Stay Packages

There's an article on Gizmodo today about Palm's effort to retain key execs during its sale process. The headline says:

Palm Bribes Key Employees to Stick Around as SVP of Software Jumps Ship

I think that's an unfortunate choice of words. These are not "bribes", these are stay packages. And they are very common, including in the startup/venture capital world.

When the board of a company makes a decision to sell a business, it is best that they share that decision with the senior team, not just the CEO. The senior team is an important part of the business value a buyer will get for most transactions. And the buyer will want to meet with the senior team in due diligence. The stronger the team, the more value the company will fetch in the sale process.

But once you tell your senior team that the business is for sale, some of them, maybe all of them will start getting antsy. They will worry that the buyer will not want them. Or they will worry that the sale process will not succeed and then what will happen. Or they will worry that they'll end up working for a buyer that they don't want to work for. And so once you tell your senior team you are putting the company up for sale, you risk seeing all their resumes on the street.

Enter the "stay package." These are compensation packages that are specifically designed to keep the senior team and all valuable employees in the company through the sale process. They usually include a cash "sale bonus" which is paid when the sale transaction closes and additional stock options that should increase in value upon a sale transaction with vesting provisions that incent the recipient to stay at the buyer for some period of time.

This appears to be exactly what Palm did. The company is required to disclose such packages for its most senior managers because it is a public company. It does that through a filing called an 8K. AllThingsD has the Palm 8K filings posted on their blog if you want to read them.

Not only are stay packages common, they are best practices in sale processes where there is a risk of a talent drain. A Board should seriously consider them whenever a sale process is discussed. They are a critical part of maintaining and ideally enhancing shareholder value which is the Board's fiduciary responsibility. Calling them bribes misrepresents what they are for and why they are important for all stakeholders in the company.

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Comments (Archived):

  1. Alan Warms

    Exactly. And when the conversation happens with the exec team that the business is “up for sale” that is the right conversation to also announce the stay packages in detail to top mgmt

    1. fredwilson

      yes, i should have stated that explicitlygood point Al

  2. Marilyn Byrd

    Words are important. There is too much of this disingenuous word play in all sections of the media today. Your explanation correctly explained the purpose of stay packages and neutralized the snarky Gizmodo article.

    1. fredwilson

      that’s what i have been telling the team at business insider. i love thereporting work they do. it’s really terrific. but then they put asensational headline on it and ruin the whole thing

      1. kidmercury

        true dat on business insider. i’m a fan, but they def roll like youngsters some times

  3. Marilyn Byrd

    Words are important. There is too much of this disingenuous word play in all sections of the media today. Your explanation correctly explained the purpose of stay packages and neutralized the snarky Gizmodo article.

  4. robertavila

    When businesses were predominantly physical capital, land, resources, machinery, stuff one could kick, it was easy to think that a business could exist some how independent of its employees. As physical capital has been replaced by intellectual capital, as marketing has replaced fabrication as the primary component of value add and as innovation has become the engine of growth, it has become all too obvious that the people who run a business are the business.

    1. fredwilson

      great point

    2. ShanaC

      SO when you are hired, and you are the capital, and there is at will employment- what should the relationship be with the company? Who owes who here? This is a very confusing relationship (even if it is a true one)

      1. robertavila

        In larger organizations the confusion only gets worse when HR systems are implemented that are designed primarily with issues of legal liability in mind and result in employee alienation or when accounting systems believe that all employees are interchangeable by pay grades. Circuit City went bankrupt after firing all its highest paid top sales people as a means of reducing operating cost. Indeed confusion is every where…

        1. ShanaC

          *sigh* not the answer I was hoping for…

          1. yougotg

            This is s not confusing at all. The employees now face a potentially higher opportunity cost for staying in an unknown and unpredictable situation. The employers need to ensure they attain maximum value and the employees.. you can call it a bribe, completion bonus, etc.. the name is irrelevant

          2. ShanaC

            So why are there unemployed people and employed people and board members ofvarious institutions all “working” here together, voluntarily, for free?

  5. wshields

    Fred,You are of course completely correct about the normalcy of stay packages. “Bribe” is arguably inflammatory here but with Palm having an uncertain future (unlike a more typical M&A situation) and with at least one senior departure, the characterisation of Palm as a bit of a sinking ship is not completely unfounded.

  6. Fred H Schlegel

    Unfortunately headlines like that undermine the reputation of the publication over time. Indicates a basic misunderstanding of the issue they are addressing. On the sad side, I’m sure it generates a lot of hits.

  7. sfmitch

    Just because something is common doesn’t make it right.From an outsiders point of view, paying people hundreds of thousands of dollars (or it looks like over a million dollars of stock) not to quit seems outrageous.I am glad when this type of information is made public. Even after Fred’s ‘explanation’, bribe seems much more appropriate than stay packages.

    1. Satish Mummareddy

      What if your company is bought and what if the buyer basically decides to eliminate your position? Would you feel the same way when you wait patiently for the sale to happen and then one day they hand you the pink slip?

      1. sfmitch

        I am not sure what your point is.It would be quite reasonable to expect a number of layoffs at Palm depending on the buyer – I would be surprised if all (or very close to all) of those people were sad, disappointed and maybe even angry.

        1. Satish Mummareddy

          Sorry for being vague. Here is my real point:When there is talk of a sale, everyone in the company is insecure about their position and want to protect themselves by finding a new job instead of risking being let go by the buyer. Management has to deal with the fact that some key people might leave because they don’t want to deal with the risks associated with the sale. And the only way to do that is by giving out stay packages to key people without whom the sale wouldn’t happen at the current value.

    2. fredwilson

      What if all these people left? What if the result was a loss of hundreds of millions of value and a failed sale process? You can’t look at the value of these packages in a vacuum. You have to look at it in the context of what value it protects.

      1. sfmitch

        It sounds like the people you hired have no loyalty to you or the company they work for. Is the new buyer getting a bunch of mercenaries that don’t care about Palm?

        1. zackmansfield

          Mercenaries or not, if you’re the Board and feel that keeping key employees provides best possible financial outcome in a sale (potentially preserving multiples of your one-time expense in post sale value) how can you argue that this is not a rational fiduciary decision?The end result may still be in question (whether or not the value is actually preserved), but there is certainly a rational argument for the action.

        2. fredwilson

          that’s not true. they had plenty of loyalty because they are still there.but a sale process makes everyone nervous. this chills them out.

          1. sfmitch

            Seriously? They need hundreds of thousands of dollars so they can ‘chill out’?I didn’t realize that the best and brightest are unable to ride out rough times like everyone else and will only do so when paid hundreds of thousands or millions of dollars. These are some real team players!!

          2. Fernando Gutierrez

            Concepts like team playing and loyalty are great, but the truth is that we are all alone out there and we must take care of ourselves. Same for this guys.They were working under some circumstances and got paid for that. The company owed them nothing and they owed nothing to the company. Now the circumstances change and they negotiate their new payment. Price increases when demand increases. And in their case demand has increased a lot. The company needs them all for a certain amount of time and can’t afford to loose them, so that puts them in a very strong position to negotiate. Pure capitalism.I understand that some people can get pissed off because they too want to be important for the company and have that kind of power. But the sad thing for them is that most times they aren’t. Not everyone has the power to derail a sale.

          3. fredwilson

            i am not sure you understand. there are companies that want to hire themaway from palm. this is what it takes to keep them there

          4. kidmercury

            brutal boss, you def put him in his place. also, i was thinking about your upcoming beef on fat startups. might want to mention ning. they were fat, realized how unhealthy it was, now trying to slim down. anyway, just thought it might help you win the beef.

          5. fredwilson

            hmm. i wasn’t thinking of my debate with ben like UFC. bringing up Ning could take it there 🙂

          6. kidmercury

            Lol IMHO it could very well be the truth he is afraid of, and thus your trump card in the beef.

          7. circumspice

            The software engineers at Palm are probably highly marketable – the perception of most reviewers is that the software stack on the current Palm phones is very good. Palm’s problems seem to be with product marketing/segmentation, lack of carriers and/or Verizon’s execution – none of which is likely to reflect poorly on the software folks.As for “rough times” – investigate the unemployment rates for those with college degrees, and those without. The marketplace for software engineers is somewhat different that for those laid of from the Big 3

        3. Aaron Klein

          You can care about your company deeply, but you HAVE to care about your family more and realize that the company could have a failed sale process or be sold to a company that doesn’t want you.I am intensely loyal to the companies I am involved in, but not to the detriment of my wife and two children. Period.The retention package allows the company to say “relax – we’ll take care of you if you’ll keep focused on doing your job here.” I’ve never been the recipient of one, but I’d give them to an exec team in a NY minute if I was in Palm’s situation.

    3. andyswan

      Why would you be outraged by the terms of a deal that doesn’t involve you? Never understood that mentality.

      1. sfmitch

        No outrage, just don’t agree with the rationalization that the highest paid members of the Palm team deserve to be paid 6 to 7 figures just to stick around – on top of the compensation (which, I’m sure is commensurate with their positions) they are already receiving.Actually, it does seem pretty outrageous. Palm is not doing well. The people at the helm are those responsible for the performance of the company. If the company was doing well, these same people would be heaped with praise. I believe that failing (or not over-performing expectations for a less flammable descriptor) is not a reason to reward people with hundreds of thousands or millions of dollars.Do you really find it strange that people have an opinion about other people’s pay?Movie stars, professional athletes, bankers, CEOs and other famous people’s pay has been the source of interest of the public for as long as I can remember. It seems perfectly normal, not noticing seems to be the unnatural state.

        1. andyswan

          I guess I just default to trusting that the person writing the check has his reasons….he certainly has more information and insight into their value than I could ever have.

  8. Satish Mummareddy

    A person chooses to work for a company under one set of circumstances and when the circumstances change the person can choose to leave. I guess that is what at will employment means. :)In some sense stay packages are recruitment bonuses to come work for a new company in a new set of circumstances.

    1. fredwilson

      Well said

  9. HowieG

    Great explanation of why some of the banks we bailed out had to pay upper management bonuses to stay. Sometimes its a bitter pill, but for the sake of the best outcomes it needs to be done. I think the biggest sign of great leadership is the ability to determine who is critical for the firm to go forward with the best possible outcome. A firm gets sold for one of two reasons, under performing, or over performing. Palm is under performing, some of the key people are responsible, others are the glue that are preventing things from being worse.

    1. sfmitch

      Funny, I see a lot of this as old fashioned cronyism. The company under-performed so let’s pay ourselves. The company over-performed so let’s pay ourselves.It’s PAYDAY!!!

      1. HowieG

        Just to clarify because I agree with your points. If the company over performs and thus is bought at a premium by a bigger firm there is no reason for key people not to be compensated. Especially if they are not equity owners because why should you do the hard work and only the shareholders benefit. Another reason why employees should have board seats and also share in the profits.To your other point for example the bailed out banks. All upper management should of been fired and sued to claw back past overpayment where applicable and the people just below deemed capable but not responsible for the demise should of been kept with such incentives in hopes of salvaging the best case results for all involved. If your the CEO of a major company and it fails big time vs slowly over time usually its out of stupidity (negligence) or greed (fraud). I mean Robert Nardelli had a $190 mil severance deal from Home Depot after he almost ran the company into the ground (lost 20% of stock value in 5 years during the housing boom). Then was hired to run Chrysler into bankruptcy. So I agree with the why pay these chumps who fail.

        1. andyswan

          Then don’t hire them…..why is this anyone’s concern other than the CEO, the company’s management and its shareholders?

          1. sfmitch

            It sounds like you are saying that if you don’t have a direct interest, you shouldn’t have (or at least communicate) an opinion.

          2. andyswan

            When it comes to mutual, voluntary agreements of compensation, that’s exactly what I am saying.The best answer to “why would they pay him that much” is ALWAYS “because they think he creates more value than that”.

          3. HowieG

            First off LOVE THEM DAMN GIANTS! also for Andy Swan this is a complicated topic. It sucks all around for us that aren’t rolling in the cash, and yes I am one of them. Often its the employees who get screwed vs also the tax payers. So banks are a bad example.Usually the discussions on compensation, company sales etc often include just the equity owners and upper management and in my opinion that is wrong. Workers even the janitors have a stake in a business succeeding. hell not just the workers think of vendors for these businesses from big to small.Fred was trying to explain why specific folks get these bonuses. I personally think they should be company wide to varying degrees.

  10. LIAD

    the sum total of my knowledge on these matters can be written on the back of a very small postage stamp. however….whichever way you look at them they are just financial incentives to get key personel to stick with the team, notwithstanding the blatant link-bait aspect of the chosen wording, isn’t this just a case of you say potato, I say, erm, patato?

    1. LIAD

      in retrospect, its pure link-bait

  11. DGentry

    Sometimes the acquiring company wants to retain the senior management to run their new division. The retention bonuses will be structured with short term compensation plus longer term incentives tied to meeting various business goals.Sometimes the acquiring company wants the senior management to stick around just long enough to ease the transition, then go softly into yon goodnight. The package will be structured to payout when the transaction closes, and possibly include gag clauses for a period of time afterwards.It is really interesting when the board isn’t sure which outcome is most likely. Then you get confusion. I suspect that is what is happening with Palm right now.

  12. paramendra

    The Street. Ha! Talking Mafia Wars language, are we?

  13. Dylan Salisbury

    In an acquisition agreement, I’ve heard about acquirers requiring that a certain percentage of key employees accept stay packages, as a contingency for closing the deal. Is that a common practice?

    1. fredwilson

      it certainly happens quite often. i am not sure it is “common” though.

  14. Mihai Badoiu

    When the acquired company is very tiny, the decision to join the new company is made by all. In a talent acquisition, you don’t expect these people to leave — they want to join. In this case, any monetary compensation cannot be described as a bribe.When the company is bigger than a few people, the decision will not be shared by all. There are many reasons why not to like a deal. In such cases, eventually people will find a way to leave, sooner or later. This doesn’t apply only to the management, but to all employees. So then the acquiring company will have to ask what is the chance of each employee leaving and what the loss in value would be if they leave. You’ll want to sweeten the compensation for these people, so that they don’t leave, at least for a while. In a small start-up, with only a few engineers, losing those would be devastating. But in a big company, management is much more important. Palm is a big company. Stay packages for senior management make perfect sense. The acquiring company wants to maximize the expected value of the deal.I guess things only become complicated when there’s bluffing involved, and it’s hard to evaluate somebody’s value added and chances of him leaving.

  15. Facebook User

    Fred, in a startup environment with small teams, how do you handle those who aren’t selected as “key employees”? There will be people who contribute to the effort in meaningful ways but aren’t as essential to the value creation. The sales process is distracting enough, but it would be harder knowing that management considered you expendable.

    1. fredwilson

      first of all, i believe everyone in the company, including theadministrative employees, should have some equity. so ideally everyone willbe getting a payday in a sale.but you raise a good point. when you craft special packages for certainpeople, everyone else wonders why not them way to do this is to limit the packages to the senior team. butsometimes you also have to do this for key developers, sales people, etc. and then it gets very tricky.

      1. Dylan Salisbury

        From start-up acquisitions I’ve seen, regular employees consider leaving and worry about two things:1. Will the the most influential managers and executives stay (because they will keep people from being jerked around by the new company, and often are seen as the defenders of rank-and-file jobs).2. Will there be a talent exodus led by the brightest engineers.Stay packages address both issues. (1) with money, and (2) because if the executive are any good they are meeting the concerns of the star engineers who can’t just be persuaded with money anyway.

      2. Satish Mummareddy

        You kinda are in a similar situation when you have to relocate a team. You have to make the tough choice of deciding who you can’t live without and do what ever it takes to convince them to move (if possible), then you ask others you want to retain to move with some incentive, and then you are willing to let go of some. There is no easy way to do it. It is case by case and a gut wrenching process and you manage the highly inflammable situation. 🙂 If you handle it with respect and are considerate to the feeling of people, you probably get over safely to the other side and rebuild with the help of the people who you worked hard to keep.Any other radical changes such as downsizing to deal with the economy or change in strategic direction or mistakes in expanding the team too early pose the same kind of issues.

      3. Aaron Klein

        I think it can be done, even though it’s tricky. The one time I’ve had that situation, we had quick 10-minute 1:1s with each team member and quietly informed them of the plan and offered them their retention package. Each package was different based on that person’s criticality to the situation.After spending the morning doing that with everyone, we held an all-hands meeting and announced that everyone had agreed to a retention package and we’re all going to see this process through together.It worked. And while no one came to me upset about the differences between the packages, I was fully prepared to defend any differences between them based on logical distinctions between roles and project involvement (rather than “value”).

        1. Dave Pinsen

          “Project involvement” — very tactful.

        2. fredwilson

          great story. that’s how its done.

      4. ShanaC

        That’s awesome, yet you are right, very tricky. I still think there needs to be development of “alternative methods of loyalty”

  16. Todd Krieger

    Re. your comment about Henry and Headlines – I couldn’t agree more. Every time I take a wee RSS holiday I find myself thinking that SAI or TBI is becoming non-essential due to link-bait pandering. Rise above. Rise above.

  17. andyswan

    I call them “golden handcuffs”. They get a little itchy in the 2nd year.

  18. Mark Essel

    The perception becomes warped about stay packages in shrinking or failing businesses. The common Joe might make 40k a year busting his hump. Then they read an article about an exec or top manager of a sinking ship corporation getting a million dollar bonus to stay and feel a level of frustration with the system of value we share.Personally, I don’t care if currencies flood into fools bank accounts or are well earned by the wise. I care about one thing, and that’s real value to me.Sure if enough undeserving folks get massive paydays it undermines the social value of currency, but who am I to judge? We’re all free to position ourselves for maximum profit and wealth growth or to sink into pits of poverty. It’s capitalism baby 😉

  19. Tariq

    A few weeks ago, I had the opportunity to advise on a couple deals and one of the crucial elements rested on putting together stay packages in order to reduce deal risk. One of the businesses was particularly dependent on its team members – to the point where if one left, you would readily see a decline in financial results. So there, you really wanted to make sure the stay package would be adequate enough to keep them around.It is really a tricky juggling act, because you don’t want to pay too much but at the same time want to incentivize team members to stick around. I think if possible, granting some form of equity or performance-based earn outs can work really well.Unfortunately, there is no one size fits all approach here, but it really should be a careful consideration whenever you begin looking at doing a deal.

  20. ShanaC

    I have one very simple question: How do we know that they’re not overpaying them to stay?a friend of mine posted this link recently:…It it points that the open source movement works because of other, friendlier motivations. Paying people too much de-incentivizes those same friendly motivations of “group-love.”And while I recognize that Palm is definitely gone down the rabbit’s hole, why does the incentive have to be money, especially if the people are the capital- shouldn’t other ways of developing loyalty be thoroughly explored? Are the golden handcuff’s honestly the best way of getting a team to work together?

  21. desmondpieri

    When a potential sale of the company is announced, the trick is to move fast in doing “damage control” via these “retention packages.” Else, the good people will be well on their ways to finding another job.

  22. Glenn Gutierrez

    Good take. Always enjoy seeing multiple sides of these contentions.

  23. benortega

    “Retention Package”…whatever.For key employees…sure. Those at the top only.Everyone gets equity…ahem. 500K for you and 5K for you. That’s fair.For Palm, and many other companies, they are paying “last ditch” effort money to people that brought them to where they are. I know FAIL is sort of good these days but to bring a company to its knees and then get paid extra for doing just that…that makes no sense.I’d rather say to my board, “we all suck and we don’t deserve anything more so let’s get on the sale train and end everyone’s misery already”. Shareholder interest…if they had any interest they would have been doing their jobs.I respect 99% of your posts Fred, but this one doesn’t go up on my “you should see what Fred posted” list.

  24. Keenan

    Nice post Fred,Employees are the business, having started two small companies, nothing became more evident; people are everything.The last thing a company wants during a sales process is turnover and instability.

  25. LIAD


  26. wshields

    This has been discussed a lot. My personal opinion is the only likely buyer is HTC. Opinion seems to be Palm doesn’t have a strong patent portfolio (which is always a useful purchase). I don’t think it’s an exaggeration to say Palm is in dire straits.

  27. Matt A. Myers

    How do you think the situation would have unfolded if it went the other way? If CFO supported you, etc..

  28. Aaron Klein

    Sure wish BlackBerry would step up to the plate and buy Palm. Kill the hardware, take the OS and build BlackBerry e-mail and messenger onto it. Then put that package into a Bold 9700 with both the BlackBerry keyboard, a touchscreen and 8GB of storage and you have a killer phone.

  29. fredwilson

    what a dreamwebos would be killer on blackberry hardware

  30. wshields

    That’s an interesting idea. I still use a Blackberry. I can’t get past two things on the iphone: 1. Blackberry has (had) better Gmail integration, namely a better push model (iphone improved on this in the last 6 or so months I believe) but the real kicker is 2. a real keyboard. I hate virtual keyboards. It’s one reason the Droid was interesting (but ultimately immature).

  31. Aaron Klein

    I know. And all they have to do is pick up the phone and write a check.

  32. Matt A. Myers

    Maybe I’ll point them to this thread; I have a friend who does consulting for RIM. 🙂

  33. ShanaC

    it’s a big check, one that shareholders really should approve of.

  34. Aaron Klein

    My investors signed off on the one I was involved in, but that’s pretty impractical for a public company. The talent is long gone by then.

  35. Aaron Klein

    Shoot, I have to apologize. I misunderstood which comment thread I was replying to! Of course, you’re right…shareholders should sign off on THAT large of a check. 🙂 Thought you were talking about retention packages at Palm.

  36. Aaron Klein

    I hope you do! And if they need a beta tester after the deal closes, I’m game. 🙂

  37. ShanaC

    Right, the thing is- it’s a big check.

  38. Aaron Klein

    Respectfully disagree. That’s what boards have compensation committees for.

  39. ShanaC

    s’ok (though I’m feeling dead…)