Having a stay bonus in place, especially if the business owner is over 50 years old, is an important part of making sure key managers stay with the business if something happens to the business owner.
A stay bonus usually has four parts to it. Each of the “triggering events” are different and need to be treated differently in the stay bonus agreement.
If the business owner dies – If this happens you will agree to pay your key people a certain amount of money if they stay to help with the orderly transition of the business. This part of the stay bonus would likely be six months to two years in salary. I recommend the owner buys a life insurance policy to fund this part of the stay bonus.
If the business owner becomes disabled - Most disabilities are temporary in nature. In that case you might want to have a short-term bonus to incent your key managers to stay throughout your disability.
If you become permanently disabled you might want to put combine this part of the stay bonus with a business sale bonus. The funds for event will come from the proceeds of selling the business.
If the business is sold – If you are able to sell your business the buyers will be more interested in making sure your managers stay than you. In many cases your key managers are more important than you in making sure the cash flow continues after the business is transferred.
I recommend that you have a portion of the proceeds from a business sale earmarked towards paying bonuses to your key managers if you sell your business. This bonus should only be paid after the managers have finished the stay portion of their agreement.
This means that if the bonus is paid if the managers stay for a year you would only cut them a check after that year is done. Having the bonus placed in escrow is a method that helps your managers know they will be paid once they fulfill their stay bonus requirement.
If the manager reaches retirement age – Not all stay bonus agreements have this as part of the agreement. I believe it’s important if you want your key managers to stay for their normal work history with you.
This bonus should be funded in some way. Many business owners use a funded deferred compensation plan to insure that money is available when needed. It’s important for your managers to know that if they spend their career with you that when it’s time for them to retire you’ll have money put aside for the retirement benefit that you’ve promised.
A stay bonus is something every business should consider as part of their normal planning. If you have key people you want to make sure that you do everything you can to help you get through rough patches that could appear.
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