Retention Bonus is an incentive tool used by businesses to induce employees to stay employed with the company. It is a payment which is over and above the salary and other benefits offered to an employee by the company. It is a common market practice amongst corporates in India to offer retention bonus to employees whom the company wishes to keep on board while undergoing business transitions such as business transfer, merger or acquisition or closure of business. Retention bonus is also offered at times to retain high performing employees to continue with the organisation and to prevent them from considering other employment opportunities whether with competitors or otherwise. Retention payment serves the interest of both, the employees and the company as it motivates the employees to continue providing their services as per the requirements of the company and at the same time, provides an opportunity for the employees to earn additional incentives.
From the company’s perspective, such payments (i) increase the productivity of the employees and stimulates them to work more efficiently; (ii) gives the employees a sense of belonging to the organisation and increases their loyalty towards the company; (iii) boosts the morale of the employees and decreases negative emotions towards terminations; and (iv) enables the organisation to retain reliable employees to fulfil specific duties and achieve the overall goals of an organisation. The amount of retention bonus payable, depends on factors such as the salary of the employee, his role within the organisation and the time period for which the retention bonus is being considered. It may be a one-time bonus or even a recurring bonus.
As per Indian laws, retention bonus is in the nature of a contingent contract under the Indian Contract Act, 1872. It is considered as conditional/ contingent payment which is repayable if the prescribed conditions are breached by the employee. In case of breach, recovery of the retention bonus is typically made from the dues payable to an employee. Retention bonuses are agreed to in the form of a letter or an agreement, which clearly sets out the terms and conditions of payment and repayment. A company has recourse under the judicial process for enforcement.
It is important that corporates structure the retention bonus in an efficient manner and ensure that it is a separate payment from and in addition to the salary or other incentives of the employee. It should be an extra discretionary payment which was not otherwise part of the employee’s pay package. Depending on the requirements of the company, below are the various models that may be adopted by an organization while structuring the retention bonus scheme:
- Paying the retention bonus amount in equal monthly instalments over the applicable retention period and requiring the employee to repay the total retention bonus amounts paid to him if he chooses to resign or is terminated by the company for cause within the retention period.
- Paying the entire retention bonus amount upfront and requiring the employee to repay the retention bonus amount paid to him if he chooses to resign or is terminated by the company for cause within the retention period.
- Paying the entire retention bonus amount upfront and requiring the employee to repay a proportion of the retention bonus amount paid to him depending upon the timing of his exit from the company within the retention period.
- Post payment model wherein a promised retention bonus is paid to employee after he completes a specified duration in the company.
It is advisable that organisations seek professional advice while structuring and drafting retention bonus related documentation in order to safe guard their rights. Certain aspects that become critical in drafting the retention bonus related documentation are (a) identification of the retention period, i.e. period for which the company requires the employee and consequently identifying the exit date; (b) identification of the tasks/ projects that the employee shall undertake during the retention period; (c) defining the duties and responsibilities of the employees during the retention period; (d) structuring the retention amount (iv) identification of conditions upon which the retention bonus amount will be payable; (v) consequences and repayment of the retention bonus by the employee to the company; and (vi) consequences of misconduct or resignation by an employee during the retention period.
Although helpful, there can also be challenges to a retention bonus, which an organisation may face such as (i) employees who were planning to leave may continue at their current position for the monetary aspects; (ii) the attitude of the retained may become disruptive; (iii) retention bonus provided to employees may inculcate a feeling of resentment in others; and (iv) the employees could develop an entitlement attitude towards their role in the organisation. Therefore, retention bonuses need to be structured very meticulously so as to achieve the organisation’s goals and purpose for which the employees are retained. The repayment obligations should be clear so that they may act as a deterrent for them to leave the company during the retention period.
The organisations should also maintain scrutiny over the employees to whom the retention bonus is paid and ensure that the employees who receive retention bonus are worthy of retaining.
For further information, please contact Vineet Aneja, Managing Partner and Raveena Verma, Senior Associate at Clasis Law.
