Mailly Law - March 2020

March 2020

714-384-6531 | www.maillylaw.com

How to Keep Key Employees The Uses of a Retention Agreement

In addition to stock options, a CEO’s retention agreement should include a severance package. These are often called “golden parachutes,” and for good reason, because they allow the CEO to land softly following his dismissal, often after a merger. I’ve seen situations where the board of the buying company appoints the CEO of the company being bought as CEO of the surviving company! The CEO of the buying company then uses his own severance package to exit the company. While they pertain more to CEOs, retention agreements aren’t used for them exclusively. The buying company can offer these agreements to any existing employees. When considering offering a retention agreement to other employees, a company’s leadership should consider several factors and evaluate who generates value in the company. If it’s in their marketing platform, for instance, they should determine what employees made the selling company successful. Employees who bring the most value are not only unbeaten in their role, but they’ve often built sustainable processes and management systems. Regardless of the reasons behind or recipients of retention agreements, they can be challenging to manage if you’re not familiar with them. If you receive such an offer, reach out anytime. We will work with you to ensure the offer is appealing to you and fair to all parties involved.

For those unfamiliar, restricted stock is a form of compensation that’s granted to an employee if and when they’ve reached a specified milestone. These milestones come in various forms, but for a CEO with a retention agreement, some common defining metrics for these milestones are continued employment for a specified period of time or the achievement of certain revenue or profit goals. We sometimes hear that a CEO is making tens of millions or hundreds of millions of dollars in a particular year. Often, those amounts are the result of the exercise of stock options, which achieved great value due to the extraordinary achievement of the CEO. Usually, the company’s board incentivized the current CEO to stay on at the business and do well. Because the value of the stock is intrinsically tied to the company’s success, the better the CEO performs, the higher the stock is valued.

When one company buys another and wants the seller’s CEO to stay on as a consultant, or if the purchasing company wishes to retain the CEO in their current position, they use a retention agreement. There are specific considerations for each of these situations. For instance, if the buying company wants to retain the former CEO as a consultant, the purchasing company’s leadership needs to define their expectations for the consultant, including the duration of services and compensation. In this case, the consulting CEO helps foster a successful transition by introducing the new CEO to critical partners like customers and suppliers. In situations where the CEO is retained, the buying company must look at all aspects of the CEO’s employment, including their pay, benefits, severance, and restricted stock.

-Guy Mailly

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