What Is An Employee Retention Agreement And When To Use It?

Retaining top talent is one of the most significant challenges employers face today. The labor market is highly competitive, and employees’ expectations of their work life have changed dramatically in recent years. One strategy becoming more popular for keeping top performers amid a difficult market is the use of incidental bonuses. While sign-on bonuses are designed to attract new employees, retention agreements or stay bonuses are used to retain existing employees, particularly the top performing ones. Retention agreements can be mutually beneficial for the employer and employee, but they’re not always the right move. This guide will explain what a retention agreement is, when you should use one, and some samples to consider when drafting your own.

‍

What is an employee retention agreement?

An employee retention agreement is a contract between employer and employee for the purpose of incentivizing the employee to remain with their organization for a specified period of time. Employers offer incentives to the employee in exchange for their commitment to stay on.

An employee retention agreement may include:

• A lump sum bonus
• A percentage raise in compensation
• Stock
• A promotion or change in job title
• Other benefits or perks

‍

Like any other contract, a retention agreement should be designed to benefit both parties - in this case, the employer and the employee. As such, you should expect some negotiation to take place. Allow the employee some time to consider the offer carefully before demanding a decision. Negotiate the terms and conditions of the offer to ensure that both parties’ needs are being met.

‍

When is an employee retention agreement appropriate?

Retention agreements are particularly useful during times of upheaval such as a merger or acquisition, the launch of a new project, or some other major change. Retention agreements can be used to incentivize key team members to see the organization through an important transition, or stick it out during a particularly difficult or demanding time. If you can anticipate that a situation like this is in your company’s future, it is often best to be proactive. Insofar as you can, offer retention incentives in anticipation of a challenging period, not as a last resort. Of course, under these circumstances, it is important to be transparent with your employee about the changes coming and what will be expected of them.

Another example of when you may wish to offer an employee a retention agreement is in recognition of exceptional performance. Retention agreements can serve as a reward for a job well done, and demonstrate how much you value the members of your team. Simultaneously, a retention agreement can keep your company from losing your most valuable talent to your competitors who may be willing to offer your employee a sign-on bonus or other incentives to leave you.

‍

When is an employee retention agreement not appropriate?

An employee retention agreement should not be used in response to high turnover within your organization. If your company is suffering from high turnover, it may be due to a systemic problem within your organization.

A retention agreement is not a quick fix for long-term problems related to job dissatisfaction, burnout, and employee disengagement, nor is it a replacement for a comprehensive retention strategy. If morale is low and employees are eyeing the exits, offering a retention agreement may appear as an act of desperation, or worse, a refusal to address the root cause of the problem. The keys to holding on to top performers long-term at your company are to compensate your workforce appropriately, invest in their development and well-being, cultivate a healthy workplace culture, and listen to your people.

‍

Retention Agreement Samples

This local government employee retention agreement sample from the council of Perth & Kinross in Scotland is simple:

Retention Agreement

As an employee of Perth & Kinross Council, I (name), (Job title, Service) have agreed to accept the offer made by the Council of accelerated incremental advancement of________/one-off payment of________ in order to retain my skills, competencies and expertise. I understand that this payment is subject to deductions for Tax and National Insurance Contributions. In doing so I shall remain in the Council’s employment for a period of one year.*

If I leave the Council’s employment before completion of this period, I accept that the

Council, dependent upon the length of completed period of service and my reason

for leaving, will determine the level of repayment I will incur.

I authorize the Council to deduct all such costs from any sum of salary, allowance or

any other sums payable to me by the Council.

Employee’s Signature

‍

This example from the Society for Human Resource Management in the U.S. is more detailed:

[Date]

[Employee name]

[Address]

Dear [Employee name]:

This retention bonus agreement establishes the terms of your continued employment with [Company name], following the closing of the current merger with/acquisition of [merged/acquired company name]. We will refer to the date that the merger/acquisition is closed as the closing date.

Duration

The term of this agreement will begin on the closing date and end two years later, unless your employment is terminated earlier.

Title

You will be employed as [position title], devoting your best professional efforts, time and skill to the performance of the duties under your job description. You will continue to report to [insert position title].

Compensation

Your annual base salary will remain [amount of salary], and you will be paid in accordance with [company name]'s normal payroll procedures. Salary adjustments may occur including merit increases, equity adjustments, salary reductions or other changes as deemed necessary.

Retention Bonus

You will be eligible for a retention bonus of up to [amount], subject to the terms described below. One half of that amount will be paid to you only if you are still employed by [company name] on the first anniversary of the closing date. The second half of that amount will be paid to you only if you are still employed by [company name] on the second anniversary of the closing date. Both sums will be paid to you through the next reasonable payroll cycle following the respective anniversary dates.  

Termination

If [company name] terminates your employment before the end of the duration of this agreement, [company name] will be obligated to pay you only the retention bonus amount up to that point. For example, if [company name] terminates your employment 18 months from the beginning of this agreement, you will have earned the first half of the retention bonus (at the 12-month mark). No fraction of a retention bonus will be paid even though you worked six months into the second of the two years agreed upon.

If you resign from [company name] without good reason at any point before the end of the duration of this agreement, you will be obligated to repay to [company name] any part of the retention bonus paid to you up to that point within 60 days. For example, if you resign after 18 months from this agreement, you will be obligated to reimburse [company name] for the first half of the retention bonus you received six months earlier.  

If you are terminated for cause at any point before the end of this agreement, you will be obligated to reimburse any earned retention bonus.

For purposes of this Agreement, cause means:

Your willful and continued failure to perform substantially your duties with [company name].

Your willful engagement in illegal conduct or gross misconduct.

For purposes of this Agreement, good reason means:    

[Company name] fails to maintain fiscal strength enough to retain your employment.

[Company name] unlawfully discriminates against you.

Your employment remains at will and nothing in this agreement shall be interpreted to be in conflict with or to eliminate or modify in any way your at-will employment status.

Governing Law

The validity, interpretation and performance of this agreement shall, in all respects, be governed by the relevant laws of [state].  

Modification

No provision of this agreement may be modified, altered or amended, except by collective agreement between [company name] and you in writing.

Arbitration

By signing this agreement, you agree that any claims or disputes covered by this agreement or resulting from your employment during the term of the agreement must be submitted to binding arbitration and that this arbitration will be the only remedy for resolution of any such claim or dispute. This promise to resolve claims by arbitration is equally binding upon both you and [company name].

Any arbitration will be administered by the American Arbitration Association under its Commercial Arbitration Rules. [Company name] will be responsible for any costs of arbitration, and each party shall bear its own expenses.

If you accept the terms of this agreement, please sign below in the space provided.

Printed name: _______________________________

Signature:  __________________________________

Date: _______________________________________