Mumbai: For companies looking at mergers and acquisitions (M&As), paying the right retention incentive to critical talent often holds the key to success, Mercer’s Survey of M&A Retention and Transaction Programs has found.
According to the survey by the human resource consultant, when companies adopt a retention programme, executives critical to long-term success are eligible for retention incentives in 70% of the programmes, compared with employees for the short-term success of the integration, who are eligible in just 53% of the programmes.
Moreover, the use of retention incentives is even higher for organizations conducting cross-border transactions—80% for executives critical to long-term success and 60% for employees for the short-term success of the integration, the study said.
Organizations must first review their acquisition strategy to determine if a retention incentive plan is needed to protect against critical employee flight risk, said Ake Ayawongs, Mercer’s M&A business leader, growth markets. “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 Ayawongs.
Mercer’s survey was based on information from 42 organizations globally which are actively engaged in M&As, to better understand the tools used to retain critical talent. The survey reflects information on the retention and transaction programmes implemented in over 70 deals completed by these organizations in the past three years.
Mercer’s 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—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.
According to the study, retention programmes focus on retaining executive and senior management critical to the integration process. Almost two-thirds (62%) of the deals completed by participating organizations over the past three years used retention programmes. 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 half (57%) the organizations surveyed said executives critical to long-term success are always eligible for retention incentives. However, for a typical divestiture, only 44% reported these executives are always eligible.
Retention incentives also vary from country to country. According to the survey findings, US 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 programme,” said Ayawongs. “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.”
Transaction bonuses are typically paid to chief executive officers, executives and deal team members. Forty-two percent of executives other than CEO are often targeted for a transaction bonus.
Talent is hard to find in a country like India and it is important to retain key people who may otherwise not be available, according to Avinash Gupta, senior director and leader, financial advisory, Deloitte in India, a consulting firm. “In sectors like financial services, acquisitions have been made only for the team.”