Financial retention agreements increasingly effective

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Starting the retention process early yields the best results during M&As

Financial retention agreements, which ensure that acquired talent remains with the new company during a merger or acquisition (M&A), have become more effective over the past three years according to Willis Towers Watson.

The 2017 Global M&A Retention Study surveyed 244 companies and found that 79% of acquirers were successful in retaining at least 80% of employees with agreements through the end of the retention period. In the company’s prior survey in 2014 on global M&A retention, just 68% met this threshold.

Of those employees with retention agreements who do leave the company before the end of the retention period, nearly half (44%) blamed the new or changing culture. Other frequently cited reasons for leaving included being pursued by competitors (36%) and not liking their new role (25%).

The research suggested there were several compelling reasons to begin the retention process early by focusing on senior leaders. Nearly a quarter (24%) said they had asked their senior leaders at target companies to sign retention agreements before the initial merger agreement signing. Early communication with senior leaders was noticeably different between high-retention acquirers (28%) and low-retention ones (11%).

Jessica Norton, UK executive compensation transactions lead at Willis Towers Watson, highlighted the importance of early communication. “Senior leadership typically steers the transaction pre-close and are most responsible for getting the deal done,” she said. “To make sure they aren’t distracted by concerns over their own futures, early communication is critical to get them on board and aligned with the goals and strategies of the acquisition. Retention agreements can provide a clear personal stake in the success of the new company.”

Cash bonuses, most commonly expressed as a percentage of base salary, were found to be the primary financial award in retention agreements for senior leaders (77%) and other key employees (80%).

“Key employees understand their value in the marketplace, which raises the importance of additional retention tactics,” said Norton. “The most successful acquirers realise retention agreements alone can buy time — but not loyalty. And by not using their arsenal of tools to build loyalty during what can be tumultuous periods, companies often lose talent that would serve them well in the long-run.”

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