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Introduction to this document

Retention bonus letter

A retention bonus is a payment offered as an incentive to keep a key employee in your employment during a particularly crucial business cycle. Our letter sets out the amount of the bonus and outlines when, and in what circumstances, it will be paid.

Retention bonus defined

A retention bonus is a one-off sum that you promise to pay to an employee to entice them to remain in your employment. There are various reasons why you would want to use such a bonus. The main one though is to retain key talent for as long as possible during a merger, acquisition or business sale, or during a particularly crucial business cycle such as an office move, so that you can keep running your business without interruption during such periods of uncertainty and transition. By offering valuable employees a guaranteed bonus for their continued employment for a set amount of time, you aim to ensure that they don’t resign until at least the commercial deal or crucial business period is completed, and possibly for some time afterwards. The retention bonus provides an incentive for them to stay. However, it doesn’t stop the employee from subsequently resigning before the bonus has been paid, e.g. because they’ve found another job, but then they won’t get the bonus. It also doesn’t stop them leaving once you’ve paid them the bonus.

Bonus amount

The amount of the bonus needs to provide enough of an incentive for the employee to want to stay put. You’d normally calculate it based on a percentage of the employee’s annual basic salary, but it’s up to you to decide what the amount is going to be, e.g. you could scale it based on the achievement of specific objectives during the relevant retention period. You’d generally pay the bonus at the end of the retention period, whatever you decide that’s going to be; if you pay it early, e.g. upfront, you’d then need to write terms requiring repayment if the employee’s employment subsequently terminates before the retention period is over, and they would need to explicitly agree to these terms. That makes things more complicated so it’s best to avoid this if possible.

Retention bonus letter

Our Retention Bonus Letter starts by advising the employee that they’re eligible for a bonus after the current transaction or crucial business cycle (you’ll need to define exactly what this circumstance is) has been completed. It sets out the amount of the bonus and when it will be payable. We’ve given you four payment date options: a specific date; the next payroll cycle following the completion of the transaction; a defined number of months after completion of the transaction; or the first anniversary of the completion of the transaction. The final options aim to keep the employee at your business for a longer period; you need to think carefully about how long you really need to try and retain them for to minimise business disruption. Finally, our letter includes some additional terms, the key one of which is that the employee must still be in your employment, and not serving notice either by resignation or dismissal, on the bonus payment date. We’ve also included optional terms withholding the bonus if the employee receives a disciplinary or performance warning and making payment dependent on the achievement of specific objectives. If you want to include this latter option, you’ll need to define what those objectives are in an appendix to your letter.