How to Buy a Company and Keep Its Top Talent

Retention agreements are no magic bullet, but they can improve the chances that an acquisition will achieve its objectives, Towers Watson finds.
David McCannOctober 10, 2014
How to Buy a Company and Keep Its Top Talent

It’s common knowledge that failure to retain key employees can spell doom for an M&A transaction. Still, there’s a gaping chasm between the type of retention efforts practiced at companies that are good at retention during and following deals, versus those that aren’t.

SONY DSCTowers Watson asked 248 companies about the success of retention agreements, one of the most frequently used tactics for keeping talent in such situations. The consulting firm defined high-retention companies as those that reported retention rates of more than 60% for the full retention period. Low-retention companies managed to keep 40% or fewer of employees that received retention agreements.

The study offered statistical evidence that holding on to value-producing employees is an important determining factor in the success of a deal. At high-retention companies, 88% of respondents rated their transaction as highly or mostly successful in terms of meeting strategic objectives. At low-retention firms, 67% were similarly happy with the deal’s outcome.

Why do some companies have better results with retention agreements? One reason is simply that they pay more. For senior leaders, the median value of the retention plan among high-retention firms was 60% of base pay, compared to 35% for the low-performing companies. But there were several other factors. High-retention firms were:

  • More likely to identify eligible employees based on their ability to affect the success of the transaction (73% vs. 33%).
  • More likely to tap into the target company’s senior leadership for input on which employees to keep (66% vs. 27%).
  • More likely to let management discretion by the target’s senior leaders drive decisions on who will be offered a retention agreement (32% vs. 8%).
  • More likely to offer cash bonuses in exchange for retention of senior leaders (80% vs. 50%) and other employees (89% vs. 55%).
  • Less likely to rely on data from the target’s HR systems to identify retention candidates (28% vs. 58% for job-description data, and 36% vs. 67% for reporting-level information).

Clearly, a retention agreement is no magic bullet. Among all survey participants, just two-thirds (68%) reported that most employees who signed one actually stayed for the full period covered by the agreement. “Key employees understand their value in the marketplace,” Towers Watson wrote. “Most who left before the end of the retention period were either uncomfortable with the new culture or their new role, or were aggressively pursued by competitors.”

And at only 43% of responding companies were such employees still on board a year later.

Still, retention bonuses are increasingly popular. In a 2012 study, Towers Watson found that 74% of participants were using retention bonuses for senior leaders, other employees or both. This year, that figure was up to 83%. Similarly, two years ago 47% of companies surveyed were using equity awards as retention incentives, compared with 56% this year. However, cash is a more attractive retention award, for nonexecutive employees in particular, “because it provides a higher degree of certainty during a transition period that is fraught with risk,” Towers Watson wrote.

Another measure of the perceived importance of retention bonuses is the hefty amount of funds often allocated to them. This year, the median retention bonus pool was just under 2% of total transaction cost, and 20% of respondents dedicated at least 6% of the deal cost to keeping key employees on board. In a handful (2%) of cases, more than 20% of transaction value was earmarked for that purpose.

Image: SriMesh, GNU Free Documentation License

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