SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
RETAINING THE RIGHT TALENT FOR
DEAL SUCCESS
Survey of M&A Retention and Transaction Programs
Contents
CONTENTS
1. Introduction ......................................................................................................................................... 1
2. Methodology ....................................................................................................................................... 2
I. Survey Design ...................................................................................................................................... 2
II. Data Analysis and Reporting ................................................................................................................ 2
III. Survey Usage ....................................................................................................................................... 3
3. Retention Programs ............................................................................................................................ 4
I. Eligibility and Participation .................................................................................................................... 4
II. Individual Award Levels ........................................................................................................................ 6
III. Conditions for Payment ........................................................................................................................ 8
IV. Timing of Payout ................................................................................................................................. ..9
V. Number of Payments .......................................................................................................................... 11
VI. Payout Vehicles .................................................................................................................................. 12
VII. Overall Program Cost ......................................................................................................................... 13
4. Transaction Bonus Programs ........................................................................................................... 14
I. Eligibility and Participation .................................................................................................................. 14
II. Individual Award Levels ...................................................................................................................... 15
III. Conditions for Payment ...................................................................................................................... 16
IV. Number of Payments .......................................................................................................................... 17
V. Payout Vehicles .................................................................................................................................. 17
VI. Overall Program Cost ......................................................................................................................... 18
5. Designing Your Retention Bonus Program ....................................................................................... 19
I. Examine Whether a Retention Plan Is Critical To Deal Success ........................................................ 19
II. Evaluate The Population For a Strategic Retention Program ............................................................. 19
III. Determine the Award Sizes for Retention Program Participants ........................................................ 20
IV. Clarify Conditions for Payment: Pay-for-Stay Or Pay-for-Performance? ............................................ 20
6. Participant Profile .............................................................................................................................. 21
I.
............................................................................................................ 21
II. Participant List .................................................................................................................................... 21
III. Geography .......................................................................................................................................... 22
IV. Industry ............................................................................................................................................... 23
V. Size and Capitalization ....................................................................................................................... 23
i
© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
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2
INTRODUCTION
Survey of M&A Retention and Transaction Programs
Introduction
1
Introduction
For many organizations around the world, M&A activities represent tremendous investments of capital and
time and have become vital strategies for growth and competitiveness. As M&A has become a priority for
many companies, the ability to successfully retain critical talent has become a significant determinant of
overall deal (and company) success. Simply put, according to one of the participants in this survey
retention is a critical aspect of the deal
Retention of key talent, however, can be challenged by the perceived impact of the transaction on job
security and career prospects, and can distract even the most highly valued and critical talent. Companies
that are successful at retaining critical talent and at M&A in general make the connection between the
objective of the deal and talent strategy. These organizations understand that human capital is critical to
achieving deal synergies and that the loss of key talent could be detrimental.
An important tool that many successful companies use is retention incentives. To better understand the
retention incentives that companies utilize to help retain critical talent, Mercer gathered in-depth information
from 42 companies across the world. The research focuses on common questions facing organizations in
situations where talent retention is a concern, including:
Is there a need for a retention incentive plan?
Who should participate and how should award size be determined?
What should be the timing and structure of the plan?
How much should the overall plan cost?
Survey results reflect detailed information on the retention plans used in over 70 deals of various types that
participants closed in the past three years.
As this study illustrates, retention plan design varies by deal, and is determined based on many factors
including the type of deal (e.g., merger, acquisition, divestiture), the deal objective and the impact of the deal
retention strategy, we look at the type of
deal and then assess the skills of the people in the deal. Our approach to retention is both people-driven and
dealIn a merger that results in redundancies due to overlapping capabilities across the two
organizations, the focus may be on retaining those employees critical to integration only.
In an acquisition of a start-up, the focus may be on retaining entrepreneurs who have critical skills.
than over the long-term.
In an acquisition of a smaller rival, the focus may be on retaining customers and a smaller group of
key talent.
In addition to data on retention plans, we also gathered information from survey participants on transaction
bonuses designed to reward employees for the incremental work they undertake during a transaction.
Similar to retention incentives, we find that transaction bonuses are also tailored to the specifics of the deal
and the team members involved.
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© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
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METHODOLOGY
Survey of M&A Retention and Transaction Programs
Methodology
2
Methodology
I. Survey Design
To deliver comprehensive data on M&A retention and transaction practices, this survey was designed to
cover the most important aspects of these programs and the companies that implemented them. The survey
covered three main topics:
Participant Profile
To assess retention programs in the proper light, it is necessary to understand the companies that
implement them. We gathered information on company size, industry, location and M&A activity.
Typical Structures
We asked survey participants to answer questions on their typical retention and transaction incentive
designs (if they have one). We find that often companies have a typical design that they use for most
deals, and customize the design for the specific needs of an individual deal. This gives valuable insights
on how companies approach and think about retention.
Recent Transaction Data
We collected in-depth data from each participant on three M&A transactions completed within the past
three years for which a retention and/or transaction program was implemented. By also collecting data
on the size of the deal, the type of transaction and the industry of the target, we are able to identify
trends and patterns of how retention programs differ for each unique situation.
II. Data Analysis and Reporting
To deliver the insights contained in this survey report, data is analyzed in the following categories:
¡
¡
¡
¡
In aggregate form
By country / region
By type of deal (acquisition vs. divestiture)
By deal size
In addition to the data gathered, Mercer consultants also conducted interviews with eight of the larger survey
participants to gather more information on the thinking and approach around retention, and how retention fits
into organizations’ overall human capital and talent management strategies. Insights from these interviews
are contained throughout this report.
A few survey reporting notes:
¡
Percentages in columns may not add to 100 percent when organizations are given the option to
provide more than one response to a specific question.
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© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
¡
¡
¡
Methodology
For all questions that provide a percentage response, the percentage was calculated based on the
number of organizations that responded to each question and not the total number of survey
respondents.
Mercer reminds readers to exercise caution in drawing definitive conclusions on data where sample
sizes are small (e.g., fewer than 10 organizations). This could potentially represent an insufficient
sample size and not be an accurate reflection of the marketplace.
All dollar amounts ($) are denoted in US Dollars. Any values reported in foreign currencies have
been converted to USD using the applicable exchange rates.
To protect the confidentiality of survey participants and to ensure quality data, no statistics are shown for
sample sizes of less than four. Percentiles are shown for sample sizes of five or larger.
III. Survey Usage
The information and data contained in this report are for information purposes only and are not intended nor
implied to be a substitute for professional advice. In no event will Mercer be liable to you or to any third party
for any decision made or action taken in reliance of the results obtained through the use of the information
and/or data contained or provided herein.
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© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
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4
RETENTION
PROGRAMS
Survey of M&A Retention and Transaction Programs
Retention Programs
3
Retention Programs
The use of retention incentives is selective and depends primarily on the type of deal. Among all deals
completed by participants over the past three years, 62% include retention programs.
“Retention is not related to the value of the deal, but to the value of the people.” – Survey
participant
I. Eligibility and Participation
Participants report that they typically determine whether a retention program is necessary early in the due
diligence process. However, eligibility is not usually determined until the deal approaches close.
“Our M&A team, HR team and business team work together to determine eligibility for the
retention bonus.” – Survey participant
Retention plans target executives, senior management and those critical to integration
Retention programs are primarily focused on retaining executive and senior management talent (key for
long-term value creation and continuity) or employees critical to integration, such as those in finance and
accounting roles. Few companies offer retention incentives to employees outside these groups.
Concerns about the long-term success of the deal drive retention strategy
While just over half of companies (53%) provide retention incentives to employees critical in the short-term
for integration, 70% provide incentives to executives critical to long-term success and 69% to senior
management.
Retention Bonus Eligibility
% of Companies Providing Retention Incentives, by Employee Group
80%
70%
70%
69%
53%
60%
50%
40%
30%
14%
20%
10%
0%
Executives critical
for long-term
success
Senior Management Employees critical in
short-term for
integration
4
Other employees
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
Buyers are more likely than sellers to provide retention incentives
Companies are more likely to provide retention incentives when involved in an acquisition than a divestiture.
For example, when describing their “typical” retention program structure during an acquisition, 57% of
participants say executives critical to long-term success are always eligible for retention incentives. For a
typical divestiture, however, only 44% say these executives are always eligible.
“In addition to bonuses, leadership interaction and a well designed change management strategy
are critical to retention. When we want to retain key talent, we look closely at what is being
communicated to them.” – Survey participant
% of Employee Group Always Eligible for Retention Incentives
For Typical Structures, by Deal Type
60%
57%
50%
Acquisitions
44%
40%
29%
30%
Divestitures
33%
25%
24%
20%
10%
0%
Executives critical for longterm success
Senior Management
Employees critical in
short-term for integration
Retention bonuses are more common in cross-border transactions
Retention programs are more commonly implemented for all employee groups when the transaction is
cross-border. This reflects the fact that acquiring firms tend to be more cautious when the target is outside
their home market and thus are more likely to implement retention programs in order to retain to key talent.
Retention Bonus Eligibility – Cross Border Transactions
% of Companies Providing Retention Incentives, by Employee Group
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
80%
80%
60%
4%
Executives critical for
long-term success
Senior Management
5
Employees critical in
short-term for
integration
Other employees
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
II. Individual Award Levels
Retention incentives are typically determined as a percentage of base salary and vary significantly based on
factors such as the employee’s level in the organization and whether the deal is an acquisition or divestiture.
Our data also show that the country in which the deal takes place and the company’s industry also impact
award levels.
“Our retention strategy is based on our findings during due diligence. We use a formal approach
to determine dollar payments. In setting amounts, we consider the disruption of day-to-day
work.” – Survey participant
Retention Bonus as % Base Salary
25th %ile
Median
Executives critical for long-term success
25%
75%
Senior Management
25%
45%
Employees critical in short-term for integration
15%
25%
Other Employees
15%
25%
6
75th %ile
130%
95%
45%
60%
N=
52
50
37
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© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
Region matters
Among participants, U.S. and Canadian companies provide larger retention incentives than European and
Asia/Pacific (APAC) companies when viewed as a percentage of base pay.
Retention Bonus as % Base Salary – By Country / Region
Executives critical for long-term success
Senior Management
Employees critical in short-term for integration
Other Employees
Executives critical for long-term success
Senior Management
Employees critical in short-term for integration
Other Employees
Executives critical for long-term success
Senior Management
Employees critical in short-term for integration
Other Employees
Executives critical for long-term success
Senior Management
Employees critical in short-term for integration
Other Employees
United States
25th %ile
35%
25%
15%
18%
Canada
25th %ile
25%
25%
Europe
25th %ile
5%
5%
5%
Asia Pacific
25th %ile
20%
18%
-
7
Median
95%
55%
30%
25%
75th %ile
130%
103%
55%
73%
N=
29
27
24
10
Median
75%
45%
25%
-
75th %ile
130%
130%
-
N=
9
9
4
0
Median
25%
35%
25%
-
75th %ile
95%
73%
50%
-
N=
8
8
7
0
Median
45%
30%
-
75th %ile
111%
106%
-
N=
6
6
0
0
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
Bonuses tend to be larger for acquisitions than for divestitures
Incentive size also depends on the type of deal. Companies acquiring another company or a division tend to
offer larger retention incentives to important employee groups in the acquired company than do companies
selling off a business.
“As a seller our focus is to ensure that the management team and key talent stay on board
through the closing – often a small population that has to be retained for a short duration. When
we are the buyer’s position, it’s a much bigger challenge to retain a broader population for longer
– which means retention incentives need to be more compelling.” – Survey participant
Typical Median Retention Bonus as % Base Salary
Acquisitions vs. Divestitures
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
45%
45%
45%
Acquisitions
30%
30%
Divestitures
25%
10%
5%
Executives critical for Senior Management
long-term success
Employees critical in
short-term for
integration
Other Employees
III. Conditions for Payment
A majority of plans condition payment only on time
Retention incentives are used primarily to induce key employees to stay with the company for a certain
period of time in light of employment uncertainties arising in connection with the transaction. Thus, the
majority of participants in this survey condition their retention payments only on time – either through closing
or, more often, for a defined period after closing. Roughly a third of companies (36%) also tie payments to
integration milestones. Only a fifth (22%) of participants tie retention bonuses to financial performance.
Conditions for Retention Bonus
80%
70%
60%
75%
58%
50%
36%
40%
30%
22%
20%
10%
2%
0%
Stay through
closing of deal
Stay for a defined
period after
closing
Performance Integration
Milestone
8
Performance Financial
Objectives
Other
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
Buyers are more likely than sellers to condition payments on financial performance
Companies divesting a business unit or other part of the company condition retention payments on financial
(performance-based) objectives in only 9% of deals, whereas those acquiring a company are more likely to
condition payment on financial performance metrics (26% of deals). This could be because companies
divesting a business are more concerned with ensuring that key talent remains with the company until close;
acquiring companies, on the other hand, are also focused on the long-term performance of the acquired
talent.
Conditions for Retention Bonus
Acquisitions vs. Divestitures
Acquisitions
57%
88%
38%
26%
Stay through closing of deal
Stay for a defined period after closing
Performance - Milestone
Performance - Financial Objectives
Divestitures
73%
45%
27%
9%
Acquisitions based on 42 responses. Divestitures based on 11 responses. Some participants provided more than one response.
IV. Timing of Payout
Most retention plans pay out only after deal closing
Mercer's experience has been that key employees are most at risk of leaving an organization during the
period between deal announcement and three-to-six months after deal closing. Although buyers typically
want to retain key employees through this entire period, they have no formal relationship with these
employees prior to closing. Therefore, retention programs offered by buyers typically require employees to
stay from close until a future date following close, at which time retention incentives are paid. Frequently
buyers, with the seller’s cooperation, reach out to key executives prior to closing to communicate the
retention program that awaits them once the deal closes.
“It’s critical to bring individuals on board quickly. The sooner individuals are on-boarded, the
more effective they are and the more successful we are as a company.” – Survey participant
Retention Payment Timing
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
78%
80%
Employees critical for longterm success of deal
Employees critical in shortterm integration
12%
11%
Paid fully at or before
close
10%
9%
Paid only after close (ex: Part paid before close;
3 months after close)
rest paid after close
9
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
Retention plans provided by sellers typically pay out only a few months after closing
The seller’s interest in retention is often somewhat different from the buyer’s. The seller typically wants to
keep the management team and key talent intact between deal announcement and closing – so retention
incentives offered by sellers are more likely made payable upon closing than are those offered by buyers.
However, this arrangement does provide some motivation for key employees to leave immediately upon
closing, once they have collected the retention payment. To address this issue, a majority of plans offered
by sellers require employees to stay with the company for some number of months past closing to earn a
payout. Since the employee’s relationship with the seller ends at closing, such a plan usually requires the
buyer to agree to accept the retention agreements and pay the retention amounts when due. To the extent
a seller-provided retention incentive replaces the need for a new retention incentive post close, the buyer
may not consider this financial obligation in determining the purchase price
Retention Payment Timing
Typical Structures, Acquisitions vs. Divestitures
75% 75%
80%
Acquisitions - Employees
critical for long-term success
of deal
70%
57%
60%
50%
50%
40%
29%
30%
20%
10%
Acquisitions - Employees
critical in short-term
integration
10%
15%
29%
21%
15%
10%
14%
0%
Paid fully at or before
close
Paid only after close
(ex: 3 months after
close)
Part paid before close;
rest paid after close
Divestitures - Employees
critical for long-term success
of deal
Divestitures - Employees
critical in short-term
integration
Payout term is longer for employees critical to long-term success than for those critical
only to integration
The retention bonus is a temporary reward designed to discourage key employees from leaving. The longer
these employees stay after close, the more effectively new owners are able to retain and engage them.
Mercer research shows that employees key to integration are typically paid within 12 months after close,
while those critical in the longer term are typically paid in installments over a 24-month period.
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© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
V. Number of Payments
The number of payments and their timing are closely linked to the retention objectives and are correlated to
the size of the retention bonus. If the objective is integration, bonuses are smaller and are paid in one lump
sum. For longer-term retention, bonuses are larger and are paid in two to three installments.
Lump sum payments are most common
While employees critical to long-term success are more likely than those critical to integration to receive their
incentive payments in multiple installments, almost half (48%) receive their incentives in one lump sum
payment. Meanwhile, employees critical to integration receive an all-in-one payment in 60% of deals.
Acquisitions are more likely to pay in multiple installments where as divestitures are more likely to pay out in
one or two installments.
Payment Installments
By Employee Group
Employees Critical for LongTerm Success of Deal
Prevalence
N=
48%
25
23%
12
13%
7
15%
8
All in one payment
2 payments
3 payments
4 or more payments
Employees Critical in ShortTerm for Integration
Prevalence
N=
60%
25
19%
8
12%
5
10%
4
Companies in the U.S. are more likely to pay in multiple installments than those in other
regions
According to survey data, the U.S. is the only region in which companies are more likely to pay retention
incentives in multiple installments than in one and the only region in which companies sometimes pay in
four or more installments.
Retention Bonus Installments
Employees Critical for Long-term Success of Deal
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
United States
89%88%
Canada
75%
Europe
Asia Pacific
23%
32%
25%
13%
0%
All in one payment
2 payments
26%
19%
11%
0% 0%
3 payments
11
0% 0% 0%
4 or more payments
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Retention Programs
VI. Payout Vehicles
Retention incentives are most often paid in cash
Cash is by far the most prevalent payout vehicle used by survey participants (used as part or all of the
retention incentive in 96% of deals). Non-financial vehicles, such as career enhancement and progression
opportunities, are sometimes offered in conjunction with a retention bonus to increase the employee’s
motivation, but are never used in place of financial vehicles. When equity is awarded in the US, Canada or
Asia Pacific it is done so in conjunction with a cash payment.
Cash Only
Cash & Equity
Cash & Equity & Non-Financial
Cash & Non-Financial
Total - Payouts using Cash
Other Vehicles:
Equity & Non-Financial
Equity Only
Non-Financial Only
Prevalence
N=
64%
27%
4%
2%
35
15
2
1
96%
53
4%
0%
0%
2
0
0
Percentages may not add to 100% due to rounding
Equity is much more commonly used as part of a retention program for an acquisition than for a divestiture.
Given the benefits of equity in tying employees’ incentives to those of long-term company shareholders, it is
used in 30% of the observed acquisitions; equity is not used by any companies undergoing divestitures.
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© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
VII.
Retention Programs
Overall Program Cost
Across the deals captured in this survey, the retention pool size as a percentage of deal size decreased as
deal size increased. For deals under USD $100 million, the median retention program size was 2% of deal
cost; for deals greater than $1 billion, the median retention pool size fell to 0.25% of deal cost.
As expected, retention bonus pools as a percentage of deal value are smaller for divestitures than for
acquisitions.
Retention Incentive Pool as % Deal Value
By Deal Size
25th %ile
0.75%
0.75%
0.25%
Less than $100M
$100M - $1B
Greater than $1B
Median
2.00%
1.25%
0.25%
75th %ile
2.75%
2.75%
0.75%
The technology industry provides larger retention bonus pools
Companies in the technology sector provide larger retention incentive pools as a percentage of deal value
than did companies in the other sectors surveyed. This finding reinforces our belief that concerns about
retention are greater for companies where specialized knowledge, intellectual property and talent are critical
to deal success; for transactions in the technology sector, the importance of human capital is especially
acute, which contributes to the importance of retention.
than land and assets
participant
we need the intellectual capital and skills to bu
Survey
Total Pool as % Deal Value
Technology Industry
Total Pool %
2.50%
2.25%
0.75%
th
75 %ile
Median
th
25 %ile
13
© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
4
5
TRANSACTION
BONUS PROGRAMS
Survey of M&A Retention and Transaction Programs
Transaction Bonus Programs
4
Transaction Bonus Programs
I. Eligibility and Participation
CEOs, executives and deal team members get the bulk of transaction bonuses
Executives other than the CEO are the employees most often targeted for a transaction bonus (42% of
deals). Participants in roughly a third (33%) of deals provide transaction bonuses to deal team members,
while 31% provide them to the CEO. Other employees were less likely to receive a transaction bonus.
Transaction Bonus Eligibility
42%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
33%
31%
17%
CEO
Other Executives
Deal Team
Other Employees
European companies are more likely to provide transaction bonuses
Companies in Europe and Asia Pacific are more likely to provide transaction bonuses to CEOs and other
executives than companies in the U.S. and Canada. However, while deal team members are the most likely
employees to receive a transaction bonus from companies in Europe (90% of deals), companies surveyed in
Asia Pacific never provide transaction bonuses to deal team members.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Transaction Bonus Eligibility
By Region
90%
United States
Canada
70%
Europe
60%
50%
50%
33%
25%
21%
25%
17%
13%
13%
0%
CEO
Asia Pacific
40%
0%
Other Executives
Deal Team
14
0%
Other Employees
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Transaction Bonus Programs
II. Individual Award Levels
Transaction bonus award levels are usually smaller than retention award levels since they reward
employees for incremental work beyond normal duties or for a successful transaction, rather than strategic
retention. However, for the deals profiled by participants in this survey, transaction award amounts varies
greatly; for executives including the CEO, award size ranges from 5% to 200% of base salary.
Transaction Bonus as % Base Salary
25th %ile
5%
5%
5%
5%
5%
CEO
Other Executives
Deal Team Member - High Involvement
Deal Team Member - Low Involvement
Other Employees
Median
5%
15%
5%
5%
5%
75th %ile
23%
25%
15%
5%
5%
N=
14
18
17
14
12
European companies award transaction bonuses to deal team, more so than to
executives
Finally, while transaction bonuses as a percentage of base salary for deal team members are fairly
consistent among companies in the U.S. and Europe, companies in Europe provide much smaller
transaction bonuses to CEOs and other executives than companies in the U.S. With deal team members
being eligible in 90% of European deals, we can speculate that they focus transaction bonuses on people on
the deal team more so than the executives.
Transaction Bonus as % Base Salary
By Region
United States
CEO
Other Executives
Deal team members - high involvement
Deal team members - low involvement
Other Employees
25th %ile
8%
5%
5%
-
Median
113%
20%
5%
5%
5%
75th %ile
89%
13%
5%
-
N=
4
6
6
6
4
25th %ile
5%
5%
5%
5%
5%
Median
5%
5%
5%
5%
5%
75th %ile
5%
15%
15%
5%
5%
N=
8
8
9
6
6
Europe
CEO
Other Executives
Deal team members - high involvement
Deal team members - low involvement
Other Employees
15
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Transaction Bonus Programs
III. Conditions for Payment
Bonuses are conditioned on deal closing
Transaction bonuses are generally paid only if the deal closes, although deal team members in a small
percentage of deals received transaction bonuses regardless of deal closing, reflecting companies’ desire to
reward deal team members for their work on the transaction even if it didn’t close.
Transaction Bonus Payment Conditions
100%
13%
75%
50%
Paid only if deal is closed
at a certain price
Paid only if deal is closed
100%
93%
77%
90%
25%
7%
0%
CEO
Other
Executives
50%
Paid whether deal is
closed or not
38%
23%
10%
Deal Team
Deal Team
Member - High Member - Low
Involvement
Involvement
Other
Employees
Bonuses are rarely conditioned on performance
While CEOs, other executives and deal team members are never paid a transaction bonus contingent on the
deal closing at a particular price, a small percentage of other employees do receive a bonus that is
performance-based, reflecting the ad hoc and discretionary nature of these bonuses.
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© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Transaction Bonus Programs
IV. Number of Payments
All-in-one payments are the norm
Roughly four-fifths of all transaction bonuses are paid in one payment. Companies may pay in more than
one payment if they are trying to achieve an additional retentive effect from the transaction bonus.
Transaction Bonus Installments
90%
80%
80%
81%
Executives
Others
70%
60%
50%
40%
30%
20%
20%
19%
10%
0%
Alll in one payment
2 or more payments
V. Payout Vehicles
Transaction bonuses are paid in cash
Cash is by far the most common payment vehicle for transaction bonuses (used as part or as the entire
transaction bonus in 88% of the deals).
Cash Only
Cash & Equity
Cash & Equity & Non-Financial
Cash & Non-Financial
Total - Payouts using Cash:
Other Vehicles:
Equity & Non-Financial
Equity Only
Non-Financial Only
17
Prevalence
N=
72%
8%
0%
8%
88%
18
2
0
2
22
12%
0%
0%
3
0
0
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Transaction Bonus Programs
VI. Overall Program Cost
Transaction bonus pools rarely exceed 0.5% of deal value
The median size of the transaction bonus pool among participants is 0.25% of deal value. However, almost
three-quarters report a pool of less than 0.5% of deal value, and this is consistent across regions.
Total Pool as % Deal Value
75th %ile
Median
25th %ile
0.63%
0.25%
0.25%
Based on 22 responses
18
© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
5
6
DESIGNING YOUR
RETENTION
BONUS PROGRAM
Survey of M&A Retention and Transaction Programs
Designing Your Retention Bonus Program
5
Designing Your Retention Bonus Program
As the data in this report makes clear, there is no one-size-fits-all retention incentive program. While many
of the plans included in this study share certain characteristics, retention plan design varies – in some
cases, significantly – based on deal size and complexity, type of deal, industry sector, region and whether
the transaction is cross-border. And even among like deals, there is considerable variation.
When developing your strategic retention bonus program, we believe it’s critical to look beyond market
benchmarks to examine your own unique needs and context. The following four steps will help you develop
the most effective program to meet your needs.
I. Examine Whether a Retention Plan Is Critical To Deal Success
The first step is to determine whether a retention incentive program is critical given your objectives. Key
questions to answer include:
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Will the business be negatively impacted if key employees leave?
How does the deal impact the employment situation?
Do ongoing post-close HR programs encourage retention?
II. Evaluate The Population For a Strategic Retention Program
We recommend that companies base retention incentive program eligibility on two factors:
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The impact the individual has on either integration success or long-term performance
The likelihood that the individual will leave
Often, the seller will work with the buyer to quickly identify those high-impact, high-risk individuals who might
be difficult to replace in the short-term. Established tools for succession planning and business risk
assessment can be very useful in identifying these individuals.
19
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Designing Your Retention Bonus Program
III. Determine the Award Sizes for Retention Program Participants
There are three questions companies should ask in order to determine retention award levels:
1. What is the total plan cost?
Deal valuation should incorporate potential retention plan costs to get a true sense of the total cost
of deal completion and integration. Companies can either adopt a bottom-up approach (determine
the population targeted for retention and their respective award levels to arrive at an overall program
cost) or a top-down approach (determine the total pool in the context of the deal value and
determine awards based on this).
2. Is the award meaningful to the employee and sufficient where a competitor cannot easily buy
out the award?
The award should be large enough to dissuade participants from looking for other opportunities
despite the uncertainty and perceived risk to their jobs and careers. The size of the annual pay
package and any change-in-control severance arrangements are also relevant – an above-market
pay package or a substantial severance for termination following a change-in-control may indicate
that a modest retention award is appropriate.
In some situations, existing long-term incentives are cashed out upon closing of the deal, resulting
in a windfall payout, especially for executives. At the same time, new long-term incentive plans that
are put in place will not pay out for three to five years. Flush with cash from the windfall, executives
will have relatively little at-risk pay if they were to leave six to twelve months following close.
Retention plans can be used to bridge this gap with shorter-term payments.
3. Should different roles have different award levels?
A tiered approach can ensure that awards are proportionate to the risk-impact profile and are
meaningful to individuals at various levels. Executives who are critical to long-term success typically
receive the largest awards, while professionals critical to post-deal integration usually receive
smaller awards.
IV. Clarify Conditions for Payment: Pay-for-Stay Or Pay-for-Performance?
Participants tend to discount the value of a retention award if it comes with a performance condition, as
there is uncertainty associated with its payout. Therefore, it is important to have a clear understanding of
the objective of the retention plan when deciding whether to include performance conditions.
If the objective is to retain key employees despite significant employment uncertainty, performance
conditions may undermine the effectiveness of the retention plan by placing too much of the award at risk.
However, some situations are more suited for using performance conditions. For example, companies might
consider synergy milestones for executives leading post-merger integration work streams or deadlines for
function heads to ensure stand-alone capabilities in a divestiture situation.
20
© 2012 Mercer LLC.
SURVEY OF M&A RETENTION AND
TRANSACTION PROGRAMS
6
7
PARTICIPANT
PROFILE
Survey of M&A Retention and Transaction Programs
Participant Profile
6
Participant Profile
This survey was conducted in the spring and summer of 2012. Participants were selected on the basis of
having completed at least one successful M&A transaction over the past three years. A total of 42
organizations headquartered around the world participated in the survey. Each participant had the
opportunity to report data for up to three recent transactions as well as data on the typical retention and
transaction bonus structures it utilizes. The information presented in this report represents over 70 recent
transactions completed by participants.
I. Participants’ M&A Experience
The participants in this survey are all large and complex organizations and are well experienced in M&A
transactions. Some participants completed as many as 41 transactions in the time period covered by the
survey, while others completed far fewer. Among all transactions completed by participants over the three
years ending in 2011, 62% included a retention bonus program and 25% included a transaction bonus
program.
The deals closed by participants over the past three years ranged in size from $2 million to almost $4 billion,
with a median size of $105.2 million.
II. Participant List
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Albemarle Corporation
Britvic PLC
Caterpillar
Chevron
Corning China
CSA Group
Cytec Industries Inc.
Daiichi Sankyo, Inc.
Dockwise B.V.
Emerson Network Power
Florida Ice & Farm Co.
Fujitsu Technology Solutions GmbH
GE China
Gibson Energy Inc.
Grupo ICA
Heineken
Heineken International
HP
IBM
J&J Medical
JDSU
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21
Kolon Industries, Inc
Liberty Seguros Argentina S.A.
Lixil Corporation
Melbourne IT
NCR
Nokia Siemens Networks
OpenText
Pantaleon, S.A.
PTT International Company Limited
RBC
Shell
SNC – Lavalin Group Inc.
Solera
Solvay
Sumitomo Heavy Industries, Ltd.
Symantec
Symcor Inc.
The Hershey Company
The Principal Financial Group
TMX Group Inc.
Tyco International
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Participant Profile
III. Geography
Approximately two-thirds of participants are based in the U.S. and Canada, 19% are based in Europe, 14%
in Asia Pacific and 7% in Central America
Central
America
7%
Canada
17%
United
States
43%
Asia
Pacific
14%
Europe
19%
22
© 2012 Mercer LLC.
Survey of M&A Retention and Transaction Programs
Participant Profile
IV. Industry
Survey participants come from diverse industries and employ a wide variety of business models. The largest
sectors represented include: Technology (33%), Consumer Products (19%), Services (12%) and Energy
(10%).
Other, 5%
Transportation,
2%
Diversified /
Conglomerate, 5%
Finance, Banking
& Insurance, 7%
Technology, 33%
Manufacturing, 7%
Energy, 10%
Services, 12%
Consumer
Products, 19%
V. Size and Capitalization
The table below provides data on participants’ annual revenue as of the last fiscal year, market value as of
the completion of the survey (for those companies that are publicly traded), and number of employees as of
the end of the company’s most recent fiscal year.
25th %ile
$1,653
$2,554
2,950
Revenue (USD Millions)
Market Value (USD Millions)
Employees
23
Median
$5,295
$5,700
13,450
75th %ile
$18,840
$25,000
45,318
N=
36
23
40
© 2012 Mercer LLC.
Mercer (US) Inc.
1166 Avenue of the Americas
New York, NY 10036
+1 212 345 7000