Drafting US short- and long-term incentive and bonus agreements
Drafting US short- and long-term incentive and bonus agreements

The following Share Incentives guidance note provides comprehensive and up to date legal information covering:

  • Drafting US short- and long-term incentive and bonus agreements
  • Sign-on bonuses and sign-on equity awards
  • Short-term cash incentives
  • Key legal issues with bonuses requiring employment through the payment date
  • Long-term cash incentives

Employers frequently grant equity awards and cash bonuses to incentivise key employees. The first part of this Practice Note focuses on key considerations with awards that are intended to encourage a key employee to accept a position with the employer (ie, a sign-on bonus or sign-on equity awards).

The second part of this Practice Note addresses short- and long-term cash incentives to influence executives to remain with the employer and/or focus on specified performance goals.

This Practice Note is divided into the following sections:

  1. Sign-on bonuses and sign-on equity awards

  2. Short-term cash incentives

  3. Long-term cash incentives

For information on equity incentives to encourage key employees to remain with the company, see Practice Notes: Understanding types and taxation of US equity compensation, Designing a US public company equity compensation plan, and Drafting a US private company equity compensation plan.

Sign-on bonuses and sign-on equity awards

Sign-on bonuses

Sign-on bonuses most commonly occur when an employee would forfeit equity, deferred compensation, or other amounts by resigning from their current employer. In other cases, they simply provide an added incentive for an employee to change jobs. Employers typically pay out these bonuses in full upon hire.

Other than determining the amount of the sign-on bonus, the most important consideration in drafting sign-on bonus agreements is any repayment obligation. An employer does not want to pay a large