Biotechnology giant Genentech said it may spend $371 million for a bonus plan to keep its workforce during the $43.7-billion takeover bid by its largest shareholder Roche Holding AG, which has held a 55.9-per cent stake since 1990.

The size of the retention plan, assuming all employees remain to receive their full payment, is in lieu of the value of the stock options which were expected to be granted in the company's 2008 option grant programme.

The retention and severance plan adopted by a special board committee for the company's 10,700 employees, would make CEO Arthur Levinson eligible for $8.74 million on 30 June  2009, based on a comprehensive market analysis and comparison, Genentech said in a regulatory filing along with details of severance packages for employees who would lose their jobs after an acquisition. 

Genentech said the bonus programme would cost it about 22 cents a share in earnings, spread over three years. Had the 2008 stock option grant programme been implemented instead, the estimated GAAP EPS impact would have been approximately 23 cents per share, spread over six years from 2008-2013.

The retention bonuses will be paid whether or not the merger goes through, and will cost Genentech 22 cents a share from 2008 to 2010 if fully paid, under the plan, meant to provide continuity and stability by addressing employee concerns created by the Roche proposal.

Genetech, with its strong an entrepreneurial culture and scientific talent pool, is reputed to be the best drug developer in the biotechnology sector. It has provided Roche with its best-selling Rituxan, Avastin and Herceptin cancer therapies and the deal will create the seventh-largest drug firm by market share in the US, with more than $15 billion in annual revenues.

Roche is said to be concerned about losing Genetech employees, despite the compay's bonus programme.

A special committe comprising outside directors, appointed by Genentech to evaluate the offer, has already turned down Roche's $89-per share offer, which it found low and analysts nowexpect Roche to raise its acquisition price to any where between $110 and $125 per share.

Ironically for Roche, a higher offer would only make Genentech employees much richer, especially if the unvested stock options are allowed to vest immediately, and they may opt not to have to ever work again or become entrepreneurs.

In its 8-K filing before the Securities and Exchange Commission, on Thursday, 21 August 2008, Genentech disclsed that its retention bonus under the retention plans was based on employees' job levels, and will be paid as follows:

• If a merger of the company with Roche or an affiliate of Roche has not occurred on or before June 30, 2009, then 100% of the retention bonus will be paid on June 30, 2009, subject to the employee remaining employee by the company on that date.
• If a merger of the company with Roche or an affiliate of Roche has occurred on or before June 30, 2009, then:
  
• If vesting is not accelerated with respect to 100 per cent of the company's then outstanding unvested stock options in connection with the merger, 100 per cent of the retention bonus will be paid on the completion of the merger, subject to the employee remaining employed by the Company on the date the merger is completed, or 
• If vesting is accelerated with respect to 100 per cent of the company's the then outstanding unvested stock options in connection with the merger, then 50 per cent of the retention bonus will be paid on the completion of the merger, and the remaining 50 per cent will be paid on the first anniversary of the completion of the merger, subject to the employee remaining employed by the Company on those dates.

In addition, in the event of a merger of the company with Roche or an affiliate of Roche, any employee who is terminated without ''cause'' or resigns with ''good reason'' (within three months of the initial existence of the condition or event that constitutes ''good reason'') will be entitled to receive any remaining unpaid retention bonus upon such termination. However, under the Executive Retention Plan, such payment would be subject to Section 409A of the Internal Revenue Code, such payment will be de delayed until the first payroll date that occurs following six months and one day following termination.