January 22, 2015

M&A Retention Plans: Market Trends & Best Practices

Here’s an excerpt from this recent Towers Watson memo from Scott Oberstaedt and Mary Chico:

When we dissected the responses to identify retention plan design features and practices that were most effective in enhancing retention, several design trends emerged that may assist acquiring companies:

– Personalized selection: High-retention companies are more likely than others to identify eligible employees for retention based on their ability to affect the success of the transaction (73% for high-retention acquirers versus 33% for low-retention companies).
– Engagement with acquired company leadership during the selection process: High-retention companies are more likely (66% versus 27%) to tap into the target’s senior leadership for information about which employees to keep. They are also significantly more likely than low-retention companies to include management discretion (that is, the opinion of the target’s leadership) in the retention-agreement selection process (32% versus 8%).
– Simple plan design, focused on cash bonuses: High-retention companies focus on cash bonuses more than other forms of retention awards. Cash bonuses (exclusively or with other forms of compensation) are more likely to be used in retention agreements at high-retention acquirers (80% for senior leadership, 89% for other employees) than at low-retention companies (50% and 55%, respectively). They are also less likely than low-retention companies to adjust the value of retention awards where employees earned some value due to the sale of the company.
– Higher target values: Finally, the high-retention companies offer retention awards with higher target values per employee than low-retention acquirers. For senior leaders, the median value of the retention plan among high-retention companies is 60% of base salary, versus 35% for low-retention companies.