While the vast majority of companies involved in mergers and acquisitions (M&As) use retention agreements to retain key talent, a new survey by global professional services company Towers Watson shows that companies that are more successful at retention begin the process early — identifying people and tactics — and don’t rely solely on money.
The survey, conducted earlier this year, included 180 companies from 19 countries and focused on current retention practices as well as specific tactics used by those companies that the survey identified as more successful in keeping top talent below boardroom level. The responses revealed the effectiveness of various retention strategies and also confirmed that, while economic uncertainty has slowed the pace of deal making in some parts of the world, acquisitions and divestitures remain a viable growth strategy for many organisations. More than half of the respondents completed between two and 10 acquisitions over the last two years.
“With successful deal implementation a core priority for many companies, the focus on retention has intensified. In today’s climate, when companies are often buying skills or relying on an acquisition’s staff to meet critical sales or market share goals, the ability to retain the right people can be a make-or-break element in the deal,” said Mary Cianni, global leader of M&A services at Towers Watson. “Companies and shareholders increasingly recognise that achieving a deal’s strategic goals depends on having the right people, with the right skills, in the right roles. Clearly, there is a lot at stake. And despite widespread agreement on the importance of identifying and retaining talent, the complex nature of transactions makes the process that much more challenging for organisations — even for those companies with significant M&A experience.”
Successful Acquirers Do Things Differently
Since most companies that use retention agreements as part of their overall strategy still face challenges in keeping people, Towers Watson focused on a subset of the acquirers that reported greater success at retention to learn what they did differently. These “successful” buyers included the 44% of respondents that rated their retention agreements as being highly or mostly effective at retaining employees during an acquisition and that also retained all or nearly all employees through the retention period in past acquisitions.
The survey found that companies with successful retention strategies identify which employees they want to target for retention agreements early in the process. Almost three-quarters of successful acquirers (72%) determine which employees are asked to sign retention agreements either during due diligence or during transaction negotiations. This is twice the number of less successful acquirers (36%) that ask employees to sign agreements during either of those times. In fact, nearly six in 10 (58%) of less successful companies don’t ask employees to sign agreements until after the transaction closes.
“Deal makers that are successful at retaining top talent beyond the transaction tend to ink retention agreements early in the cycle, often as early as when a deal gets under way. Some companies also start determining which employees will help the organisation move ahead with the deal as soon as the due diligence process begins. The bottom line is that the sooner companies are able to pinpoint retention targets, the more thorough they can be in designing an effective retention program,” said Steve Allan, EMEA leader of M&A services at Towers Watson.
While companies with successful retention strategies use many of the same tactics to retain employees as their less successful counterparts do, they also emphasise certain ones to a much greater extent. The vast majority (92%) of successful acquirers use retention bonuses, compared with just 53% of less successful companies. Additionally, three-quarters (74%) of successful companies use personal outreach by managers and leaders, more than three times the number of less successful acquirers (24%) that use this tactic.
“While money is a large part of the retention game, it isn’t everything. In fact, the most effective retention agreements include not just monetary incentives, but also a mix of varied retention tactics, with particular emphasis on personal outreach by managers,” said Allan.
Overall Survey Results Show Widespread Use of Retention Agreements
Among the key findings from the survey:
- Retention agreements are the primary retention vehicle — used by 84% of acquirers and 70% of sellers — with retention bonuses the cornerstone of this approach.
- Roughly two thirds to three quarters or more of both buyers and sellers use agreements, chiefly for senior leaders below the boardroom level, key contributors and technical experts
- Retention bonuses are far more common in North America (reported by 83% of respondents) than either Asia (40%) or Europe (56%). Personal outreach by leaders to retention targets shows a similar pattern across the regions.
- 90% or more of buyers across all three regions use time-based “pay to stay” provisions in their retention agreements, typically stretching from six months to one year post-close.
- Performance-based metrics are less common, but are used at roughly half the acquiring companies across the regions, with nearly twice as many (74%) using individual performance goals as using organisation-wide performance goals (38%).
- Retention efforts can only go so far. Respondents said that of those employees who leave the organisation despite having retention agreements in place, six out of 10 cite the deal as one of the primary reasons for leaving.
“The success of any transaction depends as much on effectively managing people and the organisational environment as it does on managing the timing and financials. Organisations that keep their overall retention and engagement programs strong will be much better positioned to succeed years beyond the closing of the deal. Through being prepared and proactive, HR, in partnership with their business leaders, has a tremendous opportunity to step up and influence the ultimate success of a transaction,” concluded Cianni.