Financial incentives used to entice executives to stick around
Back in 1990, HBC acquired about 50 Towers department stores in Canada, including 3,000 employees, with plans to convert them to Zellers outlets. While the merger made business sense, it had its downsides — such as the departure of nearly every single Towers store manager.
“Towers had a culture in which they believed, right or wrong, that management treated employees very, very positively and carefully. And they believed that Zellers treated their employees very br3utally,” said Dave Crisp, a speaker and writer on leadership effectiveness who headed HBC’s HR department for 14 years.
“Of their 50 store managers, 47 quit for that reason, because they believed that Zellers was going to force the store managers to treat employees badly, and they just didn’t want to do that.”
In the end, the managers who chose not to stay were given severance and the total bill, including replacement costs, was about $5-million, he said.
That kind of letdown is not rare, according to a study conducted by the Canadian Financial Executives Research Foundation (CFERF) and sponsored by Towers Watson. Only one-fifth of finance executives involved in mergers or acquisitions during the past five years said their transactions were very successful.
But the companies that identified people and cultural issues early on were best positioned for a successful deal, found the survey of 78 respondents.
“The biggest improvement that those organizations can do is really to be able to identify the people they want to retain and determine how they want to retain them and be aware of the cultural issues they have to address before closing,” said Eric D’Amours, account director and Canada leader of mergers and acquisitions at Towers Watson in Toronto.
“They tend to get due diligence and to focus almost exclusively on financial factors, which is the purpose of acquisitions, but... this is the time to start figuring out what it is going to (take) to integrate those people — and this is too often forgotten.”
There’s a role for HR to play in due diligence but HR often comes in later, said Shelley Rosenbaum, senior manager of human capital consulting at Deloitte in Toronto.
“What people tend to rely more on is the financial retention element and not the other programs, because there’s so much involved in a merger — the cultural elements and the commitments and the engagement pieces of retention are not necessarily top of mind.”
During a merger, there’s a lot of uncertainty around job security and new leadership, and not enough time is spent around those areas, she said.
“People tend to not want to share a lot of information, especially in mergers, because they’re very focused on the outside communication, all the regulatory requirements as opposed to communication to employees,” she said.
“People are going to make decisions and they’re going to make assumptions on their own, so it’s very important to have a communication strategy that, once you’ve identified top talent, you make sure that they know they’re valued and they know they have a future in the organization.”
It’s also important to involve employees, to engage and empower them, said Rosenbaum.
“You want to try to integrate them as quickly as possible. One of the mistakes people make is that, from a culture perspective, they ignore the cultural elements of retention.”
Too often, HR doesn’t communicate terribly well during a merger because it has a million other issues to worry about, such as merging pension plans, benefit plans, administration and payroll, said Crisp.
“The real issues for HR are ‘Are these people going to integrate, are they going to feel respected, are they going to feel there’s a place for them or are they going to feel that they’re second-class citizens?’” he said, adding the integration can take a couple of years.
Can retention bonuses help?
HBC offered retention bonuses to store managers in the acquisition of Towers, along with giving them ample opportunity to decide if they were staying or going, but it was to no avail, said Crisp.
Almost two-thirds (62 per cent) of deals completed over the past three years used retention programs, according to a Mercer survey of 42 organizations from around the world. And executives critical to long-term success were eligible for retention incentives in 70 per cent of the programs.
“As a buyer, you want to put some insurance policies in place there in the form of a retention plan that helps you fight off that initial risk you have with these people leaving or being hunted down by competitors,” said Bart Hermans, a partner in global M&A consulting services at Mercer in Toronto.
It’s about buying some time so people get to know the new company and its owners, he said, adding there’s also the risk employees will leave because they receive some kind of financial windfall through the acquisition, which has to do with vesting of stock options.
It’s important for HR to look at the employment agreements in place at the target company, as some people might be less likely to jump, said Rosenbaum.
“It’s important to get the leadership of the target to identify who those critical people are, especially at the executive level, where you tend to have more individualized employment agreements, to really understand the intricacies of the agreements, to see what clauses are in place when there are acquisitions, to really understand what the impact is.”
Forty per cent of “very successful” companies and 64 per cent of “fairly successful” companies implemented a retention bonus during the integration period of their M&A, found the CFERF survey. Other popular retention initiatives include clarified career paths, mentoring programs, learning and development opportunities, and promotions.
More employers are going beyond retention bonuses because they can be seen as a signal that a person is likely to leave after the bonus period is over, said D’Amours.
“If you want people to stay longer than a minimum of one, two years, then you need to go to a combination of tools, not just a retention bonus,” he said, citing as an example personal outreach — asking people about their career preferences and ambitions.
Retention bonuses may keep people for the first 18 months, said Rosenbaum, but what happens afterwards?
“That retention bonus gives a false sense of security to the employer: ‘Oh, these people are going to stay.’ Yeah, they’ll stay until they get paid,” she said, adding the risk of losing these people includes a loss of knowledge, employee engagement, customer relationships and market position.
Financial incentives are just one way in the short run to tie people in, said Hermans.
“You need to then do something to make those people engaged in the longer run, and that’s around showing that there is a life for them and career for them in the company.”