With the unemployment rate at its lowest in decades, opportunities abound for talented employees looking for greener pastures. Given this environment, as well as the costs and disruption that come with replacing high-performing workers, employers have had to redouble their efforts to attract and retain such employees, especially those in the c-suite.
Employers increasingly use employment agreements as part of their employee retention strategies. Historically, these well-crafted contracts focused on defining the respective parties’ rights and obligations while reducing risks for the employer and employee alike. While that certainly remains one of the motivations behind and benefits of an employment agreement, employers now see how extending a contract can be a powerful tool for keeping employees in the fold.
The reasoning is that extending an employment contract to key talent will help assure them that the employer is willing to invest in them and plan for their future in the company. This written assurance is perceived as being much stronger than just a promise and a handshake.
Retention-Focused Benefits and Features
We have seen many employers use employee contracts to provide c-suite executives and mid-level managers with incentives to put down stakes at the company, including:
- Transition planning: This involves bringing in a mid to high-level employee as a partner or co-owner with a compensation plan that includes a small buy-in spread over a couple of years. A common formula would give the employee around a 10-20% ownership interest over the course of five years.
- Partnership Track: Providing employees with an option to buy into the business after a certain number of years of service. This is similar to the transition planning mentioned above, with the main difference being that the employee knows at the start of their tenure that they can buy into the company after a set number of years.
- Stock: Higher-level employees may have the option to purchase stock in the business. This is more common in larger businesses that may not have a partnership structure but offer stock as part of a benefits package.
- Phantom Stock: Sometimes called shadow stock or simulated stock, phantom stock is a type of deferred compensation that provides the employee with many benefits of stock ownership without actually giving them any stock in the company. Instead, the employee receives the right to cash payments equal to the value of the shares at a specified later date or distribution event.
- 401(k) Match: A time-tested method of employee retention, the company matches the employee’s contributions to the company’s 401(k) plan, but the vesting of the match will occur in increments over several years. So, employees are more likely to stay to get the full match.
Additional retention-focused benefits and incentives that employers can include in their employment agreements are:
- Increased salary based on performance.
- Increased PTO.
- Staff appreciation days to increase loyalty to the company.
- Staff gifts from the management or owners.
- Positive workplace culture and environment.
- Options for remote or hybrid work.
As with all contracts, employment agreements must be written with care, thoughtfulness, and a thorough consideration of the risks and benefits involved. Employers would be well-served to consult with experienced counsel before making offers to executives and other high-level personnel to ensure the upsides for the employee are matched by robust protections against potential downsides for the employer.
Welsh Wire Podcast
You can listen to Jordan and Mariah discuss employee agreements and retention on the Welsh Wire Podcast hosted by Welsh & Associates.