What’s negotiated in Retention Contracts?

There are a variety of issues that are negotiated in retention agreements, including but not limited to salary, bonuses, stock options, medical and other benefits, as well as other perks. One item that many executives do not think about is what will “trigger” these negotiated terms into being an active term of the contract.

The three most common types of triggers in a retention contract are:

● Single trigger – provides for the key employee who steps down at the time of the transition

● Double trigger – provides that the terms activate when the executive is terminated during a predetermined time period and after the change of control has occurred

● Trigger and a half – occurs when a senior executive quits after a predetermined period of time

It is important to consider all your options when negotiating the triggering events. Once the triggering events have been decided, the next issues to discuss are salary, bonus and stock options. A common rule of thumb for salary is for the executive to receive three times his or her annual salary, plus a yearly bonus. However, every situation is different and salary negotiations are decided on a case by case basis. Negotiations regarding stock options must consider valuation and vesting. It is common for executive contracts that award stock options to have those stocks vest over time. You should confer with your lawyer regarding negotiating when the stocks vest, the rate they vest, as well as what occurs if you lose your position with the company.

Once you have negotiated how much you will be compensated under the retention agreement, you must also negotiate how your compensation will be paid. Again, it is important to confer with an attorney to understand any future tax issues that can result from your payout under the retention contract. Your lawyer can help you minimize the tax consequences.

Finally, it is important to negotiate other benefits such as medical and retirement. Not only do you want to discuss healthcare benefits while employed by the company, but also if you have the right to COBRA if you are terminated. If possible, negotiate for the company to pay the costs associated with COBRA.

Senior executives and other key employees should negotiate retention agreements as early as possible, particularly in the context of a merger or sale of the company. If you are an executive or other key employee in need of representation during negotiations of your retention agreement in the merger or acquisition of your company, we can help. Our experienced attorneys understand the importance of having your best interests as our sole focus. Schedule a consultation today!