How to retain top talent after M&As

Employee retention agreements after mergers or acquisitions are falling short of expectations, according to a recent research report, which found that poor employee retention and changing organisational culture are critical stumbling blocks post M&A.

While more than two-thirds of organisations indicated they retained four out of every five employees who signed a retention agreement over the course of the full retention period, less than half retained that same percentage one year after the period expired.

The primary factor for employees who left before the end of the retention period centred on their concern with the changing organisational culture (48 per cent).

“Retaining the right people can make or break a deal. After all, human capital is very often a company’s most important asset,” said David McNeice, M&A leader in Australia for Towers Watson, which conducted the research report.

“Retention starts with properly identifying the talent, roles and functions most critical to the success of the transaction. It’s clearly more efficient to take the steps necessary to keep key talent in place than it is to find, hire and integrate new employees during or just after an acquisition.”

Retaining talent in M&As
The survey results further validated the importance of retaining key talent during M&As. Most participants acknowledged their company’s transaction achieved its strategic objectives, but the gulf between high-retention and low-retention companies on attaining those objectives is significant.

Nearly nine in 10 high-retention companies (defined as having retention rates over 60 per cent for the full term of the agreement) said their transactions successfully met their strategic objectives. However, only two-thirds of low-retention companies (those with retention rates of 40 per cent or less) expressed the same sentiments.

This has implications for Australian companies buying into growth or divesting non-core assets, according to Towers Watson.

The retention of leadership and key staff is usually a critical deal objective and a longer term driver of success. Companies involved in M&A need to understand the organisational and cultural implications of the deal, build employee engagement and work individually with key employees as early in the deal process as possible.

Retention agreements are useful in that they offer a way to buy time, but the time must be used productively and wisely, according to Towers Watson, whose 2014 Global M&A Retention Study included 248 mid to large size organisations across 14 different countries including Australia.

The role of leadership
The report also found that 62 percent of the respondents said engaging with the target company’s senior leadership was the most useful source in drawing information about which individuals should sign retention agreements.

Here again, high-retention companies differentiated themselves by a greater margin than low-retention companies (66 per cent vs 27 per cent). High-retention companies also used management discretion to a greater degree in the agreement selection process than low-retention companies (32 per cent vs 8 per cent).

“Retention should start with executives. It’s critical for them to be completely on board and aligned with the goals and strategies of the acquisition,” said McNeice.

“Their behaviour is essential to the retention and engagement of employees. They can’t be distracted by concerns about their own future employment, so it’s helpful to provide them with a clear personal stake in the success of the new company.”

Retention budgets and bonuses
In general, the higher the deal value, the lower the relative size of the retention budget. When considering retention budgets, most participants 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 in the aggregate.

Not surprisingly, cash bonuses were the most common type of financial award used in retention agreements. But high-retention companies used cash bonuses in retention agreements, exclusively or with other forms of compensation, far more often (80 per cent for senior leadership, 89 per cent for other employees) than low-retention firms (50 per cent and 55 per cent, respectively).

“Executives and managers perform much better on the other side of transactions, and stay longer, when they are focused on delivering results for the new owners and well rewarded when the business succeeds,” said Jon Finlay, Towers Watson’s executive compensation practice leader in Australia.

“Being rewarded with a cash bonus for remaining in place for a pre-determined period of time appears to be effective in retention, but the executives must also be encouraged to excel. The trick is to get the balance right between cash incentives for retention and good salaries, with enough genuine opportunity to win big when big results are delivered. ‘Skin in the game’ is essential for executives to stay and perform over the longer term.”