When Should You Use a Stay Bonus Agreement?
Do you have certain key employees who help make your family business a success? Keeping those employees may be essential to a successful transition of ownership and management to your children or another new owner when you retire or pass away. A “stay bonus” (also called a retention bonus) is a strategy that is frequently used by large companies during mergers and acquisitions but can also be used to facilitate a smooth transfer of small family businesses to the next generation or to new owners.
What Is a Stay Bonus Agreement?
A stay bonus agreement is a contract between the business and a key employee providing that the employee will not leave the company for a specified period of time after a particular triggering event, for example, the death of the business owner. At the end of that period, the key employee will receive a bonus. The amount of the stay bonus could increase over time: The longer the employee stays, the larger the bonus will be.
Why Is a Stay Bonus Necessary?
According to the 2019 PricewaterhouseCoopers Family Business Survey, 62% of business owners plan to pass the business on to the next generation. However, only about 18% have a formal, documented plan in place to achieve this transition. This is likely one of the main reasons why only 30% of family businesses survive the transition to the second generation.
A stay bonus can be a vital part of a business’s succession plan because retaining key employees may be a determining factor in whether the business succeeds or fails during and after a transition. The expertise and experience of essential personnel are especially necessary if the transition occurs as a result of the sudden death of a business owner, which could cause a transfer to occur earlier than expected.
A stay bonus can help:
(1) Retain talented people who are essential to the successful day-to-day operations of the business. If you have the personnel, like managers or salespeople, who add a lot of value to your business, offering them a stay bonus can provide them with enough financial security to persuade them to stay during and after the transition, particularly if they are concerned that their future with the company may be in jeopardy.
(2) Preserve relationships with customers or clients. If your salespeople have long-term relationships with your customers, they could take those customers with them if they leave. Similarly, the loss of other important employees possessing extensive knowledge about your business and its operations could leave a substantial vacuum that could endanger the future of the company. This could be especially damaging if they go to work for a competitor.
(3) Prevent the interruption of critical functions. Retaining key employees will provide continuity, which is essential for avoiding disruption in the services offered to customers and for ensuring adequate cash flow for the business.
How Are Stay Bonuses Funded?
There are a variety of strategies for funding stay bonuses. Often, business owners plan to provide funding for stay bonuses by purchasing a life insurance policy with the business as the beneficiary. Then, upon the owner’s death, the death benefits from the life insurance policy can be used to fund the stay bonuses for key employees. Another strategy is to purchase life insurance on the key employees whose cash value could be used to pay for the stay bonuses.
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If you want your business to survive after you leave—whether your departure is because of retirement, illness, or death—it is important to develop a plan to retain your key employees during the transition period. A stay bonus is an incentive that could persuade them to remain with your company, increasing the likelihood of its continued success. We can help you develop a business succession plan, including stay bonus agreements for your essential personnel, tailored to your particular circumstances. Please contact us to set up a meeting.