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Acquisitions mean big changes for numerous stakeholders. The implications for a target company’s total rewards structure can be profound, requiring the buyer to tweak metrics, replace certain awards and often realign the performance management framework to support an integrated post-acquisition rewards structure.
This change management process can be fraught with human capital risks that can undermine the HR leaders’ ability to execute the post-acquisition HR strategy successfully. To mitigate these risks means that as soon as practicable in the diligence process, HR leaders should identify, plan and quantify them, where possible.
It’s crucial to have a disciplined methodology for addressing potential issues. A best practice used by HR leaders to assess risks is by looking at the organization’s current state, establishing a future state and then identifying what they should do to close any gaps.
Pre-Acquisition: Understand the Target’s Rewards
It’s not as easy as compiling a list of plans, participants and potential payouts. The buyer should know how the target makes compensation-related decisions and understand the company’s performance management process. Ask:
Understanding the link between the company’s performance management system and incentive structures can provide valuable insight into the target’s culture, clues to potential retention risks, and impediments to rewards integration.
Specific considerations should include:
Buyers are sometimes hesitant about exchanging target equity awards because of dilution or concerns about the associated expense. However, flexibility under the tax rules for setting the terms of the replacement award beyond the more conventional “exchange ratio” approach can reduce the dilution and associated profit-and-loss impact. For target long-term incentive plans (LTIPs) that provide for board discretion on treatment, any decision made by the buyer will result in a compensation expense related to the equity awards in the post-combination period, regardless of whether such awards are accelerated or cashed out at closing or assumed as unvested awards over the buyer’s equity.
Post-Acquisition: Identify Gaps
While integration risks can be challenging to quantify, HR leaders should assess the areas that present the greatest risk and plan appropriately, mapping each component of the target’s total rewards to the acquiring company’s reciprocal program to identify immediate gaps and needs. The approach described below considers corporate acquisitions in which acquired employees may be integrated into existing structures. In practice, there are many different approaches to establishing total rewards structures post-transaction (many of which may rely on the requirements or leniency of the purchase agreement, which may require certain provisions for compensation and benefits post-transaction).
HR leaders should also assess whether the target’s performance management framework helps improve business outcomes. For example, once the target’s employees are integrated into the buyer’s incentive structures, the performance review process can help facilitate greater differentiation of performance, if that’s what leadership desires.
Below are common post-acquisition structural changes to targets’ HR programs:
Pre-Plan for Post-Transaction Poise
The launch of the diligence process should be viewed as the time to start building understanding of the target’s total rewards offering, a process that should continue for the duration of the deal. This can help the buyer to structure a post-transaction total rewards program that supports both HR and business objectives.
In so doing, it’s important to consider each element of the target’s compensation and benefits package separately, as well as to assess its total overall value. This perspective can lend insight into where ‘take-aways’ in certain areas can potentially be mitigated by more generous provisions in other parts of the rewards program.
Once leadership has a sense of the changes the deal will entail and a strategy for moving forward, they should also be prepared to come full circle enterprise-wide with a solid, proactive communication plan that appropriately promotes the desired changes, furthers business goals, and nurtures the evolving culture.
Aaron Sanandres is a principal in the
Human Resources Services practice at
PricewaterhouseCoopers in New York.
Andrew Skor is a manager in PwC's human resource services practice in New York.
2013 PricewaterhouseCoopers. All rights reserved.
Republished with permission.
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