DealLawyers.com Blog

This recent ClearBridge presentation addresses some of the key factors to keep in mind regarding M&A-related executive compensation issues both before and after closing. Here’s an excerpt from the discussion of pre-closing efforts to identify, incentivize, and retain key talent:

As part of the M&A process, it is important for both the target and acquiring companies to identify the key talent through the close, and for the post-close company, to take inventory of retention hooks and identify any gaps in the retention and incentive objectives.

If gaps are identified, companies may use certain tools to address concerns, including:

−Cash retention bonuses tied to deal close (or period beyond deal close)

−Equity grants with long-term vesting (and/or tied to performance goals / transaction close)

−Enhanced severance provisions upon a qualifying termination in connection with the deal

−Post-transaction covenants (e.g., guaranteeing pay levels for one year post-close

Market Commentary: Companies will typically approve M&A award pools as a percent of deal size; the pools are typically <1% of deal size, although the percentages are often higher for smaller deals, private companies, or companies undergoing a disposition strategy (i.e., selling individual business units separately). In assessing award structures, companies should determine their objectives and aim to strike a balance between “pay to stay” with “pay for performance”.

Other pre-closing topics include change-in-control & severance agreements, treatment of outstanding incentive plan awards and disclosure requirements and execution.  Post-closing topics covered in the presentation are compensation philosophy and peer group, go-forward pay levels, incentive plan designs and compensation-governance policies.

– John Jenkins