A stay bonus agreement, also referred to as a retention bonus agreement, is a written agreement between a company and a key employee to induce the employee to stay with the company. Understanding the definition and purpose of this type of bonus agreement is critical for both business owners and employees.
A stay bonus agreement is a contract between a company and an employee stating that the employee will not leave the company for a specified period of time after a certain triggering event (for example, the sale of the company). If the employee continues working for the company after the end of the specified time period, the employee will receive a bonus, which may increase the longer the employee stays with the company, depending on the terms of the agreement. A company may choose to offer a stay bonus instead of a salary increase if it does not have the funds needed to maintain a permanent salary increase. In some ways, a stay bonus agreement is the opposite of a severance agreement, which provides a payout to an employee who agrees to leave the company on good terms.
This type of agreement is often used during a transition period to give key employees an incentive to remain with the company. When a company goes through a period of change, employees often start looking for other employment rather than waiting to see if the company will survive the transition or if their job will be eliminated. Some common types of transition periods that prompt the use of a stay bonus agreement include the death of an owner; a large project; a major period of production; the sale, merger, or transition of the company to the next generation of the family; the relocation of the business’s headquarters; the outsourcing of manufacturing; and a change in the primary business systems (software). The stay bonus can encourage key employees to stay with the company so the business can successfully weather the transition period.
Stay bonus agreements provide the following benefits:
- Smooth transition. Retaining key employees during a time of transition provides continuity in critical company functions, avoids disruption of services or manufacturing, and secures cash flow for the business. In addition, without the key employees who understand the business’s operations, the company’s management may not have the know-how and skills to continue its operations.
- Retention of key personnel. It is critical to keep key employees on board through the transition so those employees can continue to add value to the company after the transition.
- Preservation and continuity of client relationships. Generally, key employees have strong relationships with a business’s customers. Customers are more likely to remain loyal to a company that retains the key employees with whom they have well-established relationships. Stay bonus agreements help prevent customers from leaving a business in favor of its competitors. Continuity of a business’s key employees may also help retain its investors’ support during a transition.
- Improved morale. Offering a stay bonus to key employees will make them feel appreciated, which in turn leads to long-term retention and improved productivity.
When a company is drafting a stay bonus agreement, it should consider how it wants the bonus to work for the company, the amount of the bonus, the length of time required for an employee to earn the bonus, and which employees should be offered the bonus. Bonuses are often calculated as a percentage of an employee’s base pay (typically 10–25 percent), though some companies tie bonuses to an employee’s performance or length of time with the company. If the goal is to keep the employee from seeking employment with a competitor, the competitors’ salaries should be considered. However, if the purpose of the stay bonus agreement is to retain the employee for a big project, then the length of time of the project and extra hours of work expected should be factored in. The bonus can be paid out in a lump sum or over a period of time, usually at the end of the agreed-upon service. Selection of the employees to whom the bonuses are offered depends on the unique circumstances of each business, but businesses typically offer a stay bonus to employees who are the most knowledgeable about the company’s trade secrets, have strong customer relationships, and add unique value to the company. The length of additional service required for an employee to earn the bonus also depends on the needs of the company.
While stay bonuses are often used by large companies, smaller family businesses may also use stay bonus agreements when the business owner plans to pass the business down to the next generation and wants to retain key employees with crucial customer relationships and experience.
If you think a stay bonus agreement would be helpful to prepare your business for expected or possible future changes, our team of lawyers can help you create one that complements your business succession plan. Call us today to set up a meeting for this or any of your business’s legal needs.