Light BulbHuman capital is a critical component of any merger or acquisition.  High profit margins and synergistic gains cannot be realized without key talent who are able to motivate employees to achieve high levels of performance. Although there is no simple solution to retaining top performers, retention strategies should be adopted in any merger or acquisition. The most common retention award offered to executives and employees is a cash bonus, calculated as a percentage of base salary.  Expressed relative to purchase price, retention budgets are quite minimal and are usually borne by the purchaser.

The Global M&A Retention Study conducted by Towers Watson (the Study) found that 88% of high-retention companies and only 67% of low-retention companies rated a transaction as successful with respect to strategic objectives.  A 21% difference in perceived success is significant considering most companies allocate less than 2% of the total purchase price to retention budgets.

There are a number of things that high-retention companies do differently than low-retention companies, including:

  • identifying employees who are eligible for retention based on their ability to influence the success of the deal;
  • speaking to senior executives to seek out information regarding which employees should be targeted for retention;
  • giving management discretion in the retention-agreement selection process;
  • including cash bonuses in retention agreements;
  • not simply relying on data provided by the target company’s HR database in the retention selection process; and
  • offering executives a retention plan that is approximately 60% of base salary.

According to the Study, 68% of respondents stated that over 80% of employees will stay with the organization for the full retention period once they have signed a retention agreement. However, only 43% of respondents claimed they were able to maintain that same level of retention just one year later. These statistics suggest that retention agreements are a valuable, yet time-limited, solution to a critical issue. Companies operating in a competitive landscape risk losing their top talent if employees see the opportunity cost of remaining with their current employer to be too great.

Retention agreements are an important aspect of a transaction; however, long term sustainability requires executives to consider how companies will continue to retain key talent after these agreements expire. The Towers Watson Global Workforce Study, which surveyed more than 32,000 employees across 31 markets, identified the top drivers of employee retention as personal outreach by managers and executives, learning and development sessions, opportunities for career advancement, transparent reward systems valuing top performers and clear and honest communication from senior executives. It is these factors that complete the retention equation; good people equals better results.

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