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Article | Executive Pay Memo North America

Special M&A synergy awards among the largest U.S. mergers

By Dan Leon and Scott Oberstaedt | October 23, 2023

A new study shows how a limited number of the largest mergers in the U.S. utilize one-time discretionary awards based on synergy goals for the combined company.
Executive Compensation|Mergers and Acquisitions
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Major acquisitions are meant to drive business transformation — and, as such, come with shareholder demands that the deal create synergies for the new combined company. Whether it’s cost efficiencies or new revenue streams, executives are expected to improve the bottom line post-close. To reinforce those goals, a limited number of companies introduce special incentive plans tied to those synergies.

WTW’s Global Executive Compensation Analysis Team (GECAT) recently reviewed special synergy awards among the 100 largest U.S. mergers from 2018 to 2022. While M&A activity has varied over this period of review, the prevalence of special long-term incentive (LTI) awards tied to post-merger synergy goals has been consistent.

A few highlights from the study include:

  • Only 14% of companies granted special synergy awards to named executive officers (NEOs).
    This includes 5% that also had synergy goals in their short-term incentive (STI) plan in addition to making special synergy awards. The remaining 86% of companies did not grant special synergy awards; however, 23% included synergy goals in their STI plan.
    • Boards have consistently stated that the existing compensation package provided to NEOs should be sufficient to align those top executives with the long-term strategy of the business, including M&A. In a limited number of situations, a special incentive or addition of a special synergy-related goal may be warranted.
  • Special synergy awards were strongly correlated with large deal values.
    Seventy-nine percent of awards were made at mergers above the $13.8 billion median deal value. These large deals are among those most likely to be transformative to the business or require the greatest workload in order to achieve synergy goals.
  • Performance share units (PSUs) were the most common award vehicle used for special synergy awards (65%).
    The remainder were granted as performance shares (14%), performance stock options (7%), performance cash (7%), or a mix of PSUs and performance stock options (7%).
    • Granting company equity with performance vesting conditions serves as double leverage; synergy goals need to be met in order for the awards to vest, but the ultimate value of the award also depends on the stock price. Executives must balance both those internal goals and the external investor concerns to maximize the plan’s value.
  • Most companies reported vesting periods of between three and four years
    86% of the companies reported vesting periods of between three and four years. Of the 86%, 36% reported vesting in three years, 28% between 3.25 and 3.5 years, and 22% in four years. The remaining 14% were split equally among two-year and five-year vesting periods.
    • Multiyear performance periods are a sign that meeting the synergy goal itself may not be sufficient; the gains must be lasting to be truly transformative to the business.
  • Performance metrics for 57% of these synergy awards included a mix of synergy goals (commonly defined by either cost reduction or revenue improvement) plus other financial goals.
    The remaining 43% of awards used only synergy performance metrics.
    • Using both specific acquisition-related financial goals plus other corporate financial goals emphasizes the need to focus always on the business overall, not just the acquisition.

Companies may still be very selective on when to adopt a synergy incentive plan. However, if structured correctly, these plans can better align executives with the need to integrate businesses following a merger and maximize the advantages of being a combined company. If adopted, boards should keep in mind several key issues:

  • Any such award to any NEO would need to be disclosed to shareholders.
  • In the disclosure, the company should make clear the one-time nonrecurring nature of the award.
  • The disclosure should also draw clear links between the values that the selected executives can earn and the importance of meeting the synergy goals.
Authors

Senior Associate, Global Executive Compensation and Analysis Team (Houston)
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Senior Director, Executive Compensation and Board Advisory (Washington D.C.)
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