What Does Stay Bonus Mean?
A stay bonus is a tool used to retain and motivate senior management and key employees during a sale process. They are more common when the company is being sold due to poor financial performance or insolvency and the number of buyers is limited. However, they may also be used for redundant management positions, such as when a large corporate buyer is acquiring a smaller private company. The corporate buyer may have a CFO in place, which may result in the private company's CFO role being eliminated. Stay bonuses are typically paid at the end of a sale process, and they require the employee's participation up to and including the closing date of the transaction.
Divestopedia Explains Stay Bonus
Stay bonuses are especially important in the due diligence process — if it makes sense, the seller needs somebody who knows the business to provide the right information and keep the business running.
Sellers will sometimes tie the amount of the stay bonus to the success of the auction process. Often severance arrangements are also negotiated in order to keep key employees involved through the process, despite the fact their continued involvement with a prospective buyer may be limited.
Stay bonuses do not provide the best incentive for senior management to stay since they are finite in nature. It is best to provide longer-term incentives for senior management to stay, such as options or performance-based bonuses that align them to the longer-term future performance of the business and ultimate sale.