Willis Towers Watson recently completed its 2017 Global M&A Retention Study, the third overall and first since 2014. This survey of retention compensation plans and strategies for acquiring companies is based on data from 244 respondents in 24 headquarters countries.
Here are some of the key findings:
- Acquirers continue to use retention awards as a way to retain leaders and other key talent. Our survey found that 79% of acquirers using retention plans retained at least 80% of targeted employees for the full desired retention period. These plans tend to be targeted toward acquired company leaders and those whose skills are critical to the transaction. In addition, the most effective source used to identify the right participants remains the target company’s leaders.
- There has been a modest increase in individual target values as a percentage of salary when compared to our 2014 study. For senior executives (i.e., top executive and direct reports), the median retention award was 55% of salary, vs. 48% in 2014. For other employees, the median retention award was 31% of salary, vs. 27% in 2014.
- The median overall size of the retention budget pool is 1% of the purchase price. This percentage is a decrease from previous findings, and likely reflects an increase in the overall values that companies have paid for acquisitions, and not a decrease in the total dollars spent on retention awards.
- Acquirers continue to rely on cash retention bonuses as the primary award vehicle. In total, over three-fourths of acquirers use cash bonuses for both senior leadership and other participants.
- Vesting schedules for senior executives tend to be longer than for other employees. The median full vesting for senior executives occurs at 18 months, vs. 12 months for other employees.
When we review the data specific to those companies that reported achieving high retention rates (defined for this purpose as 80% or greater retention) vs. those that did not, we see several key plan design differences:
- Specialized selection. High-retention firms are more likely to target employees below the executive level with key skills than low-retention firms (61% vs. 47%), while the low-retention firms were more likely to give awards to those identified as high potential (33% vs. 23%) or high performance (30% vs. 21%).
- Early communication. At high-retention acquirers, 28% of senior leaders were asked to sign before the initial signing vs. only 11% for low-retention acquirers.
- Standardized awards. High-retention companies were less likely to take values earned at sale (for example, shares owned or accelerated stock awards) into account when determining retention values.
- Delayed vesting. High-retention acquirers are more likely to pay out in full only at the conclusion of the retention period (53% senior leadership/61% other employees), while low-retention acquirers used interim vesting/payment terms (35% senior leadership/39% other employees).
One important note from the study’s findings is that higher target retention award values are not aligned with higher retention rates. In fact, the median retention award value among the high-retention companies was 50% of salary, while the median value among the lower-retention companies was 60%.
Retention success goes beyond the bonus
The most common reason that employees at acquired companies leave their new employers is discomfort with the new and changing corporate culture. Therefore, it is critical to focus on both workplace culture and change management as part of a multi-faceted approach to retention. A majority of companies in our study used personal outreach by managers and leaders during the transition in order to improve retention and employee buy-in. Other common strategies not related to compensation include enhanced career development opportunities, invitations to participate in integration-related task forces, and both promotions and lateral moves.
Our study has found that retention incentives can provide acquiring companies with extended time to integrate new employees, but it does not guarantee loyalty or long-term success. Therefore, it is imperative for acquirers to use the retention period to engage with these employees, build extensive communication channels and evaluate newly-acquired talent.
To learn more, download the study.
Mary Cianni leads our Mergers & Acquisitions practice globally for Willis Towers Watson. Scott Oberstaedt is a director in the executive compensation business at Willis Towers Watson. Email firstname.lastname@example.org, Scott.Oberstaedt@willistowerswatson or email@example.com.