Retention Bonus Agreement: A Lion in Sheep’s Clothing

My employer was recently purchased by a larger company and they have just asked me to sign a “retention bonus.”  What do I do?

This is a question that I recently got from a client who was in a quandry about what to do with a retention bonus agreement she received.  She was a good employee for the company for many years, enjoyed her job, her benefits, and her co-workers.  She was a faithful, competent employee that wanted to continue to work for the new company.  The problem was that the “Retention Bonus” was a lion in sheep’s clothing as it was really a non-compete agreement in disguise.  The Agreement hit all the buzz words such as a “bonus” but the restrictive covenants that were part of the non-compete portion of the Agreement prevented the employee from working in the very industry that she had grown to love and more importantly had her experience after she separated from the company.

Non-compete Agreements are either negotiated separately when an employee is first hired by a company or buried as a clause in another document.  They typically address preclusions of areas where an employee may work after they separate from a company.  The agreements will restrict a geographical area of employment, potential employers, and be in place for a period of time post-employment.  The company often attempts to prevent the employee from competing with the company or removing or attempting to remove any of its employees. The more restrictive both in area and in time should be reflected in the compensation received.

Bonuses can be used to reward past performance and quite possibly retain key employees, but such performance bonuses represent just one of the many aspects of the compensation family. To name just a few others, there are (i) signing bonuses to attract desirable employees; (ii) retention bonuses to encourage employees to remain in their positions; (iii) referral bonuses to incent employees to help recruit talented colleagues; and (iv) holiday bonuses to spread cheer and improve morale.

At its essence, a bonus is “a consideration or premium paid in addition to [an employee’s] what is strictly due” (emphasis added). Webster’s Third New Intl. Dictionary 252 (2002). See Black’s Law Dictionary 206 (5th ed.1979). But even the dictionary definition is not dispositive. Because the complex language of executive compensation comprises many variations with collateral consequences intended to achieve particular results in the context of overall compensation packages, a broad dictionary definition may not address adequately all of the intended meanings.

It is important to determine the desired effect of the bonus from the employer’s perspective before truly understanding the bonus. If you find yourself in a position where you have been presented a document from your employer you should have it reviewed by an attorney.  The attorneys at Heinlein Beeler Mingace & Heineman, PC are here to assist you with the interpretation of your bonus agreement, bonus retention agreement, non-compete agreements, stock incentive plans etc.   We are available for consults and/or for assistance at negotiating better terms of your proposed agreements.