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Retention agreements combine pay-to-stay and pay-to-perform metrics for senior leaders
Creating the ideal employee retention strategy remains elusive for companies that have recently completed a merger or acquisition (M&A) and then exercised employee retention agreements. Towers Watson’s 2014 Global M&A Retention Study, released in October, revealed that:
• More than two-thirds of employers retained a high percentage (over 80 percent) of employees who signed a retention agreement, over the course of the retention period specified in the agreement.
• However, less than half said they retained that same percentage one year after the period expired. The primary factor for employees who left before the end of the retention period centered on their concern with the changing organizational culture.
“Clearly, companies should pay closer attention to the dynamics that will keep their employees for the long term,” said Mary Cianni, Towers Watson’s global leader of M&A services.
When considering retention budgets, most respondents said their companies aimed for a sweet spot that encouraged retention by an optimal number of key employees, not the maximum number of employees, so individual rewards would be most meaningful to those retained, without overspending.
Financial Awards in Retention AgreementsCash bonuses were by far the most common financial award used in retention agreements. (Figures below show the percentage of M&A companies that gave awards to senior executives and other employees.)
Type of Award
Cash retention bonuses
Time-vested full shares/share units
Increases in base pay
Guaranteed payment of regular bonus
Performance-vested full shares/share units
Other types of financial awards
Source: Towers Watson
Companies with high retention rates used cash bonuses in their retention agreements—exclusively or with other forms of compensation—far more often (80 percent for senior leadership, 89 percent for other employees) than low-retention firms (50 percent and 55 percent, respectively).
Towers Watson conducted a similar retention survey two years ago and found that at that time, only 1 percent said their companies offered retention agreements based purely on performance, whereas today that number stands at 14 percent for senior leadership and 16 percent for other employees.
The new survey found that companies typically use retention agreements that feature a combination of pay-to-stay and pay-to-perform metrics for senior leaders, while using purely time-based agreements for close to half of their other employees.
“Overusing performance-based metrics can backfire,” said Scott Oberstaedt, an executive compensation senior consultant at Towers Watson. “Employees who are measured on unattainable metrics or those beyond their control are more likely to seek employment elsewhere. Or they may stay with the company but feel less engaged than they might have been had the performance measures been easier to meet when they were established.”
The survey showed the importance of keeping essential employees on board beyond the retention agreement period. Most participants said their company’s M&A achieved its strategic objectives, but the gulf between high-retention and low-retention companies on attaining those objectives was significant:
• Nearly 9 in 10 high-retention companies (defined as having retention rates over 60 percent for the full term of the retention agreement) said their transactions successfully met their strategic objectives.
• Only two-thirds of low-retention companies (those with retention rates of 40 percent or less) expressed the same sentiments.
“This disparity between high- and low-retention companies around meeting the objectives of the transaction underscores the critical impact that talent retention can have on deal success. High-retention companies behave differently. They excel at positioning talent as a key value driver for achieving the business goals of the deal,” said Cianni.
Participants stressed the importance of identifying candidates who are most vital to the deal. High-retention companies were significantly more likely to identify and target these individuals—those who can affect the success of the transaction—for retention agreements when compared to low-retention companies (73 percent vs. 33 percent).
Respondents ranked as the leading factors in determining eligibility for retention agreements:
• Those having key skills that could affect the success of the transaction (63 percent).
• High-potential status (45 percent).
• Job function (44 percent).
“Keeping the right people is critical, and this starts with properly identifying the talent, roles and functions most critical to the success of the transaction,” said Cianni.
Sixty-two percent of the respondents said that the target company’s senior leadership was the most useful source for information about which employees should sign retention agreements, and high-retention companies used management discretion to a greater degree in the agreement selection process than low-retention companies.
Moreover, getting senior leadership on board to sign their own retention agreements as early as possible can help keep executives engaged throughout the entire process. On average, senior leaders receive far larger payouts and had longer retention periods than other employees (although vesting schedules varied; awards were either prorated or were fully vested at the end of the retention period).
A retention period of more than 18 months after the deal’s close was imposed on senior leaders by 41 percent of companies with pay-to-stay provisions, while only 24 percent of companies imposed this on other employees.
“Retention should start with executives,” said Oberstaedt. “It’s critical for them to be completely on board and aligned with the goals and strategies of the acquisition. Their behavior is essential to the retention and engagement of employees. They can’t be distracted by concerns about their future employment, so it’s helpful to provide them with a clear personal stake in the success of the new company.”
The survey was conducted in the spring of 2014, with 248 respondents from 14 different countries worldwide. Organizations had to employ at least 500 people (1,000 if based in the U.S.), have completed either a merger or acquisition within the past two years, and have used employee retention agreements for at least one of those transactions.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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