Executive Sign-On Bonus: Terms & Negotiations
From the executive sign-on bonus to the retention bonus, bonuses are a major factor in the average executive compensation package. Whether you want to negotiate a signing bonus, performance bonus, or a retention bonus, the point is to keep the position valuable for you.
Often, there’s more room to negotiate bonuses than your base salary. As such, it is crucial to have a full understanding of your bonus options to seek a structure that makes a major difference in your pay.
The Executive Signing Bonus
Often called the “golden handcuffs,” companies use the executive sign-on bonus to lock in key executive employees. These packages require the executive to stay at the company, vest, and earn the benefit over time.
Should the executive leave the company for another firm, they might lose the options due to vest over the next few months. These options may include RSUs, stock options, or direct cash.
Alternatively, a new job offer may come into play just before an executive earns a lucrative bonus. If this happens, it’s crucial to fight for an executive signing bonus that makes up for the loss of these options.
When the new employer meets that standard, they essentially offer you the “golden keys” to unshackle you from your company. With executive representation, you have an advocate to help you fight for what you’ve earned and protect your interests.
Unknown Risks of New Jobs
Taking a new job is a risk regardless of the situation. As a senior executive or C-suite employee, you spent time establishing yourself with the CEO, Board of Directors, and your peers. In your tenure, you earned their trust and have reached milestones.
When you take on a new position, it means you start anew in a fresh environment. No matter your accomplishments, you have to prove yourself to a new group of people and navigate unknown dynamics.
Additionally, there’s always the risk that the new position doesn’t work out or is a bad fit. These factors justify an executive sign-on bonus to draw you out of your comfort zone and into the unknown.
While the “golden keys” bonus tends to be cash, this type of executive signing bonus often comes in the form of equity. Typically, it requires a limited amount of vesting – for instance, one year. This gives the situation a reasonable chance.
If you leave without good reason before this benchmark, you have to either pay the bonus back. Alternatively, it may cancel the equity you would earn.
Oftentimes, a performance bonus is tied to a sales target or other milestone in development, efficiency, funding, or another area the company hires an executive to address. For example, a CEO’s bonus may be rooted in the performance of the company as a whole. Other senior executives may also have bonuses based on the company’s performance when the company wants to encourage teamwork or limit bonuses to good years.
Typically, companies measure performance according to revenue, profitability, or EBITA. If you work in a life sciences company, profit may be years down the line. This means the target of the bonus may be progress-based instead.
A guaranteed bonus is paid when an executive remains at a company through a specific period. The company issues the bonus regardless of performance.
This type of bonus is a way to compensate an executive without raising their base salary.
However, parting ways with the company – whether terminated or resigning – means the company saves the bonus part of the compensation package.
With this in mind, it is crucial that you have an attorney review the terms of your executive sign-on bonus. This helps you gain a deeper understanding of the terms in order to protect your interests.
Also called a stay bonus, a retention bonus is a one-time agreement or payment for the executive agreeing to stay with the company for a certain period of time. This may be based on a date or through a planned event, such as a merger.
For this type of executive sign-on bonus, the cash consideration often ranges from 10-25% of the base salary.
However, it may also or alternatively offer equity or other considerations. Often, this is all negotiable as part of your compensation package – from the terms and duties to the award.
Understanding Executive Signing Bonuses
Before you agree to an executive signing bonus, it is essential to understand the terms and targets that apply. Your employment agreement should be specific and clear about the bonus structure, providing a mechanism for calculations and payouts.
Additionally, it should never include language such as “sole discretion of the company” in regard to your bonus.
Because performance targets can be complex, you want to ensure the bonus structure rewards you properly for your achievements. These targets need to be established early on so that you have a good idea of what to achieve.
The executive sign-on bonus is a significant aspect of the compensation package. Getting these terms right makes a major difference in your take-home pay. When it comes time to negotiate, be sure to consult an experienced executive compensation attorney.