What Executives Need to Understand about Retention Agreements

All executives and senior-level management officers need to understand the importance of retention agreements. The two primary situations where retention agreements are used are: (1) when a company is being acquired by another party or other times of uncertainty which may place the key employee’s job security in jeopardy, or (2) when the executive is being recognized and retained for a significant contribution or value to the company. Retention agreements can be drafted in a personalized manner to meet the needs of each individual employee, as well as the desired requirements of the company.

The Executive’s Leverage

While it may seem that the employee is at a disadvantage in negotiating this type of contract because they want to keep their job, the company considers the executive to be important to the future success of the business if they are offering a retention agreement. If you are considered a key employee, the company is using the contract as an incentive for you to continue working for it. In return, the company expects you to continue maximizing the value of the company by doing what you have already been doing. Of course, as with any contract, negotiations can lead to a variety of topics being covered. For instance, bonus compensation, scheduled severance, the provision of additional benefits and other subjects are typically covered in a retention agreement. In future blog posts, I will discuss in more detail what an excellent executive compensation package should include.

The Executive’s Protections

There are certain protections an executive should seek in their retention agreement. A change in control provision is particularly important when the company is likely to merge with, or be acquired by, another entity. A change in control provision provides the executive with the assurance that his/her compensation and benefits will remain intact even if he/she loses the position or title currently possessed. The retention agreement will also set forth the terms under which, and the duration of time, the executive or founder of the seller will continue to work for the buyer after the sale.

Change in Control

A change in control provision is sometimes referred to as a “golden parachute” because the provision protects the executive when he/she leaves the company. There are different types of change in control provisions. A single trigger change in control provision is used when the change in control event (such as the acquisition of the company by another entity) is all it takes for the executive to have the right to the compensation outlined in the agreement. A double trigger change in control provision requires two different events to occur before the executive’s rights are vested. For example, the first event is the merger of the company and the second event is the executive’s separation from the company (either voluntarily or involuntarily) and, therefore, triggering the compensation payment to the executive.

MAILLY LAW is knowledgeable and experienced in handling retention agreements. We will help you understand all your options and aggressively negotiate every benefit and protection in your favor. Contact us today to schedule your appointment.