Study Validates Importance of Retaining Key Talent During and After M&As

Creating the ideal employee retention strategy remains elusive for companies that have recently completed either a merger or acquisition and exercised employee retention agreements, according to a new survey by global professional services company Towers Watson.

More than two-thirds (68%) of respondents to the 2014 Global M&A Retention Study indicated they retained a high percentage (over 80%) of employees who signed a retention agreement, over the course of the full retention period.

However, less than half (43%) said they retained that same percentage one year after the period expired. The primary factor for employees who left before the end of the retention period centered on their concern with the changing organizational culture (48%).

“Clearly, companies should pay closer attention to the dynamics that will keep their employees for the long term,” said Mary Cianni, Towers Watson’s global leader of M&A services.

“Companies involved in transactions should strive to understand the cultural implications of the deal, build employee engagement and work individually with key employees as early in the deal process as possible. These actions increase the likelihood that essential employees stay on board beyond the retention agreement period to ensure the success of the merger.”

Importance of retaining key talent during M&As

The survey results further validated the importance of retaining key talent during M&As. Most participants acknowledged their company’s transaction achieved its strategic objectives, but the gulf between high-retention and low-retention companies on attaining those objectives is significant.

Nearly nine in 10 (88%) high-retention companies (defined as having retention rates over 60% for the full term of the retention agreement) said their transactions successfully met their strategic objectives.

However, only two-thirds (67%) of low-retention companies (those with retention rates of 40% or less) expressed the same sentiments.

“This disparity between high- and low-retention companies around meeting the objectives of the transaction underscores the critical impact that talent retention can have on deal success. High-retention companies behave differently. They excel at positioning talent as a key value driver for achieving the business goals of the deal,” said Cianni.

Participants stressed the importance of identifying candidates who are most vital to the deal and eligible for retention agreements.

According to the results, high-retention companies were significantly more likely to identify and target these individuals — those who can affect the success of the transaction — for retention agreements when compared to low-retention companies (73% vs. 33%).

Respondents ranked those having key skills that could affect the success of the transaction (63%), high-potential status (45%) and job function (44%) as the leading factors in determining eligibility for retention agreements.

“Keeping the right people is critical, and this starts with properly identifying the talent, roles and functions most critical to the success of the transaction,” said Cianni. “It’s clearly more efficient to take the steps necessary to keep key talent in place than it is to find, hire and integrate new employees during or just after an acquisition.”

Sixty-two percent of the respondents conveyed that engaging with the target company’s senior leadership was the most useful source in drawing information about which individuals should sign retention agreements. Here again, high-retention companies differentiated themselves by a greater margin than low-retention companies (66% vs. 27%).

High-retention companies also used management discretion to a greater degree in the agreement selection process than low-retention companies (32% vs. 8%).

Participation of senior leadership

Getting senior leadership on board to sign retention agreements as early as possible can help keep executives engaged throughout the entire process.

Nearly one-third (32%) disclosed that they asked senior leadership to sign retention agreements before the transaction’s initial signing, while 22% did so at the initial signing.

“Retention should start with executives,” said Scott Oberstaedt, executive compensation senior consultant, Towers Watson. “It’s critical for them to be completely on board and aligned with the goals and strategies of the acquisition. Their behavior is essential to the retention and engagement of employees. They can’t be distracted by concerns about their future employment, so it’s helpful to provide them with a clear personal stake in the success of the new company.”

One of the more interesting findings was that, in general, the higher the deal value, the lower the relative size of the retention budget.

When considering retention budgets, most participants said their companies aimed for a sweet spot that encouraged retention by an optimal number of key employees, not the maximum number of employees, so individual rewards would be most meaningful to those retained without overspending in the aggregate.

Not surprisingly, cash bonuses were the most common type of financial award used in retention agreements. But somewhat strikingly, high-retention companies used cash bonuses in retention agreements, exclusively or with other forms of compensation, far more often (80% for senior leadership, 89% for other employees) than low-retention firms (50% and 55%, respectively).

Towers Watson conducted a similar retention survey two years ago and found that only 1% said their companies offered retention agreements based purely on performance, whereas today that number stands at 14% for senior leadership and 16% for other employees.

The new survey found that companies typically use retention agreements that feature a combination of pay-to-stay and pay-to-perform metrics for senior leaders, while utilizing purely time-based agreements for close to half (48%) of their other employees.

“Overusing performance-based metrics can backfire,” said Oberstaedt. “Employees who are measured on unattainable metrics or those beyond their control are more likely to seek employment elsewhere. Or they may stay with the company but feel less engaged than they might have been had the performance measures been easier to meet when they were established.”