M&A Retention Bonuses Pay Off

Financial incentives for key employees of acquired companies are having a bigger impact these days.
David McCannNovember 2, 2017
M&A Retention Bonuses Pay Off

Large companies engage in M&A not only to grow and enter new markets, but also to bring in new talent. For example, a company intent on becoming more digital may acquire one that has the talent to drive that transformation.

In such cases, offering key employees of the acquired company financial incentives to stay on is a popular strategy — and an increasingly successful one.

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Willis Towers Watson surveyed 244 companies in the Americas, Asia, and Europe with at least 500 employees — 1,000 employees for U.S. companies. Each participant completed an acquisition or merger within the past two years and used retention agreements in conjunction with at least one such transaction.

The study found that 79% of such acquirers retained at least 80% of employees that received retention agreements through a designated retention period, lasting a median of 18 months after deal closings for senior leaders and 12 months for other employees.

In a similar study in 2014, only 68% of acquirers experienced that degree of success.

“Companies today are smarter about how to construct a compelling agreement,” Willis Towers Watson’s report says. “They are more selective about the number and type of selection award participants and more strategic about how to use agreements.”

Indeed, despite the increasing success of the agreements, this year the median retention budget is less than 1% of transaction cost, the study finds, a plunge from 1.9% in 2014.

The report continues, “Acquirers are moving away from the broad strokes of providing retention agreements based on factors such as organizational levels and moving toward a more focused look at individuals who are critical to delivering deal value.”

PrintThe chart (left) shows the factors that companies participating in the survey take into account when deciding who will be offered an agreement. Topping the list is “employees below executive level with key skills in the context of the transaction.” Even senior leaders are less likely to get such an offer.

Notably, high-retention companies (those with a success rate of at least 80%) are more likely to consider nonexecutive employees than are other companies, and the gap is significant: 61% to 47%, respectively.

Given the rising costs and risks of finding, hiring, and integrating new talent during or just after an acquisition, it is clearly more efficient and effective to take the steps necessary to keep key talent than to recruit externally, according to the report.

Status as high-potential or high-performance talent fell in importance substantially since the 2014 survey, dwindling from 45% and 39%, respectively, to 25% and 22%. The focus instead is on those with key skills or senior leadership roles.

Cash bonuses, commonly expressed as a percentage of base salary, are by far the primary type of financial award in retention agreements for senior leaders (77%) and other key employees (80%). Far below those levels are time-vested full shares or share units (29% and 18%, respectively), followed by base pay increases, guaranteed payment of regular bonus, stock options, and performance-vested full shares/share units.

While retention bonuses are important tools in conjunction with M&A, they’re only part of the equation for retaining key talent, notes Mary Cianni, global M&A practice lead, Willis Towers Watson.

“Personal outreach by leaders, strategic promotions, and employees’ participation on task forces are also beneficial and will pay dividends in the years ahead,” Cianni says. Learning, development, and career opportunities for high-potential talent can also play a role, she adds.