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Dear Workforce How Do We Construct “Stay” Bonuses

QDear Workforce:

What are typical “stay” bonuses offered to key employees when anoperation is sold? Are these bonuses figures as a percent of pay or equivalentto number of months of salary?

– HR Director, manufacturing, Pittsburgh, Pennsylvania.

A Dear Steel City Director:

The short answer is that there is no typical stay bonus for key employeeswhen an operation is sold. The long answer is that the appropriate retention payplan depends on numerous factors, including:

  • Circumstances surrounding the sale and integration of the company into thenew parent company.

  • Alternative job opportunities for the employees you want to keep

  • Supply of replacement talent if they leave.

  • Bench strength.

  • Employees’ organization level and importance to the organization.

  • Employees’ perceived career opportunity with the new owner, andconversely, risk that their jobs will subsequently be eliminated.

  • Economics of the business (i.e., how much can you afford to pay).

That said, retention bonuses usually are denoted as a percentage of pay,though sometimes they are paid as a premium salary for a specified number ofmonths (see below). Retention bonuses are usually in the range of 10 percent to50 percent of salary, depending on the employee’s level and length of time untilpaid. Following a sale, the transition period is usually six months.

Sometimes, installments are paid during the transition period; for example,25 percent ofthe bonus may be paid at the end of three months. In addition, enhancedseverance benefits are often provided to protect employees, should things notwork out. Special arrangements may be made for the senior-most executives (whichcan range up to 100 percent of salary).

Sometimes top executives develop a list of key employees and their bonuses,with input from managers. In other situations, bonus guidelines are developed bylevel and/or function, which are used to determine individual pools given tomanagers for distribution to their employees, as they see fit to keep theoperation running smoothly.

Sometimes the new owner earmarks key employees needed for the transitionperiod who will not be needed once the company is integrated into the parent.For these employees, a large severance package, payable upon termination of theemployee by the employer, is offered in lieu of a retention bonus. Occasionally,a premium salary is also paid during the period the employee is needed.

As with any pay plan, there are as many variations on the themes as there arecompanies. The most important principles are careful selection ofmission-critical employees and an understanding of what it will take to keepthem. Entitlement, internal equity, and consistency are not relevant conceptswhen determining a one-time allocation of scarce resources to the key playerswho must keep the business together.

SOURCE: Claudia Poster, principal in the compensation practice at UnifiNetwork, a subsidiary ofPricewaterhouseCoopers LLP, New York City, March 21, 2001.

LEARN MORE: See “How Much to Pay inBonuses,” for more information.

The information contained in this article is intended to provide usefulinformation on the topic covered, but should not be construed as legal advice ora legal opinion. Also remember that state laws may differ from the federal law.