Keeping leadership on board during M&A is key for integration success

18 September 2018 6 min. read

A large share of companies are actively leveraging M&A as part of their growth strategy for entering new markets, expanding both scale and scope of products and services, and acquiring new capabilities. The successful outcome of a deal depends however on an array of factors, of which talent is a crucial dimension. If talent walks away prior to a deal closing or just after integration, then much of the acquired know-how and expertise is lost.

To ensure that the human capital side of dealmaking and integration is successful, a growing number of acquiring firms are putting interventions in place aimed at keeping people on board, or keeping them happy. While companies have been using such agreements to retain leaders and talent most critical to success for decades now, new research by Willis Towers Watson shows that deal architects are today more selective about the number and type of retention award recipients, and are shifting from a generalist approach to a more focused look at individuals. 

The study’s results – based on a survey among around 250 dealmakers across 24 different countries in Europe, Asia and the Americas – find that senior leaders (54%) and employees below the executive level with key skills considered critical to the transition (55%) run neck and neck as the groups most likely to be offered retention agreements. Notably, high-retention companies (61%) are more likely to consider non-executive employees with key skills than low retention companies (47%).Having key skills or being on a leadership team are the main factors for retention agreement eligibility

Keeping leaders on board

The authors highlight that there are several compelling reasons to start the retention process by focusing on senior leaders. First, leaders tend to be the group managing the transaction pre-close, and most responsible for getting the deal done. “To make sure they are not distracted by concerns about their own futures, it’s critical to get them on board and aligned with the goals and strategies of the acquisition.” 

Further, retention agreements provide a clear personal stake in the success of the new company. That is why in practice, nearly a quarter (24%) of respondents said they ask senior leaders at target companies to sign retention agreements before the initial merger agreement signing and 16% at the initial signing. Companies that perform better in closing deals – measured in terms of ROI – are more likely to sign pre-close signing agreement, at 28% compared to only 11% at low-retention companies. 

Respondents also admitted that retention agreements for senior leaders differ to those for other employees. Acquirers are much more likely to provide additional incentives to leaders, including time-vested shares (29% versus 18% for others) and stock options (16% versus 6% for others). And for companies that include time-based (i.e., pay-to-stay) metrics in their retention agreements, senior leaders have longer retention periods than other employees. A retention period of over 18 months after close is imposed on senior leaders by 44% of companies with pay-to-stay provisions, while only 31% of companies impose this on other employees. Senior leaders are asked to sign retention agreements earlier in the deal than other key employees

Cash is king

In terms of retention agreements offered, while a combination of cash and other types of awards is common, cash continues to dominate with 77% of acquirers globally giving senior leaders cash awards and 80% giving cash to other key employees. Cash bonuses are most commonly set as a percentage of base salary for both leaders (40%) and other employees (45%). Fixed-amount cash bonuses are the next most popular with 35% of companies giving them to both executives and nonexecutives. 

Interestingly, Willis Towers Watson’s analysis finds that companies in Europe have more of an eye on human capital aspects, and as a result, are more successful in delivering shareholder value. Gabe Langerak, Head of M&A at Willis Towers Watson for Western Europe, attributes this to a number of developments. First, European companies involve their senior executives at an earlier stage in the acquisition process – in 34% of the deals they are asked to sign an agreement prior to signing, compared to 24% globally. Second, Europe’s decision-makers prefer financial incentives tied to performance, a feat which can drive up commitment. For example: European acquirers offer bonuses more often in the form of a percentage of the basic salary instead of a fixed amount. In Europe this percentage is 55%, worldwide this is with 45%.Cash bonuses are by far the most common financial award used in retention agreements

No guarantees

Focus on critical talent is however no guarantee that employees indeed remain on board. One development gaining ground is poaching by competitors, against a backdrop of a growing 'war on talent' but also more targeted approaches on disrupting deal processes. In the case of employees with retention agreements leaving the company before the end of their respective period, this was in one third of the cases (36%) the result of intensive recruitment by competitors. In Europe competition is even fiercer, with the percentage at around 50%. Other factors that contribute to employee departures are the changing corporate culture (20%) and the lack of enthusiasm for the new function (15%). 

Langerak added that aside from financial incentives, employees should also be incentivised to stay through a range of non-financial methods, such as promoting involvement and a personal approach by management. “Employee retention is not about securing people and stopping them from leaving the company, but rather making sure that employees feel valued and are involved in the process.”