Retention Agreements May Affect Your Employment and Financial Future
When companies merge and acquire one another, their employees can face an uncertain future. If you are a key employee, you may be asked to sign a retention agreement as a condition of either your continued employment until the merger is completed, and/or your new employment with the merged entity. Before you sign a retention agreement, understand what leverage you have, how the proposed terms might affect you, and how to best protect your interests.
Here are some typical terms that benefit an employee:
1. Continued Employment for a Definite Term.
A central feature of most retention agreements is continued employment. A continued employment clause guarantees employment through a certain date, or until a specific event occurs, such as the closing date on the sale of a business. A continued employment clause is typically subject to a “for cause” termination standard, where an employee could be terminated before the agreed upon event or date only if the employee engaged in conduct that subjected him or her to termination under a “for cause” standard. (See below for more on a “for cause” standard.) The employee benefit of this type of clause is a predictable employment period during which they can explore options with the new entity and/or look for new employment.
2. Lump Sum Bonus.
One commonly-offered incentive for employees who sign retention agreements is a lump sum payment that would not otherwise be part of the employee’s compensation package. Employers frequently tie receipt of the lump sum to an employee continuing to work through the end of the employment period. Be careful to understand the conditions for your receipt of the lump sum to ensure the measures for satisfying the requirements for receipt of the bonus are as objective as possible and not all in the control of the employer. For example, if your employer has the authority to decide if you satisfied non-objective performance criteria, you are at the mercy of the employer to be fair in his or her determination.
3. Bridge to Vesting of Retirement Benefits.
If you are within a year or two of fully vesting for retirement benefits or a supplemental pension, some employers will “bridge” you to vesting or eligibility as a benefit of signing the retention agreement. Doing so can significantly enhance your retirement benefits. If you are either partially vested or close to fully vesting, consider proposing bridging as one of the terms of the retention agreement.
4. Accelerated Vesting of Stock Options and/or Longer Time Periods to Exercise Stock Options.
If your compensation package includes stock options that vest over a number of years, your employer may be willing to accelerate the vesting of those stock options, potentially increasing the value of your compensation package significantly. Additionally, employers may also be willing to extend the time period in which you may exercise those options, improving the opportunity to sell at an opportune time.
5. Modification of the Terms of a Non-Competition or Non-Solicitation Agreement.
If an employee previously signed a non-competition or non-solicitation agreement, an employer may be willing to narrow, or at least make more specific, the terms of an existing non-competition and/or non-solicitation agreement. Doing so can improve the employee’s opportunities for finding new employment.
6. Payment of COBRA Health Insurance Premiums by the Employer.
Maintaining health insurance is frequently a high priority for employees at the time of a job change. COBRA premiums are usually very costly. Some employers will agree to have the employee continue to contribute to the cost of their health insurance coverage at the rate they did as an employee for a specified period after their employment ends.
While the above retention provisions benefit employees, some common provisions do not. The following are common employer-friendly provisions of retention agreements:
1. Payment of the Lump Sum and Other Additional Benefits is Subject to the Discretion of the Employer.
Some employers will offer a lump sum bonus, but make it subject to a requirement that the employee work through a particular date or accomplish certain subjective goals in order to be eligible for the bonus. Although it is reasonable for the employer to expect a certain quality of work and objective results in exchange for the additional compensation, you should advocate for terms that do not give your employer the opportunity to avoid paying the bonus even where you hold up your end of the bargain.
2. Employee may not leave before the specified date.
If you are job seaching during the transition period because you know you will not stay on with the merged entity, having to stay until a date certain in order to receive the lump sum and/or additional benefits can be problematic if you find the right job and need to start before the end of the period that would make you eligible for the lump sum. Options include negotiating for a pro-rated amount of the bonus if that situation were to arise, or negotiating a modification of the retention agreement if the situation arose, with the knowledge that your employer is not obligated to agree to any modification.
3. “For Cause” Standard May Include a Very Broad Catch-All Provision.
Although most “for cause” tandards include conduct that is generally within your control, such as a felony conviction or theft of company secrets or a customer list, the definition of “for cause” may also include a catchall that gives the employer broad power. Examples include “failure to satisfy the performance expectations of the employer”, or “violation of the code of conduct or personnel policies as determined at the employer’s discretion.” Clearly, such a provision puts the employer in firm control of your employment, pay and incentive benefits. Look out for broad “for cause” provisions and negotiate terms that do not leave you so vulnerable.
Before signing a retention agreement, you may benefit from legal advice. Several Hawks Quindel attorneys, including the author of this blog, have significant experience negotiating retention agreements in a variety of industries. You can contact the employment lawyers at Hawks Quindel at 414-271-8650 in Milwaukee or 608-257-0040 in Madison.
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