Retention Bonuses

What are retention bonuses?

Retention bonuses (in German Halteprämien) are cash payments that a company or an acquirer promises to key people so that they remain with the company for a defined period after a company sale. Payment does not depend on performance or results but on the employment relationship continuing on one or more qualifying dates. Anyone who stays until the agreed day receives the bonus, anyone who leaves voluntarily beforehand generally does not. The German terms Halteprämie and Bleibeprämie mean the same as retention bonus.

Retention bonuses are usually agreed between signing and closing of a company purchase agreement, for important people sometimes even earlier. Closing is the day on which the shares actually pass to the acquirer. The basis is individual agreements with the beneficiaries, while the purchase agreement regulates who finances the bonuses and how they enter the purchase price. Acquirers sometimes make the conclusion of such agreements with selected people a condition for signing or a closing condition. In legal terms they touch employment law, for tax purposes they are employment income.

Occasion and purpose of retention bonuses

A company sale unsettles employees. Responsibilities, reporting lines and locations may change, and people with sought-after knowledge receive offers from other employers precisely in this phase. If they leave, the acquirer loses part of what it paid for: customer relationships, technical knowledge, sales experience. Retention bonuses secure these people through the integration period that the acquirer provides for in its integration planning.

They are particularly important when existing equity programmes lose their retaining effect with the sale, for example because virtual shares are paid out or accelerated (accelerated vesting). In an acqui-hire, where the acquirer mainly wants to take over the team, retention packages are often the economic core of the transaction.

Design of a retention bonus

• Eligible persons: key people named individually, often from engineering, product and sales and from the second management tier. With a bonus pool (retention pool), a list regulates the distribution and the reuse of forfeited amounts.
• Amount: usually measured in monthly salaries or as a share of annual base salary. Common orders of magnitude lie between a few monthly salaries and one annual salary, for individual people also above.
• Retention period and tranches: often 12 to 24 months after closing, paid in one sum at the end or in tranches on several qualifying dates.
• Exceptions: In three cases the bonus is usually paid in full or in part despite early departure. These are termination by the employer without a conduct-related reason, death or incapacity to work, and resignation for a good cause defined in the contract.
• Method of payment: Payment is often made in arrears. An advance payment with an obligation to repay is more open to challenge under employment law and more laborious in practice because wage tax and contributions have already been remitted.

German employment law is the benchmark for good cause on the employee's side. Through the right to give instructions (the employer's right of direction under Section 106 of the German Trade Regulation Code, GewO), the employer may specify the content, place and time of work in more detail, to the extent that the employment contract and the law permit. Retention bonus agreements therefore specify which changes, for example a cut in pay or a transfer to a distant location, entitle the employee to leave without forfeiting the bonus.

Retention bonuses in employment law

Pre-formulated retention bonus agreements are reviewed as standard terms and conditions under Sections 305 et seq. of the German Civil Code (BGB) to see whether they place employees at an unreasonable disadvantage. A qualifying-date rule under which only those still employed on a specific day receive the bonus is in principle permissible if the payment rewards loyalty to the company exclusively. If, on the other hand, it is also to remunerate work already performed, case law does not allow it to be made retroactively conditional on later continued service. The retention period must be in reasonable proportion to the amount of the bonus, and the agreement must make clear what is being paid for.

If bonuses are distributed to a group under general principles, the principle of equal treatment under employment law must be observed. If there is a works council, it has a co-determination right in company pay structuring under Section 87(1) No. 10 of the Works Constitution Act (BetrVG). In an asset deal, employment relationships pass to the acquirer under Section 613a BGB with all rights and obligations, including retention bonus agreements already concluded. In a share deal, the company remains the employer.

Financing retention bonuses in the purchase agreement

Who bears the bonuses is a matter of negotiation. The acquirer benefits from people staying after closing, the seller from certainty of closing and from the acquirer not demanding a discount for the risk of departures. Solutions are therefore common in which the acquirer pays the bonuses and the seller co-finances part of them through the purchase price.

• Purchase price adjustment after a closing-date balance sheet (completion accounts): Bonuses borne by the seller are deducted from the purchase price as debt-like items.
• Locked box: The purchase price is fixed on the basis of an earlier balance sheet date. Payments by the target company to employees in connection with the transaction count after that date as impermissible outflows of funds (leakage), unless expressly permitted.
• Holdback: The seller's share is deposited in an escrow account and released with the tranches as they fall due. The contract determines who is entitled to forfeited amounts.

Tax treatment of retention bonuses

Retention bonuses are employment income under Section 19 of the German Income Tax Act (EStG). The employer withholds wage tax on them as other remuneration (sonstiger Bezug), and social security contributions are added up to the pro rata contribution assessment ceilings. For key people with a high base salary these are often already exhausted. The one-fifth rule under Section 34 EStG, a tax relief for lump-sum payments, applies only to remuneration for an activity spanning several years. The period must exceed twelve months and touch at least two calendar years, and the remuneration must in principle be received in one year. A bonus for twelve months does not meet this, and payment in tranches over several years generally does not either. Since 2025 the relief takes effect only through the income tax return, no longer in wage tax withholding.

If the acquirer or a seller pays the bonus directly, this is employment income from a third party. The target company must withhold wage tax under Section 38(1) sentence 3 EStG if it knows of the payment or can recognise it. In the case of affiliated companies this is regularly assumed. For the paying company, the bonuses are personnel expenses and deductible as business expenses.

Worked example: retention pool in the sale of a software company

An acquirer takes over a software company at a purchase price of EUR 40 million for all shares. A retention pool of EUR 1.2 million is agreed for six key people, payable in two equal tranches 12 and 24 months after closing. The sellers bear half through a fixed purchase price deduction. If the employer terminates without a conduct-related reason, the outstanding amount becomes due immediately. If the employee resigns, outstanding tranches lapse in favour of the acquirer.

• Distribution: Person A EUR 300,000, person B EUR 200,000, four further persons EUR 175,000 each; 300,000 plus 200,000 plus 4 × 175,000 = EUR 1,200,000
• Purchase price after deduction of the sellers' share: EUR 40 million minus EUR 600,000 = EUR 39.4 million
• Person A resigns after 18 months: receives the first tranche of EUR 150,000, the second tranche of EUR 150,000 lapses
• Person B is dismissed for operational reasons after ten months: receives EUR 200,000 immediately
• The remaining four persons stay: 4 × EUR 175,000 = EUR 700,000
• Paid in total: 150,000 plus 200,000 plus 700,000 = EUR 1,050,000; net cost to the acquirer: 1,050,000 minus 600,000 = EUR 450,000

In addition there are employer contributions to social security, to the extent the contribution assessment ceilings are not exhausted. The example shows that the rule for forfeited amounts helps determine how the costs are ultimately distributed.

Distinction: retention bonus, transaction bonus, earn-out and non-solicitation

• Transaction bonus: rewards cooperation in the sale and is due at closing, regardless of continued service. It is usually borne by the seller.
• Earn-out: a performance-dependent part of the purchase price for the sellers, not remuneration of employees.
• Non-solicitation of employees (non-solicitation clause): prohibits the seller from poaching employees. It prevents a departure to the seller but creates no incentive to stay.

Common mistakes

• Late approach. If key people are approached only after closing, the most sought-after among them often already have other offers.
• Only the management tier considered. For integration, people on the second tier, who have neither equity nor special arrangements, are often decisive.
• Cost bearing left open. Without a rule in the purchase agreement, the question is renegotiated after signing, then without room for negotiation.
• Invalid qualifying-date or repayment rule. If the bonus also remunerates work already performed or the retention period is too long in relation to the amount, the clause does not withstand review under the law on standard terms and conditions.
• No rule for termination by the employer. If the bonus lapses even on dismissal for operational reasons, it loses its credibility.
• Wage tax on payment by a third party overlooked. If the acquirer pays directly, the target company generally remains obliged to withhold wage tax.

Frequently asked questions

Who pays the retention bonuses?

The purchase agreement regulates this. Often the acquirer pays and the seller contributes through a purchase price deduction or a holdback. Splitting the costs is common but not a fixed rule.

How high are retention bonuses usually?

Usually between a few monthly salaries and one annual salary. The amount depends on the importance of the person to the acquirer and the risk of their departure.

How are retention bonuses taxed?

As employment income with wage tax withholding and social security contributions up to the contribution assessment ceilings. Reduced taxation under Section 34 EStG applies only with retention periods spanning several years and lump-sum payment.

Must a retention bonus be repaid after the employee resigns?

Only if it was paid in advance and a valid repayment clause exists. As a rule, payment is made only on the qualifying date, and anyone who resigns beforehand then loses only the entitlement. Labour courts review repayment clauses strictly to see whether the retention period and the amount of the bonus are in reasonable proportion.

Does the bonus lapse on dismissal for operational reasons?

Only if the agreement provides for it. The opposite is usual: if the employer terminates without a conduct-related reason, the bonus is paid in full or in part.

Do selling founders also receive retention bonuses?

Rarely. Founders who sell their shares are usually bound through parts of the purchase price dependent on staying, a holdback or a reinvestment in the acquirer. Retention bonuses are aimed mainly at people without a significant shareholding.

The Roemer Capital view

In sale and succession mandates, Roemer Capital clarifies early with the management which people are indispensable for customer relationships, product and technology. Especially in a succession where the owner withdraws, the second tier carries the value that the acquirer pays for. For these people, Roemer Capital estimates a retention pool before approaching acquirers.

In the negotiation, Roemer Capital treats retention bonuses as part of the purchase price bridge: amount, cost sharing and the rule for forfeited amounts are fixed before the purchase agreement is drafted. The individual agreements with the employees are drafted by the employment law advisers of the parties involved.