Towers Watson study shows what successful deal-making
companies do differently
Creating the ideal employee retention strategy remains elusive
for companies that have recently completed either a merger or
acquisition and exercised employee retention agreements, according
to a new survey by global professional services company Towers
Watson (NYSE, NASDAQ: TW). The 2014 Global M&A Retention Study
examined the tactics applied by employers during a transaction to
retain key staff, and assessed the effectiveness of retention
agreements.
More than two-thirds (68%) of respondents indicated they
retained a high percentage (over 80%) of employees who signed a
retention agreement, over the course of the full retention period.
However, less than half (43%) 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
(48%).
“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.
“Companies involved in transactions should strive to understand the
cultural implications of the deal, build employee engagement and
work individually with key employees as early in the deal process
as possible. These actions increase the likelihood that essential
employees stay on board beyond the retention agreement period to
ensure the success of the merger.”
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 (88%)
high-retention companies (defined as having retention rates over
60% for the full term of the retention agreement) said their
transactions successfully met their strategic objectives. However,
only two-thirds (67%) of low-retention companies (those with
retention rates of 40% 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 and eligible for retention
agreements. According to the results, 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%
vs. 33%). Respondents ranked those having key skills that could
affect the success of the transaction (63%), high-potential status
(45%) and job function (44%) as the leading factors in determining
eligibility for retention agreements.
“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. “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.”
Sixty-two percent of the respondents conveyed that 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% vs. 27%). High-retention companies also used
management discretion to a greater degree in the agreement
selection process than low-retention companies (32% vs. 8%).
Getting senior leadership on board to sign retention agreements
as early as possible can help keep executives engaged throughout
the entire process. Nearly one-third (32%) disclosed that they
asked senior leadership to sign retention agreements before the
transaction’s initial signing, while 22% did so at the initial
signing. “Retention should start with executives,” said Scott
Oberstaedt, executive compensation senior consultant, Towers
Watson. “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.”
One of the more interesting findings was that, 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 somewhat
strikingly, high-retention companies used cash bonuses in retention
agreements, exclusively or with other forms of compensation, far
more often (80% for senior leadership, 89% for other employees)
than low-retention firms (50% and 55%, respectively).
Towers Watson conducted a similar retention survey two years ago
and found that only 1% said their companies offered retention
agreements based purely on performance, whereas today that number
stands at 14% for senior leadership and 16% 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 utilizing purely
time-based agreements for close to half (48%) of their other
employees.
“Overusing performance-based metrics can backfire,” said
Oberstaedt. “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.”
About the Survey
Towers Watson’s 2014 Global M&A Retention Study examined the
structure, use and effectiveness of retention agreements during an
acquisition or merger, with a particular focus on the financial
elements of those agreements. Survey participants responded in
regard to one particular merger or acquisition their company had
initiated or completed within the past two years. To qualify for
the survey, organizations had to employ least 500 people (1,000 if
based in the U.S.), have completed either a merger or acquisition
within the past two years, and used employee retention agreements
for at least one of those transactions. The survey included 248
respondents from 14 different countries (Australia, Belgium,
Brazil, Canada, Germany, Indonesia, Japan, Malaysia, Mexico, the
Netherlands, Singapore, South Korea, the U.K. and the U.S.),
representing virtually every industry. Sixty-nine percent of
responding companies are publicly held. Thirty-two percent of the
transactions were global, and 10% were regional.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve
performance through effective people, risk and financial
management. The company offers consulting, technology and solutions
in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates
around the world and is located on the web at towerswatson.com.
Towers WatsonJosh Wozman, +1 703-258-7670josh.wozman@towerswatson.comorBinoli Savani, +1
703-258-7648binoli.savani@towerswatson.com
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