Roll Out A Stay Bonus To Retain Employees And Help Sell Your Company

A startup CEO recently asked me to help him develop a stay bonus program. The need for stay bonuses can emerge when a company is for sale and needs to keep key employees engaged until the sale happens. Buyers want key employees to come with the business, and once a deal is struck they typically offer retention packages. Before the deal is struck, however, key employees start to worry about the future and may disappear, and their loss can kill a potential sale.

This problem can be acute if the company is looking for a buyer because it is struggling to be successful stand-alone. Employees often see this, and concern for job security makes them look for new opportunities. CEOs can use several strategies to retain key employees. Building strong relationships, maintaining dialogue, talking up the benefits of the exit in prospect, giving key employees a lead role in solving company problems, and fostering team loyalty can all help. But sometimes they are not enough.

Risk and reward is usually a big part of a key employee’s decision to stay. The risk is months of unemployment with no benefits if the company fails to sell and shuts down, or missing a good opportunity that the employee sees before the company’s fate is known. The reward is enjoying the benefits of the sale: cashing in options, the retention package from the buyer, and the prospect of success as part of the buyer’s organization. If there is no deal yet on the table, the reward can be nebulous.

The stay bonus aims to make the economic incentive to stay bigger and clearer. How big? It needs to look attractive relative to unemployment risk. Hence it should be a significant number of months of salary: at least 3, and 6 or more to really ring the bell. And you need to think specifically about the needs of each person or group. Software engineers in the Bay Area don’t worry much about long periods of unemployment, but they are probably receiving a lot of job offers. People in other roles, like finance and HR, and people in other geographies worry more about unemployment but also have fewer immediate options. CFOs and heads of HR usually lose their jobs when a company is sold, so they will definitely be thinking about the next job.

A clear, understandable incentive is important. Ideally, it should be: if you stay until the deal closes, you get Y dollars. Give some guidance for how long the process will likely take. If the company is short of cash, the offer is often expressed as a percent of the value of the sale of the company. Then you can illustrate what this comes to in dollars with some realistic scenarios and explain why the company stands a good chance of finding an attractive offer.

Minimize the terms and conditions: they reduce the gut impact of the offer. Simple terms that I have used are: employees have to stay until the close to receive the bonus, and half of the bonus is contingent on them accepting an offer from the buyer (only if the buyer makes a reasonable offer) and staying with the new employer for a modest period: usually six months to a year. The first condition is inherent in the logic of a stay bonus (no bonus if you don’t stay). The second condition reflects the reality of selling a business: the buyer will not go forward if s/he can’t retain most of the key employees, so the stay bonus program needs to support that, not undermine it by giving key employees too much hot money on the day of the close.

Investors sometimes bridle when a stay bonus is suggested. It transfers value in the sale from investors to employees, and it often comes up at the point where the team equity incentives are long-established and investors, who have put in a great deal of money, already expect to lose money on the investment. How can management ask for more? What happened to “a deal is a deal”?

Stay bonuses are expedient. The management team always has the option to walk away. Investors agree to a stay bonus because they believe the it gives them the best chance at the best outcome from their investment. That said, if a CEO uses this tactic too aggressively, it will become part of his or her reputation and that matters when s/he looks for a new opportunity.

Here’s hoping you never need to use this. I’ve only seen it done a few times. When you’re driving to close a deal in a tough situation, however, the stay bonus is a handy tool in the tool box.

First published @ blogs.forbes.com/toddhixon on October 9, 2017.