For Our Bear Stearns Friends and Similarly Situated Persons: Sklover’s Primer on Retention Agreements
Published on April 20th, 2008 by Alan L Sklover
“Marriage is easy. It’s living together afterward that’s difficult.”
This is a Special “Bear Stearns” Re-Issue:
Sklover’s Primer: “40 Points to Consider When Given a Retention Agreement™”
Recent news reports about the purchase of Bear Stearns by JPMorganChase has given rise to many inquiries about so-called “Retention Agreements.” Indeed, in recent days many Bear Stearns executives have been given retention agreements to consider. “Word” on Wall Street is that several other financial institutions are quietly distributing retention agreements, too, especially those rumored to be on shaky financial footing. This Special “Bear Stearns” Re-issue is not written with Bear Stearns in mind, or is it necessarily reflective of JPMorganChase’s operations or motives. In fact, most of this special re-issue was written almost three years ago.
We re-issue this newsletter, and expand upon it significantly, for the benefit of all who find themselves feeling unsure of what to do when facing the decision of how to respond to the presentation of a retention agreement.
Retention Agreements are a tool used by employers to (a) retain your services and loyalty for a specified period of time, (b) for which a “bonus” or other special award is usually offered to you. Retention Agreements can be tricky to navigate and negotiate, involving significant measures of both “reward” and “risk.” It is said that knowledge is power; this is intended to give you knowledge.
Retention Agreements are most often presented to certain employees to sign before a corporate event is announced or takes place – such as a merger or acquisition, or sale of a division of one company to another company. In fact, it’s often a good indication that such a corporate event is about to take place by the mere fact of the dissemination of retention agreements. Another circumstance in which Retention Agreements are used is after a bonus distribution is so low, so below expectations, that people threaten to quit en masse. Employers sometimes respond by offering new, supplemental bonuses, but tie them to the employees staying with the company for another full year. The penalty for leaving early? Usually repayment of the retention bonus; sometimes even more.
Retention Agreements are valuable to employers for two main reasons: (1) instability instills fear of job loss in employees, who often seek job security elsewhere; (2) continuity of operations is important after a merger or sale takes place, especially to the company’s customers. And, too, if a company is to cease operations entirely, someone has to remain to the very end to “turn off the lights.” Like every legal document, retention agreements can be helpful or hurtful, and must be taken seriously.
ACTUAL CASE HISTORY: Terry, a bond trader at a mid-tier Wall Street firm, was called down to HR one morning, and was told that he needed to sign “some papers.” When Terry asked what the “papers” were all about, his HR representative told him, “Good news . . . you’ve been chosen to receive a special ‘stay bonus.’ Just stay with the company, and you’ll be given an extra forty thousand dollars.” Sounded great to Terry. He liked his job, enjoyed working with the team on his trading desk, and had no plans to leave. “Why not?” thought Terry, and he took pen to paper, and signed on the two designated dotted lines. About two weeks later, the forty thousand dollars, less deductions and withholdings, was automatically deposited into his bank account. Seemed like “manna from heaven” to Terry. And, as things often go, in a few months it was spent.
A few weeks later, rumors started traveling all over Wall Street that a merger was in the works: the word was that Terry’s firm was to merge with a Swiss firm three times its size. Terry’s firm had a special niche that made it uniquely attractive and valuable to the Swiss firm. The Swiss firm had a bond trading desk that did the exact same thing that Terry’s trading desk did. Concerns about layoffs were addressed up front: there would be a review period of six months, after which decisions would be made about who would be invited to stay, and who would be asked to go. It seems that this was precisely the reason for the “retention agreements” that Terry and his colleagues had been asked to sign.
Terry and his colleagues on his bond trading desk soon learned why it was necessary to pay them to stay put: the acquiring company’s traders were doing everything possible to take over the “old” company’s customers and customer relations, as well. Terry and his colleagues were being frozen out of the lucrative trades that made the desk real money, and justified their year-end bonuses. It now seemed to Terry that his $40,000 retention agreement might cost him his $200,000 annual bonus, for two years – the length of his retention agreement promise. Some of Terry’s colleagues had not signed the retention agreements given to them, and so were entirely free to move to other Wall Street firms. But not Terry, in light of the restrictions he’d agreed to.
Terry finally carefully read over what he’d signed. The retention agreement provided that (a) he must stay on for at least 24 months after the merger; (b) if he did not, he was liable not only to return the $40,000 payment he’d received, but also any profits derived from him trading with customers he’d traded with the past 24 months, which was nearly the entire bond-trading universe; (c) if legal expense was incurred by the company in enforcing its rights, Terry would be liable for them, and worst of all, (d) his employer could contact any future employers to advise them of this retention agreement. Perhaps most problematic, Terry had presumed that the retention agreement said – somewhere – that he would be entitled to continue trading bonds as he had in the past. It didn’t say that, or anything like it. Oh, and one more thing: if Terry left the firm before the 24 months, he forfeited all unvested stock options and restricted stock. Ouch.
Things only got worse. The “new” company’s bond trading desk took Terry’s two assistants from him, and drastically cut his entertainment expense budget, as well. He was now reporting to an assistant’s assistant, and taking orders from three people in two cities at the same time. His situation became nearly intolerable. If only he’d “looked before he leaped” for that forty thousand dollar retention payment. Next time he will.
LESSON TO LEARN: “Retention Agreements” (or “Stay-On Bonuses,” as HR folks often call them) should always be carefully read, as they limit your freedom, and you never know when your freedom is going to be crucial to your survival. It’s like being tied to the wall when the house is on fire; surely, you’d like to retain your freedom to leave a building at any time, because you never know when it may start to burn. And there’s lots of other reasons to retain freedom – unrestricted freedom – more than we can list here.
Retention Agreements (or “Checks with Chains,” as we refer to them around the office) should always be negotiated to your best ability, and to the limits of your leverage. Remember that these agreements require a legal commitment from you, to the same employer who probably finds legal commitments to its employees to be an “impossible” thing to do.
SkloverWorkingWisdom™ stresses “risk-limitation” in your employment relations, and careful, pro-active, aggressive negotiation of restrictions on your employment freedom is the essence of risk limitation. Every business person knows that when business deals fail to close, it is less common that they fail due to issues of reward allocation, but they fail more commonly on issues of risk allocation. Sure, your rewards — your salary, your bonus, your equity awards and your benefits — are all important; but you can lose them all – and worse – if you don’t pay strict attention to restrictions on your working freedom. Retention Agreements are, in their essence, restrictions on your freedom. And they’re designed that way, too. Don’t forget what we call them: “Checks with Chains.”
If presented with a Retention Agreement, and asked to sign it, here’s what you can do:
A. Action Steps to Consider WHEN YOU’RE PRESENTED with a Retention Agreement:
1. Don’t rush to do, say or sign anything, no matter how much you are urged to do so.
2. Look for any deadlines for you to sign and submit the agreement; if you need more time, email HR and tell them you “don’t understand these legal matters,” and that you need more time to locate an attorney who can advise you.
3. Remember that Retention Agreements are a business proposition, and as such are negotiable, no matter what any HR or other employer representative may say.
4. Consider locating and consulting with an experienced employment law practitioner in your locale, for an initial consultation, at the very least.
5. Retention Agreements often require that you don’t share with your colleagues the amount of the Retention Bonus offered to you. If you do share your bonus amount with your friends, do so with the utmost of discretion, and Never, Never, Never in an email.
6. When reading and reviewing the proposed Retention Agreement, focus on the conditions of payment. These are all the steps, events, and things that must take place before you’re considered to have fully earned the Retention Payment. They might be as simple as “you have not voluntarily resigned” before a certain date, or as broad and risky as “you are still employed” as of a certain date, which would make your firing (or even your passing) the very day before result in your losing out on the payment.
7. Review the proposed Retention Agreement, and look for anything that says either that the employer may terminate your employment before the retention monies are earned, or alternatively, may not do so. If it’s not clear that your employer can or cannot do so, it should be, because you may otherwise lose all you expect to gain for staying on.
8. Watch carefully for any provisions in the proposed Retention Agreement that may impose restrictions on your next employment, such as non-compete agreements, or non-solicitation agreements, or even restrictions on when you may negotiate your next employment.
9. Consider carefully the interplay of the expiration of the retention period and any vesting of your stock options or restricted stock.
B. What to Consider Putting INTO EMAIL BEFORE YOU SIGN a Retention Agreement:
10. Consider the terms of the Retention Agreement carefully, and ponder what would be the effect of the agreement if, perhaps, different types of events were to occur: as examples, if the company went out of business; or if your company stayed in business, but stopped doing the business that you do; or if all of your support staff were fired; or if you were offered the “job of a lifetime”; or if your job duties were changed to menial, humiliating work.
11. In an email to your HR representative (or the other employer representative who gave you the Retention Agreement to sign) confirm what assurances you may have been given about the Retention Agreement, such as “We have no plans for a merger or other corporate event” or “You may change your mind at any time,” or any other “assurance” you’ve been given about the document. Tell them “I’m relying on these assurances.”
12. Either in an email (or to be inserted into the Retention Agreement), make a record that any retention monies paid to you are not meant to limit or reduce monies you are already otherwise owed, for examples, as severance, “change in control,” earned bonus, or commissions. Likewise, either in an email (or to be inserted into the Retention Agreement itself), make it clear that your acceptance of these retention monies will not result in your receiving a lower future payment of bonus, stock options, raise or compensation or benefit.
13. Ask for assurance you’ve been treated “no less favorably” in retention terms than any colleagues at your level, or if you have, to be raised to that most favorable level.
C. Clauses to Consider ASKING BE INSERTED into the Retention Agreement:
14. Of course, don’t be afraid to ask that the amount of the Retention Monies be increased, or that payment be made earlier as opposed to later.
15. If payments are scheduled to be paid only after you stay the retention period, request that they be paid now, or paid at least in part now, or put into an escrow; it may be hard to get paid later, for many, many reasons.
16. Almost all retention agreements say that you will not be paid, or will have to return, retention monies if you are terminated for “cause.” Request that any definition of “cause” be as clear and as limited as possible. For example, it should not contain any subjective assessment such as “poor performance.”
17. Ask that a provision be put into the Retention Agreement that states, “If the employee’s employment is terminated without “cause” as commonly defined, or death or disability, before the retention monies are paid, the employee (or his or her estate) will be paid the retention monies.”
18. Ask that a provision be put into the Retention Agreement that states, “If, during the retention period the employer makes a material change to any of the material elements of the employment relation (including without limitation, compensation, responsibilities, benefits, reporting relation, or perquisites, then the Retention Monies will be considered automatically and immediately earned in full.”
19. Ask that a provision be put into the Retention Agreement that “The obligations of the employer under this agreement are binding on all of the employer’s successors and assigns.”
20. Don’t be afraid to ask that stock options and restricted stock that is timed to vest within six months of the expiration of the retention period will be deemed to vest the day before the expiration of the retention period.
21. The same goes for any dates of earning retirement credits, bonus, or commissions: these should be considered.
22. Look out for provisions that require you to pay your employer’s legal fees if a dispute arises; insist that the provision be removed. At the very least, insist that it be made mutual.
23. Consider tax deferral or other advantages: might it be helpful to be paid all or part of the retention bonus next year?
24. Even if you plan on negotiating your Retention Agreement, or perhaps definitely not accept it, consider making a copy of it, signing the copy, and giving it to a loved one, or placing it into a safe place, so that in case you should pass on unexpectedly, or become incapacitated, your family or estate will have a good chance of collecting the retention bonus.
25. Regardless of your age, consider what happens if you “leave employment” during the retention period due to death or disability. You or your estate should be entitled to retain the monies paid, or collect on the monies promised.
26. Does the Retention Agreement stipulate how disputes about it are to be resolved? If arbitration, be aware that the fees you pay to the arbitrators – not counting your own legal fees – could be fifty to one hundred thousand dollars!! Always ask that, in arbitration, the employer pays the arbitrators’ fees.
D. What to Consider Putting INTO EMAIL AFTER YOU SIGN a Retention Agreement:
27. First and foremost, always keep a copy of what you signed, as well as any written “explanations” given to you by HR or supervisors.
28. If, after you’ve signed the Retention Agreement, you learn that others have been treated more favorably than you have, don’t be afraid to confirm this with HR, and ask for agreement that you will be treated in this more-favorable way, too.
29. Confirm in an email anything you’ve asked be inserted into the Retention Agreement, and told is agreed by being “implied into” it, but can’t be written.
30. If they were deposited by employer “auto deposit,” retention bonus monies that have been paid to you should be removed from the bank they were originally deposited into, as your employer may later remove those monies, at its whim, even months later, if any reason arises.
E. What to Consider Doing If You CHANGE YOUR MIND AFTER Signing a Retention Agreement:
31. It may be a very good time to consult with legal counsel at this time so that you might utilize legal considerations in any assessment of steps to take.
32. If for any reason, including a change in circumstances, you believe that you have become a more valuable “human resource” to the company or its acquirer, and thus represent a greater perception of “retention value,” don’t be afraid to later renegotiate and ask for an increase in your retention payment.
33. If conditions around you take a sharp turn for the worse – as examples, if you are denied your support staff, or if you are asked to report to a lower level, or take a pay cut – confirm these changes in non-adversarial emails to your own boss, and HR, to establish a “paper trail” that they may be trying to force you out, and retrieve their monies.
34. If you’ve been asked to work for another employer before the expiration of the retention period, you must show the retention agreement to the prospective employer, and ask the prospective employer to both (a) defend and (b) indemnify you. The first relates to legal expense; the second relates to possible claims or judgments against you. Both should be put into writing and signed by the prospective employer.
35. If you feel you want to leave, or must leave, consider requesting that you be paid (or can retain) a pro rata portion of the retention monies, according to the length of time you have, in fact, stayed put.
F. IN EVENT OF LATER DISPUTE over a Retention Agreement:
36. This is the time it is near essential to consult with legal counsel to consider next steps.
37. If anything happens that suggests the onset of a possible dispute between you and your employer, consider taking home with you your personal belongings, without making it obvious. Don’t take anything that belongs to the employer. If you’re not sure regarding particular items, be conservative: assume it’s theirs for now, to avoid inflaming the situation.
38. If payment of the retention monies is not made precisely on the date that they are due, it is essential that you send a notice of default to the employer, (a) in the way notices are required under the agreement, if they are specified, and (b) by one or more ways that are later irrefutable, such as email and/or Fedex. Ask for immediate notice of when payment in full will be made.
39. Should you receive a threatening letter, or what appears to be the initiation of a lawsuit against you, it is imperative that you locate and consult with an experienced employment law practitioner licensed to practice law in your locale.
40. If either litigation or arbitration seems like it might take place, consider reminding your employer that the business interests of all sides could be hurt by adversarial proceedings. As SkloverWorkingWisdom™ reminds us, the three business interests are the “Three R’s”: (a) revenues, (b) more importantly, relations, (c) most importantly, reputations. Of course you should never accuse anyone of anything improper, because that might be considered either defamation or extortion.
Of course, you should not ask your employer for each of these 40 changes, but only those that are (a) applicable to your circumstances, and (b) reasonable to request. You will need to be the judge of that.
While you should always consider using an experienced attorney who is both knowledgeable in this area of law, and licensed in your locale, to guide you and assist you, there is a lot you can do to help yourself, too. It might be best to come to your attorney with ideas in mind, and seek his or her help in finalizing plans. Regardless of how you choose to proceed, remember that “forewarned is forearmed.”
Attached is a simple form of a Retention Agreement. Look it over, and see where these suggestions can be of use, benefit and value to you.
SAMPLE RETENTION AGREEMENT
June 29, 2005
To: Mr. John Smith, Senior Vice President
Fr: Ms. Marilyn Jones, Human Resources Director
As discussed, XYZ Resources may in the near future engage in a significant corporate transaction. It is important to XYZ that certain employees, considered Highly Valued, remain with the company in their present positions for a specified period of time. You have been identified as one of those Highly Valued employees. This letter confirms our proposal made to you regarding your additional compensation being offered to you by XYZ Resources, Inc. (the “Company”) in consideration of your entering into this agreement.
By signing this letter (the “Agreement”), you agree to the terms and conditions set forth below:
A. Your Obligations Under This Agreement:
(1) By this Agreement, subject to the provisions set forth below, you agree to remain employed by the Company for a period of eighteen (18) calendar months starting July 1, 2005, and ending on December 31, 2006 (the “Retention Period.”) You will remain in your present position, reporting to your present supervisor, performing the same duties during the Retention Period, unless otherwise directed by Company senior management.
(2) Notwithstanding, the Company retains the right, in its sole discretion, to modify your duties and reporting structure should it deem it necessary and/or appropriate for business reasons. In no event will you be required to relocate during the Retention Period.
(3) During the Retention Period your base salary, incentive bonus program, benefits and perquisites will remain as they are as of this date.
(4) This Agreement is not a contract of employment for a specified term. The Company reserves its right to terminate your employment at any time, with or without notice, but should it do so before December 31, 2006, it shall nonetheless provide you with your entitlements hereunder as if you had remained in its employ through the Retention Period.
(5) Your acceptance of Retention Monies serves as well as your agreement to refrain from providing services to any person or company engaged in activities competitive with the Company’s for a period of twelve (12) months subsequent to the Retention Period.
B Your Entitlements Under This Agreement:
(1) In consideration of your execution of this Agreement, you will receive from the Company a special Initial Retention Bonus of Thirty-Five Thousand ($35,000) Dollars within thirty (30) calendar days of the Company’s receipt of your signed Agreement.
(2) In consideration of your continued employment by the Company, you will receive special Periodic Retention Bonus Payments of Ten Thousand ($10,000) Dollars every sixty (60) days during the Retention Period.
(3) In consideration of (a) your continued employment by the Company through the entire Retention Period, and your satisfaction of each of the conditions noted in Section “C,” below (the “Final Conditions”), on or before January 15, 2006 the Company will pay you a Final Retention Bonus of One Hundred Fifty Thousand ($150,000) Dollars.
(4) Nothing in this Retention Agreement in any way alters, modifies or amends the terms and provisions of any Company benefit, welfare or equity plan. In the event of conflict or inconsistency between the terms and provision of this Retention Agreement, and those of any Company benefit, welfare or equity plan, the terms and provisions of the plan(s) shall govern and control.
C. Conditions of Retention Bonus Payments:
(1) In order to be entitled to any Retention payments, you must be employed by the Company on a full-time basis on the date of payment.
(2) Prior to your receipt of the Final Retention Bonus, you will be required to sign and deliver a General Release of the Company and its named releasees in the form required by the Company.
(3) You agree that you will maintain strictest confidentiality regarding the existence and terms of this Agreement, other than for your accountant, attorney, and immediate family.
(4) Payment of the Final Retention Bonus is contingent upon your being a full time employee at the time of that payment, neither having tendered your resignation nor having been terminated for Cause. For the purpose of this Agreement, “Cause” shall include a knowing violation of a state or federal law, willful failure to adhere to Company policies, commission of a crime against the Company or any of its affiliates, or any felony, any misrepresentation, deception, insubordination, fraud or dishonesty that is materially injurious to the Company or any of its affiliates, incompetence, moral turpitude, the refusal to perform the duties and responsibilities of one’s position for any reason other than illness or incapacity, and any other material misconduct of any kind.
(5) The Company may terminate your employment at any time with “Cause.” In the event that your employment is terminated by the Company for “Cause” or you voluntarily elect to terminate your employment, the Company shall be obligated to pay only your base salary for services up to the cessation of your employment. If you choose to terminate your employment prior to the payment of the Final Retention Bonus described above, you shall not be entitled to any prorated portion of this payment.
(6) This Agreement constitutes the sole and complete agreement between the parties as to its subject matter. It cannot be changed, modified, altered or amended without another written agreement signed by all of its parties.
(7) This Agreement will be construed in accordance with, and governed by, the law of the State of New York.
(8) This Agreement is binding upon, and shall inure to the benefit of, the parties, their successors and assigns, heirs, estates and representatives.
(9) In order to be eligible for the benefits of this Retention Agreement, you need to sign and return this latter agreement no later than close of business on July 8, 2005. Thereafter, this Agreement will automatically be deemed withdrawn and void.
(10) You acknowledge and agree that all payments to you hereunder will be less required deductions and withholdings. You further acknowledge that you have been advised to seek legal advice prior to your signing this Agreement, and that you have been given an ample opportunity to do so.
We greatly appreciate your assistance and continued dedication. If you have any questions, please contact Matt Mondugo (212) 899-NNNN.
Very truly yours,
XYZ Resources, Inc.
Reviewed, Accepted and Agreed:
John Smith Date:
If you are not comfortable with writing, or do not feel you know “What to Say, or How to Say it,™” we offer a Model Memo entitled “Model Memo Proposing a Retention Bonus or Arrangement,” to send to your Manager when you face a risk to remain on board, and your Manager faces a risk if you leave. To obtain a copy, just [click here.] Delivered by Email – Instantly!
SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation takes knowledge, and sometimes it takes specialized, legal knowledge, which can be expensive. That’s a concern, but a concern that might be addressed for you by your employer, if you look for it in the right places, or ask for it using the right rationale. Knowing your legal rights and having the advantage of a legal perspective can only help you in your negotiating and navigating, especially in the identification, assessment and minimization of risk; that is essentially what lawyers do for clients. Gaining maximum rewards while taking minimal risks is what business is all about. But it takes more than luck to make that happen. It takes forethought, care and prudence, the essential ingredients in good negotiating. And it takes the strength, stamina and perseverance to pursue it properly, as well.
Always be proactive. Always be creative. Always be persistent. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.
A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.