. As soon as your competitors learn of the transition, they may try to poach your top performers.
A retention bonus should be paid a specified date after the deal has closed. The new entity will want the employee to remain for a period to or let them go. Most retention bonuses are payable 3 – 12 months after the merger or acquisition deal has closed. Of course, for key executives that are necessary for the new entity’s long-term success, the time for payment of the retention bonus may be much longer.
If your company is considering a merger or acquisition, retaining your key employees will significantly impact the success of the deal. The legal team at Mailly Law is experienced in drafting, negotiating and closing retention agreements. Contact our office today to schedule your initial consultation.