Mergers and acquisitions (M&A) take a number of forms but most give rise to a significant number of reward issues that need to be identified and managed to enhance chances of deal success. Retaining and incentivizing the right leadership team to deliver on a new business agenda is one of the critical areas.
Our Willis Towers Watson 2017 M&A Retention Study, which featured responses from 244 acquiring employers in 24 countries, showed high retention companies most often:
- Identify employees eligible for retention awards earlier during the deal cycle
- Focus on cash bonuses rather than other types of awards
- Delay payment until the end of the retention award vesting period rather than using interim vesting schedules
The need to focus on talent when a merger is contemplated or in its early stages is especially important in Asia Pacific where most companies are already feeling pressure from a job market distinguished by significant competition to attract and retain the right talent for critical roles.
How should companies get started?
As a base, companies should realize the merger process is a very uncertain time for employees who will need reassurance during the process and beyond.
The human element must be complemented by an understanding of geographic differences, if any, and how they will impact the transaction. For instance, our M&A survey data and project experience indicate that in Asia Pacific, reporting lines, and in particular, the role of the immediate supervisor, have greater impact on employees’ experience at work, and changes to these need to be handled with additional care. Also, rewards practices in emerging markets are still evolving and not always consistent or comparable across companies. Consequently, greater differences or gaps in legacy practices can appear and create additional integration challenges.
Additionally, if a merger occurs outside of Asia Pacific, the acquirer may be challenged to manage cultural differences and appropriately adapt its governance model to run a global business. Consequently, acquirers may be tempted to let the acquired organization remain separate and operate “as is”. This hands off approach could delay the creation of a seamless, global, talent and rewards program that identifies and obtains the skills needed for the integrated company and creates a deep bench of talent that will serve the organization for future years.
Once this baseline is established, we’ve identified five important topics that a company should consider when first assessing the rewards program for the new company:
- Will the existing rewards programs terminate and be replaced, or can they continue? If they continue, will they still be fit for purpose?
- How will key employees be retained up to and beyond the M&A transaction, particularly if they realise significant wealth as part of the merger, and are critical to future value creation?
- Will transitional or milestone arrangements help support post-deal integration objectives?
- What represents market competitive design and a quantum given the organisation’s new post-deal size and market reach?
- What should the new compensation structure/philosophy look like? Is a stand-alone or integrated approach required? What will best support post-deal business objectives?
A well-conceived review of these essential questions can then be augmented by an understanding of the country/region agnostic opportunities and risks.
An opportunity for change...
M&A presents an opportunity to rethink the new entity’s rewards program so that it reflects the principles of total rewards optimization that best balances the needs of the new organization with its most valuable asset — its employees. In the process, it optimizes any new reward spend. This carefully calibrated balance can energize the workforce so that the business objectives of the new organization are met and market competitiveness in the new post-deal environment ensured.
The new rewards program can either select the “best of both” legacy sets of reward toolkits, or create an entirely new set of rewards and realize a more effective, combined rewards program. It also affords a wealth creation opportunity for equity incentive plan participants whose awards vest early due to change of control event.
...But with associated risks
In spite of some very advantageous opportunities, there is an increased flight risk associated with M&A that could conceivably upend the objectives that prompted the transaction. For instance insufficient or lack of appropriate due diligence around reward elements can leave the new management surprised by the financial impacts caused by the change in control and/or severance clauses. Such a situation could surface in the U.S., for example, when transactions could trigger Section 280G of the U.S. tax code, which prescribes tax treatment for golden parachute payments.
Other risks reflect the need to adapt to the new company’s post-merger vision. For example, over-reliance on legacy arrangements may not drive post-deal behaviours, and the design of new post-deal arrangements without awareness of and/or linkage to overall “deal logic” may result in inadequate support the key post-deal objectives.
Additionally, an over-reliance on retention and deal-related rewards granted to too many employees, rather than to a select group of talent critical to the deal and/or ongoing business success, can dilute the retention award budget. Such awards, however well-structured, should only be a short-term tactical response, until a long-term pay policy that engages employees can be implemented.
Finally, merging companies need to avoid the risk associated with waiting too long to start addressing executive transition and rewards issues. In some instances this occurs after the deal is signed.
Path to success
In our experience, as you head towards an M&A transaction, you should:
- Carry out HR due diligence activities to assess any unwanted one-off financial impacts from HR programs and inform follow-up reward/talent related actions
- Concentrate retention and deal-related incentive awards only on those who are genuinely critical to the new company’s vision – and identify them early in the deal cycle
- Communicate clearly around outstanding long-term incentives and equity awards – reach an agreement early on regarding the treatment of awards that will vest and plan supplementary arrangements
- Be ready to communicate future pay and broader rewards policy quickly. Ensure the deal doesn’t delay your planning for forward looking pay policy.
Massimo Borghello is a director of Global Services and Solutions, Asia and Australasia, and is based in Willis Towers Watson’s Hong Kong office. Email firstname.lastname@example.org or email@example.com.