In this article, Swati Garg, an Advocate and an LL.M. graduate from Gujarat National Law University discusses How to Draft a Golden Handcuff Provision

Golden handcuff

In today’s world, a company wants to retain good employees. Accordingly, the company gives financial incentives to key employees to avoid them from changing jobs. These incentives are known as ‘golden’ handcuffs.

Examples of these incentives can be release of additional bonuses for people who stay beyond a few years, employee stock options that will vest in employees only after certain years, deferred salary hikes, or other forms of compensation that fall due after staying for a certain period. These amounts are forfeited if the employee quits before.

Apart from these positive incentives, golden handcuffs can be in the form of negative/prohibitive incentives. For example, a non-disclosure clause to prevent an employee from disclosing sensitive information, or a non-compete clause to prevent an employee from working with company’s competition for some period, thus discouraging the employee to leave the company. These have already been discussed separately so we will discuss financial incentives here which serve as handcuffs.  

The purpose of these golden handcuffs is not limited to rewarding good employees but also to restrict them from shifting to other competitive companies even if they offer better packages. A company spends significant resources to find, hire and train a good employee and it would be a waste if the employee leaves the company after a short duration only.

Sample of different types of golden handcuff provisions

Version 1: Non-compete clause (Employer: Bank)

1. 1. Employee agrees that for a period of two years after the earlier to occur of (i) the end of the Primary Term of this Agreement or (ii) the termination of Employee’s employment with Employer, Employee shall not, directly or indirectly, individually or as an employee, consultant, partner, officer, director or shareholder or in any other capacity whatsoever:
      • solicit the banking business of any customers of the Bank;
      • acquire, charter, operate or enter into any franchise or other management agreement with any financial institution,
      • serve as an officer, director, employee, agent or consultant to any financial institution, or 
      • establish or operate a branch or other office of a financial institution,
      • knowingly recruit, hire, assist others in recruiting or hiring, discuss employment with, or refer others concerning employment, any person who is, or within the preceding twelve (12) months was, an employee of the Bank; provided, however, that nothing in this Section 1(a)(iii) shall apply to employment other than with a financial institution.

As consideration for Employee’s covenant not to compete herein, Employer shall pay to Employee an annual payment equal to the sum of [amount] plus the average annual bonus received by Employee during the term of this Agreement (the “Non Compete Payment”). Such payments shall be made in equal semi-monthly instalments after termination of employment.

2. If any court of competent jurisdiction should determine that any term or terms of non compete covenants are too broad in terms of time, geographic area, lines of commerce or otherwise, such court shall modify and revise any such term or terms so that they comply with applicable law.

How to Draft Golden Parachute and Golden Handshake Provision 

Version 2: Financial Incentives

1. As compensation for services rendered under this Agreement, Employee shall be entitled to receive from the Bank a salary equivalent to [ amount ] per year (which annual amount shall be pro-rated for any partial year), payable in equal semi-monthly/monthly installments of [amount], payable on such days as the Bank normally pays its employees, prorated for any partial employment period.
2. Upon execution of this Agreement, Employer shall grant to Employee, non qualified stock options to purchase up to [number] shares of Employer’s voting common stock at an exercise price equal to [amount] per share. One-third of such options shall vest on each of the first, second and third anniversaries of date of grant and shall be exercisable over a period of [years] from date of grant; provided, however, that if Employee’s service with the Bank and/or Employer under this Agreement is terminated for any reason before the completion of [years], all of such options shall not vest in the employee.
3. During the Term of this Agreement, Employer shall provide or cause the Bank to provide to Employee, his spouse and dependants insurance coverage providing benefits for sickness and hospitalization in such amounts and on such terms as generally available to all employees or officers of the Bank as approved from time to time. Further, Employer shall provide or cause the Bank to provide to Employee insurance coverage benefits for disability in such amount and on such terms as are generally available to other similarly situated or comparable officers of the Bank and Employer.
4. During the Term of this Agreement, Employee shall receive such additional fringe benefits and bonuses as allowed under the Bank’s stated policies as may be determined from time to time in the sole discretion of the Employer; provided, however, Employee shall be entitled to participate, on the same basis as other similarly situated senior officers of Employer and its affiliates, in all incentive and benefit programs or arrangements made available by Employer and its affiliates to such senior officers.

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Points to remember while drafting golden handcuff provision

1. Employer should clearly lay down the incentives which an employee will get. Employer should not only focus on to make the employee happy but also should include non-compete and non-disclosure clauses to protect himself.
2. Employer should try to provide lucrative incentives after a long interval of time.
3. Employer should also bear in the mind the cost to company while giving such incentives.

For example: Providing a stock option is risky than providing insurance policy. Suppose A company X is giving its employee stock options which he can exercise after 5 years and in other case the same company is giving its employee an insurance option of the same value. Now in the first scenario, employee can leave the company after 5 years and the company will lose not only its employee but also its stocks. However, in the second scenario, if the employee wants to shift to company Y, that company Y has to also buy out the insurance policy which can be discouraging for them.