Retention Bonus and Change in Control Agreement

Summary

This template agreement provides a retention bonus and change-in-control benefit to incentivize an employee to continue providing services to their employer. This template includes practical guidance, drafting notes, and alternate and optional clauses. This template serves as a guide to help you evaluate all pertinent provisions. Given the potential tax implications associated with retention agreements, employers are strongly advised to seek input from an experienced employee benefits and executive compensation attorney. Retention bonuses can be a useful tool where there is a particular concern that the departure of key employees could adversely impact a company's ability to, for example, achieve project-based or strategic goals, successfully grow the business, or maintain a competitive advantage. Retention bonus agreements generally provide for a financial benefit that is only earned by the employee if they stay with the company for a specified retention period, but sometimes impose other conditions to payment, such as the occurrence of a specified event or achievement of a performance goal. If the conditions are not met (e.g., if the employee quits before the end of the retention period), no bonus is paid. Sometimes, a monetary bonus alone may not be sufficient to retain key personnel. This template agreement combines a retention bonus with a double-trigger change-in-control severance benefit. Under that portion of the agreement, the company agrees to pay the employee a cash severance payment if the company terminates the employee's employment in connection with a corporate transaction, such as a merger, acquisition, sale, or spinoff. Such provisions can further incentivize an employee to remain with the employer insofar as it is an indication that the company intends to continue their employment even if there is a transaction involving a change in leadership or business strategy (or, in the alternative case where they are not retained, they will at least receive the additional compensation). Since retention agreements and change-in-control agreements tend to be legally binding obligations that provide for compensation that may be paid in future years, they must be drafted to comply with or be exempt from the applicable requirements of the nonqualified deferred compensation rules under I.R.C. § 409A to avoid adverse tax consequences. For key content regarding terminations of employment in the context of a corporate transaction, see Section 409A Resource Kit, Severance Benefits Resource Kit, Section 280G Resource Kit, Corporate Transactions EBEC Resource Kit, and Departing Employees Resource Kit. For additional related content, see Executive Retention Bonus (Letter Agreement), Retention Agreements: Drafting and Negotiating Employee Retention Agreements, Retention Agreement, Retention Agreement (IL), Severance and Change-in-Control Agreement Liabilities in Corporate Transactions, and Change-in-Control Agreement.