Options for a Purchaser seeking to retain key staff – Discretionary Bonuses, Contractual Bonuses and ESS

While a purchaser may seek to negotiate earnouts with the vendor if key staff do not remain for a pre-determined period in the sale contract, there are other practical ways in which a purchaser could seek to retain and motivate staff post completion.

This article provides a general summary and practical considerations to offering bonuses and incentives to these key employees that transfer to the purchaser’s employment in a sale of business.

Types of Bonuses and Schemes Available

Discretionary Bonuses:

1. Give the employer flexibility in considering whether or not to make a bonus, or payment, to an employee above their salary or other contractual remuneration, including the timing, the amount and the terms and conditions under which the bonus will be paid;
2. The employer has no contractual obligation to pay the bonus;
3. Typically, the provision of a discretionary bonus will not be mentioned in an employment contract; and
4. Discretionary bonuses paid to employees are usually subject to income tax and other relevant deductions.

Contractual Bonuses:

1. Are binding promises by the employer to pay, subject to certain conditions being met, a predetermined amount, or an amount calculated in accordance with a predetermined method;
2. The terms and conditions of contractual bonuses, including eligibility criteria, calculation methods, and payment timing, are outlined in the employment contract or company policy.
3. Contractual bonuses are typically based on specific performance targets or achievements, including years of service with the employer (as a retention type bonus);
4. Failure to meet the predetermined conditions may result in reduced or no bonus payment; and
5. Contractual bonuses are subject to income tax and other relevant deductions.

Employee Share Scheme Generally:

1. A company can grant ownership of shares to eligible employees by way of Employee Share Schemes (ESS), immediately giving an employee a right to purchase shares in the employer company, or Employee Share Ownership Plans (ESOP), giving an employee an option to purchase shares in the employer company at a future date.
2. The terms and conditions of employee share schemes, including eligibility, allocation, vesting periods/conditions, exercise prices and what happens to the issued and unvested shares/options if an employee leaves their employment, are pre-determined (usually by the employer) and outlined in the scheme documentation, which will generally include a comprehensive company policy, disclosure document (as required), Shareholders Agreement and an option agreement/share sale agreement with the individual employee.
3. Legislative reforms that came into effect from October 2022 make it easier for employers to utilise Employee Share Schemes and reduce the red tape, including amending the disclosure rules and allowing unlisted companies to offer an unlimited number of shares, of an unlimited value, as long as the employee is not charged more than $30,000 a year for the shares. There are some conditions that need to be met, however.
4. Tax implications and benefits of employee share schemes can vary depending on the specific scheme, the employer’s eligibility to specific reforms and concessions and the employee’s circumstances.

Consents Required

Discretionary Bonuses are not contractual and no consents, apart from a company’s corporate governance, are required.

Contractual Bonuses are typically included in an employment contract, and to vary an employment contract requires consent from the employee. A contractual bonus could also be implemented through a new company policy, however depending upon the terms of the current employment contract (whether there is a general term that the employee will agree to be bound by all company policies into the future), an employee may still need to agree to be bound by the terms of the new company policy.

Employee Share Schemes:

1. Require the employee’s explicit consent to participate;
2. Specific consents may include an agreement to be bound by the terms and conditions of the scheme, such as eligibility criteria, share allocation, vesting periods, and exercise prices; and
3. Employees may be required to sign a participation agreement or offer letter that outlines the details of the employee share scheme and their consent to participate.

In general, the employer company will also need to obtain the consent of relevant office holders in accordance with its corporate governance documents.

Timing of Incentive

Payment of a discretionary bonus could be made immediately following completion of the transaction, as a sign of goodwill in an attempt to alleviate any concerns that the senior management team have in relation to the sale. Given the discretionary nature of the bonus, and the fact it is not a contractual obligation, it would be difficult to defer payment without providing some sort of promise, or contractual right, to the senior management team.

If a contractual bonus is chosen, a purchaser may wish to consider negotiating the terms of new employment contracts with the senior management team during the period between exchange and completion, with the new contracts coming into effect contemporaneously with, or as soon as possible after, completion. The timing of the payment of the bonus could be at pre-agreed intervals based upon retention of the employee and/or certain KPIs being met.

If an Employee Share Scheme was chosen, a purchaser ought to:

1. Prepare the required documentation, including a Shareholders Deed, Deed of Accession, Offer Letter, relevant Sales/Option Agreement and Company Policy in the period between exchange and completion;
2. Communicate with the employees in the period between exchange and completion to determine the likely participation in the scheme;
3. Have the Shareholders Deed (as there will only be one shareholder, being Empire Properties, at this time) and Company Policy effective contemporaneously with completion; and
4. Provide the Offer Letter and other documents to the employees as soon as possible after completion.

The timing and eligibility criteria of the options/rights under the scheme can be staged over a period of time, or based on certain KPIs being met.

If you have any questions or concerns about the retention of staff post completion of a sale of business, or retention of staff in general, contact our Business Lawyers to discuss your options. We can assist you implement your chosen retention strategy by preparing all relevant documents, including new Employment Contracts or ESS documents.