often directly impacts the overall success of the deal, according to a report by Mercer.
When companies adopt a retention program, executives critical to long-term success are eligible for retention incentives in 70 per cent of the programs, compared to employees for the short-term success of the integration who are eligible in just 53 per cent of the programs, found Mercer’s Survey of M&A Retention and Transaction Programs.
Moreover, the use of retention incentives is even higher for organizations conducting cross-border transactions — 80 per cent for executives critical to long-term success and 60 per cent for employees for the short-term success of the integration, found the poll of executives worldwide, including Canada.
The 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.
“Organizations 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,” said Chuck Moritt, senior partner in Mercer’s M&A consulting business.
Retention programs focus on retaining executive and senior management critical to the integration process. According to survey findings, almost two-thirds (62 per cent) of deals completed by participating organizations over the past three years used retention programs. Typically, organizations 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, organizations are more likely to provide retention incentives when involved in an acquisition than a divestiture. More than one-half (57 per cent) of organizations reported that executives critical to long-term success are always eligible for retention incentives. However, for a typical divestiture, only 44 per cent reported that these executives are always eligible.
Retention incentives also vary from country to country. According to the survey findings, United States and Canadian organizations provide larger retention incentives than organizations in Europe and Asia Pacific when viewed as a percentage of base pay.
“There is no one-size-fits-all retention incentive program,” said Gregg Passin, partner and Mercer's U.S. 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 organizations 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 per cent of executives other than the CEO are most often targeted for a transaction bonus. Organizations in one-third (33 per cent) of deals provide transaction bonuses to deal team members, while slightly fewer (31 per cent) 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 organizations are more likely to receive transaction bonuses than their counterparts in the U.S. and Canada. Also, European organizations offer deal team members transaction bonuses, while none of the organizations 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 U.S. and Europe, companies in Europe provide much smaller transaction bonuses to CEOs and other executives than companies in the U.S. Transaction bonuses are typically paid only if the deal closes, found the survey.