Retaining Critical Talent Key to M&A Success

For organisations engaged in mergers and acquisitions, retaining critical talent is top of mind since it often directly impacts the overall success of the deal.


According to Mercer’s Survey of M&A Retention and Transaction Programs, when companies adopt a retention program, executives critical to long-term success are eligible for retention incentives in 70% of the programs, compared to employees for the short-term success of the integration who are eligible in just 53% of the programs.


Moreover, the use of retention incentives is even higher for organizations conducting cross-border transactions – 80% for executives critical to long-term success and 60% for employees for the short-term success of the integration.


Mercer’s survey examined the extent to which two main tools for retaining critical talent -- retention incentives and transaction bonuses – are used. According to the findings, retention incentives, which are designed to keep employees through or after deal closing, are widely accepted means of talent retention while transaction bonuses, which reward employees for the work undertaken during a transaction, are used less frequently.


“Organisations must first review their acquisition strategy to determine if a retention incentive plan is needed to protect against critical employee flight risk. If so, key design considerations include which employees should participate, how much they should be awarded, payout timing and structure, performance conditions, and finally, overall plan cost,” says Chuck Moritt, Senior Partner in Mercer’s M&A consulting business.


Retention Programs
Retention programs focus on retaining executive and senior management critical to the integration process.


According to survey findings, almost two-thirds (62%) of deals completed by participating organizations over the past three years used retention programs.


Typically organisations determine whether a retention program is necessary early in the due diligence process, then determine eligibility as the close of the deal approaches.


The type of retention incentives used depends primarily on the type of deal. For example, organisations are more likely to provide retention incentives when involved in an acquisition than a divestiture.


More than half (57%) of organisations reported that executives critical to long-term success are always eligible for retention incentives. However, for a typical divestiture, only 44% reported that these executives are always eligible.


Retention incentives also vary from country to country. According to the survey findings, US and Canadian organisations provide larger retention incentives than organisations in Europe and Asia Pacific when viewed as a percentage of base pay.


“There is no one-size-fits-all retention incentive program,” says Gregg Passin, Partner and Mercer's US Leader for Executive Rewards consulting. “While many of the plans share certain characteristics, retention plan design varies based on deal size and complexity, type of deal, industry sector and whether the transaction is cross-border. When organisations develop their strategic retention bonus program, it’s critical to look beyond market benchmarks to examine their own unique needs.”


Transaction Bonus Programs
Transaction bonuses are typically paid to CEOs, executives and deal team members. Forty-two percent of executives other than the CEO are most often targeted for a transaction bonus.


According to Mercer’s survey, organisations in one-third (33%) of deals provide transaction bonuses to deal team members, while slightly fewer (31%) provide them to the CEO. Other employees were less likely to receive a transaction bonus.


Additionally, the survey found that CEOs and other executives in European and Asia Pacific organisations are more likely to receive transaction bonuses than their counterparts in the US and Canada. Also, European organisations offer deal team members transaction bonuses, while none of the organisations surveyed in Asia Pacific provide transaction bonuses to deal team members.


While transaction bonuses as a percentage of base salary for deal team members are fairly consistent among companies in the US and Europe, companies in Europe provide much smaller transaction bonuses to CEOs and other executives than companies in the US.


Transaction bonuses are typically paid only if the deal closes.