'Please stay': How to handle retention payments

“It's one way of getting people and keeping them, but as a company, you probably don't want that to be the only way that you drive loyalty.”

So says Chris Achkar, managing partner at Achkar Law in Toronto,  referring to the pros and cons of using incentive or retention payments.

“There are certainly benefits, and it's probably next to impossible to have a winning culture and a competitive culture amongst other companies without creative compensation plans that include bonuses and equity and options and so on.”

His comments follow a recent announcement by Tesla that it is giving an interim retention award to CEO Elon Musk worth roughly $29 billion — consisting of 96 million restricted shares, subject to a two-year vesting period and other conditions.

“Rewarding Elon for what he has done and continues to do for Tesla is the right thing to do,” said the Tesla board.

This award is unique in scale and circumstance, of course, but it serves as a reminder for Canadian employers of the need for clarity and enforceability in such arrangements — both as best practice and for compliance purposes.

Trends in retention payments

Incentive-based compensation is now widespread across all levels of employment, not just at the executive tier, says Achkar.

“A lot of the businesses are more cognizant of what employees, whether CEOs all the way down, are aware of and hoping for when it comes to compensation. So having metrics and KPIs for bonuses and these types of incentives is more prevalent now than it was 10 and 15 years ago — whether it’s stock options, whether it’s RSUs for employees to participate in,” he says.

“It helps with alignment, so that everyone's pushing in the same direction.”

Achkar adds that retention bonuses are also more common in being offered to attract key talent.

“Simply starting in a role entitles some employees for an extra pay of some sort, upfront — $10,000, $15,000 or so, and obviously it could be more. But, for certain employees that are needed in certain industries, a lump sum payment upon them starting is common, as a percentage of the base pay.”

Most employers are looking to set up these incentives for a specific reason, such as a restructuring, says David Fanjoy, associate at McMillan in Toronto.

“[For example] they need to keep somebody around for at least nine months. They've got other changes in the organization, and they want to make sure they've still got people at the end. And sometimes it's even in connection with other layoffs. It’s like ‘OK, we're going to cut 25% but we need to make sure that the people who are staying are actually staying.’”

Incentive payments in uncertain times

During the COVID days, many employers were forced to offer “exuberant amounts” to retain employees amid tough competition, says Achkar, but that trend is on the mend now.

"Many employees aren't sure about jumping ship in a bit of a weaker economy or the presumption that a weaker economy is happening now.”

Fanjoy agrees, citing the uncertainty of the markets amid the U.S. tariffs.

“[Employers] are doing what they need to keep people, but it's also not such a crazy market, like what it was in the early COVID months of people jumping ship and switching organizations — we haven't seen that level of need for additional incentive or retention payments.”

However, employers may alter the type of bonus offered, he says, such as moving more towards equity-based compensation versus cash-based.

Types of bonuses

One of the easiest ways to set up these incentives is as a percentage of base pay, benchmarking KPIs from previous quarters or years, and then setting a target for the upcoming year, says Achkar.

The bonuses can also be tied to revenue growth and profits, and for executives, often it’s about EBITDA calculations (earnings before interest, taxes, depreciation and amortization).

Another common approach is profit-sharing, so if a certain target is reached, the individual receives a percentage of the revenue, he says.

As for stock options and equity grants, those generally vest over a certain period, says Achkar, to encourage people to stay around longer, and are often tied to performance.

Risks of offering incentives

However, it’s important to find a balance between short- and long-term incentives, according to Fanjoy.

“Having both in the long term is probably what’s the most important to those executives, because that’s usually where the more lucrative compensation is, whereas the flip side of that is the short term, and the company meeting its goals.”

There are two sides to everything, says Achkar.

“Ideally, you want that buy-in for many reasons, not just for compensation — you want everyone to drive for the mission and the goals the company is trying to achieve,” he says.

“But, unfortunately, even in the non-profit sector, we see many comp plans… based on metrics tied to money, profitability or revenue.”

Plus, employers will try to compensate people generously, to hold on to them for a year or two, but when the employees make enough money, they may decide to move on or retire early, says Achkar, citing as an example the “FIRE” trend, meaning “financial independence, retire early.”

Understanding ‘active employment’

Another challenge? The enforceability of incentive and retention payments, particularly in the context of terminations. One of the stickier areas involves “active employment” and what is owed during working notice.

That law is not yet settled, according to Achkar.

 “Many companies have it in their contracts that an employee has to be actively employed to be able to receive bonuses, but then lawyers argue for compensation that an employee would have received had they been allowed to continue to be employed. And I think that’s where the law will ultimately land.”

He references the Matthews v. Ocean Nutrition decision: “The Supreme Court determined in 2020 that if an employee is supposed to get their pay, and the only reason they didn’t is because of the termination, then they should still be able to receive it after their termination — unless it’s explicitly excluded in the contract.”

As a result, it’s not really a good idea for companies to limit compensation to active employment, says Achkar.

“It’s certainly advisable to try to — but whether it would be enforceable, at the end of the day, I’m not sure about that. Because if an employee is allowed to continue, and if the notice period is provided in a way that it's a working notice, then they potentially would be able to receive the bonuses that they would have received.”

Precise language key to incentives

Fanjoy emphasizes the importance of precise language, especially regarding active employment clauses.

“Just saying the words ‘actively employed’ is not enough. A court will basically say, ‘Well, active employment can include that reasonable notice period.’ So, what the clause needs to say is that it actually excludes, specifically, a common law notice period.”

It’s been a changing area of the law about what language is needed, he says, and the idea is to exclude the common law notice period.

“The default presumption is if an employee is terminated, they’re entitled to all the compensation they would have received during their notice period. And that can include whether it’s a regular, scheduled bonus plan, a one-time incentive payment, all those things.”

Disputes and constructive dismissal

Disputes around retention bonuses or incentive payments also arise when incentive plans are changed without notice.

Fanjoy notes that constructive dismissal claims can arise if an employee’s compensation is significantly reduced or promised incentives are not delivered.

Issues can also arise if the agreement doesn’t specify the exact terms, so, for example, an employee claims they hit their target while the company disagrees: “[That] can often then lead to a resignation and constructive dismissal claim,” he says.

There may also be constructive dismissal claims based on a breach of contract, says Fanjoy: “If an employee is owed certain amounts and the company says they’re not paying them, we’ve seen claims based on that as well.”

Also important: if a long-term employee is used to getting the same bonus each year and that suddenly ends, that could lead to problems for the employer, he says.

“As much as you'd like to call it discretionary, it’s sort of considered part of their compensation package.”

Reviewing, changing incentive plans

Both lawyers recommend that employers provide advance notice and clear documentation when changing incentive plans.

“The best practice is to have a policy and to revise it and reissue it each year, and to have language in that plan saying that this is for each year: ‘We’re not obligated to create it for the next year,’” says Fanjoy.

Achkar says that most incentive plans are reviewed annually but more frequent reviews of compensation are becoming common, particularly with younger employees.

“The old school way of doing it is it’s once a year, same with [performance] reviews. But now with younger people entering the professions, they’re looking for quick fixes when it comes to bonuses and compensation. So, we’re seeing more of mid-year reviews with compensation… [or] a quarterly conversation… a monthly conversation.”

And of course, best practice should see these types of agreements in writing, says Fanjoy.

“When we're talking about executives and significant payments being made, that's almost always happening. So, it's more [an issue]… at the lower level, where somebody wants to keep a manager around for at least six months, and they might do that by a handshake deal.

“And that's when it gets complicated in terms of ‘OK, well, what exactly do you mean by staying employed until this date? Like, what happens if there's a without cause termination?’”

Fanjoy also cautions that retention payments must be applied fairly to avoid discrimination claims.

“If you’ve got a C-suite made up of five women and five men, and the men all get these juicy retention payments to stay for a year, the company better have a very good business case on why each of those people are and aren’t getting that payment. Because if there’s that appearance of discrimination — whether that’s sex, gender, age, any other sort of protected ground — it could open up a claim that way.”