Retaining Key Staff in Mergers and Acquisitions

Updated May 5 2024 - According to the 2024 WTW M&A Retention Study acquiring companies are more inclined to offer retention agreements to C-suite executives or their direct reports than other salaried employees:

• 44% of acquiring companies chose half or more of C-suite executives to sign agreements, compared to
• just 19% who selected over 20% of other salaried staff to sign agreements.

WTW's survey found that most respondents were optimistic their retention strategies would be successful. 59% believed that 80% of senior leaders would stay until the end of the retention period. A similar proportion (55%) thought that over 80% of salaried employees would remain through the retention period.

Isobel Evans, senior director, Work and Rewards, WTW said:

"Engaging key executives and employees is important to a successful merger or acquisition. To that end, retention agreements play a critical role in keeping talent at target companies both during and after the transaction. The challenge is how to structure retention agreements and determine which executives and employees at the acquired companies should be offered them."

86% of acquiring companies use cash retention bonuses for senior leaders and 80% for other salaried staff (80%). 56% make use of restricted stock or other 'full value' equity awards for senior leaders and 40% for other salaried employees. Althiugh there is a siginificant range, a typical retention bonus would be:

• 75% to 100% of base salary for C-suite to CEO
• 50% for other senior leaders
• 30% for salaried employees

Fewer than 10% of agreements are purely performance based. The majority are time-based: 55% for senior leaders and 73% for other salaried staff. A smaller proportion use a mix of time and performance based systems.

Ratan Narayanan, director, M&A Consulting, WTW concluded:

"With indications that M&A activity could gain momentum in 2024, retaining and engaging talented employees will remain a top priority. Acquiring companies have both financial and non-monetary tools at their fingertips to help achieve that goal. The key for many of them is structuring a retention agreement that will be enticing enough to keep those employees at the company."

Role of HR

The role of human resource specialists in M&A is both important and under-valued. According to Adrian Gostick and Chester Elton (The Carrot Principle, 2009:98):

'It is not possible to achieve sustained, long-term success without a strong, positive corporate culture, which is what makes the culture clash that accompanies so many corporate mergers and acquisitions such a dilemma for leaders. In fact, the reason most mergers fail is culture clash and people issues, and yet, most senior leadership teams have little idea how to address this issue. In most cases, during a merger, they either outsource the culture dilemma to consultants or ask human resources to figure it out while the rest of the senior leadership team focuses on perceived "important" pecuniary issues. Is it any wonder that more than two out of three mergers fail to deliver anticipated results?'

But HR's participation may be late, or not at all:

'There are literally hundreds of reasons why the M&A failure rate is so high. But many can be traced to the exclusion of human resource professionals in the pre-deal planning phase and the function's last-minute inclusion after the transaction has closed. It's a classic case of "too little, too late". (Clemente, M.N. and Greenspan, D.S. 1999)'

Clemente and Greenspan (1999) present a description of the typical merger or acquisition.

The focus is on 'making the numbers work' and the sequence begins with an investment banker or equivalent present an apparently suitable candidate company to management. If this makes 'financial sense' the process is launched.

The due diligence phase then begins, involving a detailed examination of financial, legal and regulatory, accounting and tax issues. If these check out, the merger partners 'plunge forward', assuming that all the strategic aspects will somehow fall in line. As the authors point out, the statistics on failure suggest that this is often highly erroneous thinking.

Clearly, the 'ledgers and liability' aspects of the process are extremely important but the all-consuming focus on these matters ignores people issues. Clemente and Greenspan ask:

"If people issues are so important to the success of the deal, how can such little focus be paid to those issues in the strategy development, target company screening and due diligence phases?"

They answer their own question by stating that in most cases the merger partners have not looked closely enough at the 'people component' - strategic variables at the very heart of the deal. Most M&As are driven by apparent cost-cutting synergies and stock prices. But if they were driven by true strategic vision instead, HR professionals would need to be involved from the beginning to assess the people implications that do not feature in balance sheets or income statements. They conclude that:

"...identifying key human assets in a target company and quickly taking steps to prevent them from walking out the door on announcement of the deal is an HR-related imperative every company must take. Yet, historically, HR comes into the M&A process too late to make this vital contribution."

In most cases, the deal-making is more or less complate by the time that HR gets involved. HR specialists are left with the difficult role of:

- developing communication strategies;
- aligning payroll, benefits and compensation systems;
- melding different and possibly incompatible processes and cultures.

But by this time a number of key personnel may have gone and those remaining may be confused or hostile.

Instead, Clemente and Greenspan argue, HR professionals should be involved in the earliest stage of any acquisition involving people. This means that human resource specialists must be familiar with the organization's strategic objectives, and its business and marketing plans. HR professionals must contribute to 'target screening' to identify and evaluate the worth and 'integrate-ability' of the proposed merger partner's human assets. This includes an evaluation of the two cultures and their potential compatibility.

Hanson (2001) observes that early coordination between HR specialists in both companies is ideal but due to the 'sensitive nature of many organization transactions, it is possible that the HR team on the receiving side of the transaction will be notified before the team on the sending side, or vice versa.' Tellingly, as someone writing from experience, she concurs with Clemente and Greenspan, noting that: 'The Deal negotiators and attorneys will usually dictate when the intercompany communications can begin in the HR planning process.'