Retention bonuses in M&A: should you do it?

What is a retention bonus?

A bonus that is paid to key employees to stay with a business for a period of time after a transaction is complete is called a retention bonus.

What is the typical reason to pay a retention bonus?

During periods of uncertainty, which regularly exists before and after an M&A transaction, key staff often reassess their commitment to the business. This may cause key staff to leave if they get an inkling that they may not be offered a new role when the business changes hands.

Advice from M&A advisors is often mixed about whether to pay retention bonuses.

However, for many transactions the continued involvement of key executives before and after the deal is vital. Especially in cases where the deal is highly complex, retention bonuses are more likely to be paid.

When owners and shareholders offer retention bonuses to key personnel, such bonuses only become due when the employee stays for a certain period after the deal is complete. Of course, if the employee is restructured out of the business prior to this time, the bonus is normally paid automatically.

How much are typical retention bonuses?

Like all incentives, retention bonuses can widely vary. Often if the owners feel that the key staff member has a unique responsibility in the transaction, retention bonuses can exceed 100% of an annual salary. More commonly, retention bonuses for key leadership and executives are between 25% and 100% of their annual salary.

Most deals we see include retention bonuses because of the importance of key staff in valuable businesses.