You could hardly blame employees for getting fidgety when their company is working on an M&A transaction. They don’t know how the deal will affect their professional and personal lives, and the temptation to reassert some control by seeking new employment can be strong.
That’s why most companies involved in M&A deals pay key employees to stay on the job until after a transaction closes. Surprisingly, though, a substantial minority of companies don’t have complete insight into how much they’re spending on the retention strategy.
In a new survey from Willis Towers Watson, 72% of the 159 responding HR and compensation executives and managers said their companies either (1) establish retention award pools (usually amounting to a small percentage of the deal price) and track what portion is actually used, as well as how much becomes vested; or (2) set aside fixed retention payments for key employees.
That leaves 28% of respondents whose companies are less vigilant about understanding their M&A retention spend. “If you’re not in the majority, it would behoove you to get better at this,” Josephine Gartrell, senior director of Willis Towers Watson’s executive compensation and board advisory, told CFO.
Gartrell said in a statement, “Shoring up key executives and employees is important to a successful merger or acquisition. To that end, retention agreements play a critical role.”
Unsurprisingly, acquiring companies tend to offer retention agreements to more C-suite executives and their direct reports, compared with other salaried employees. In fact, 44% of acquiring companies selected at least half of C-suite executives to sign retention agreements, while just one in five such companies selected more than 20% of other salaried employees to sign agreements.
The average annualized value of retention deals for CEOs was 137% of annual base salary. Other C-suiters got 90% of base, on average, while other senior leaders and the remaining salaried population received 62% and 44% of base, respectively.
Retention agreements are usually time-based for senior leaders (55%) and other salaried employees (73%). Fewer companies (36% for senior leaders and 23% for other salaried employees) indicated a mix of time and performance, with the financial performance of the acquired business being the most prevalent performance metric.
More than one in three (35%) of companies award retention agreements or one-time special payments to certain employees of the buyer, such as those working on the integration of the new companies.
“With indications that M&A activity could gain momentum in 2024, retaining and engaging talented employees will remain a top priority,” said Ratan Narayanan, director of M&A consulting for Willis Towers Watson.
The research also suggested that companies can enhance the employee experience to prevent departures. Enhanced career opportunities and promotions are the non-monetary retention tactics cited as most effective for retaining senior leaders (57%) and salaried employees (62%), followed by personal outreach from leaders and managers (57% and 43%, respectively).