Employee Bonus Agreements – Behind the Legal Jargon

Chances are, if you had never heard of an Employee Bonus Agreement before the beginning of 2009, you have now. The infamous bonus agreements dished out by AIG have been front page news, but what exactly is an employee bonus agreement and why are they sometimes so controversial?

The root of that explanation lies in the fact that bonus agreements are created, issued and signed at the time an employee is hired. In the case of AIG, a government bailout like the one that occurred was not foreseen so language specifically related to an outcome such as that was never written into the contract. AIG had their legal hands tied and the bonuses were, for the most part, still paid, although some were later returned by good-hearted employees.

In general, an employee bonus agreement is a straight forward and very brief document. They begin by stating the name of the company and the name of the individual employee (or group of employees) that the document covers. The first proper section of the agreement spells out what the bonuses are and under what circumstance they can be earned. This section can either be quite short, if the bonuses are straight forward and automatic, or it can be quite lengthy if there are several strings attached.

Some bonus contracts than have sections that spell out how the bonuses are paid (cash, stock, other assets) and when they are paid. One section that every agreement like this has is a part on termination. In some cases, termination prior to the completion of the requirements to receive a bonus can result in a complete forfeit of any bonus monies, but other contracts are pro-rated and you receive a percentage of your bonus based on what percentage of your goal you obtained before your dismissal. There is also a separate section stating how the company in question is obligated to notify you of your termination.

The final part of the contract often spells out what sort of tax obligation the employee would have for their bonuses, what kind of severance package a terminated employee would receive and if amendments to the initial agreement are allowed or not. Overall, an agreement such as this is very straight forward and quite simple to write, read and follow. However, as was seen in the recent AIG bailout, these simple documents can make a huge impact on the way a company does business.