2024 M&A Retention Study

We look at the Western Europe and United Kingdom (European) results from WTW’s 2024 M&A Retention Study on the use of transaction-related retention agreements across industries. This executive summary highlights the study’s key findings on how retention agreements are used to retain key talent in Europe for employees involved in mergers and acquisitions. The details behind these findings are within the full report.

Failure to retain key executives and employees can negatively impact an otherwise successful merger or acquisition. Retention agreements therefore play a critical role in keeping talent, both during and after the transaction. Structuring retention agreements and determining which executives and employees should be offered them is a consistent challenge for acquiring companies.

The number and value of transactions

Consistent with the global results, in most transactions completed by the European respondents over the past two years, the buyer, typically a larger publicly traded company and the seller, typically a smaller private organization, have been in the same industry and market. The IT and telecom and manufacturing industries are the most represented industries in the 2024 survey, followed by financial services and healthcare. Participants in Europe typically engaged in up to four transactions over the past two years with 55% of deals completed within the same industry and market. However, in our 2024 results we note that the size of deals has seen a downward trend with 70% of deals having a purchase price of less than $500 million. Alongside deal values going down, we have seen an upward trend in deal timelines. The typical transaction took six months from preliminary discussions to the execution of a letter of intent and then an additional six months from the execution of the letter of intent until the deal closed.

The use of retention agreements

Mergers or acquisitions often represent a significant period of disruption for employees, particularly at the target organization. From the moment a deal is announced (or sometimes even suspected) these employees face a sense of uncertainty about the impact of the transaction on their own career prospects and the future of the business.

Organizations often use retention agreements to help retain key employees through this period of disruption and to create a period of stability post-deal close. Over 60% of European acquirers track or set aside fixed budgets for retention pools. Although these pools can be quite large, they are typically less than 2% of the purchase price. With the need for employees to transition core responsibilities being the most frequently cited factor considered in setting retention pools showing the perceived importance of human capital to deal success, followed by acquisition of new and critical skills that the buyer does not have.

When determining eligibility for retention agreements, acquirers make decisions based on multiple factors with 82% of European respondents citing information from the sellers’ leadership as a key factor in determining eligibility for retention awards. Given the focus on employees who have key/critical skills or market/industry knowledge considered important to deal success, acquirers are twice as likely to target a large part of the executive team to sign retention agreements as they are to target employees outside this cohort. Most respondents said that fewer than five percent of employees outside of the senior leadership team are selected for retention agreements.

In addition to eligibility for retention agreements, there are also significant differences between senior executives and other salaried employees in the timing of these agreements. Senior leadership are typically asked to sign retention agreements earlier in the deal process than other employees. For example, respondents were more than twice as likely to say senior leadership were asked to sign a retention agreement before signing the deal, while other salaried employees were more than twice as likely to do so at or after the closing.

Terms of retention agreements

As with the eligibility and timing of implementing retention agreements, we also see differences in the terms of retention agreements for different employee populations. Retention agreements are almost always time-based (rather than for example, milestone based), although in many cases these agreements also include a performance-based component.

When looking at the use of performance metrics for European respondents, there were differences to the global results, with 44% of European respondents (versus 36% for global respondents) using a combination of performance metrics and time-based components for senior leadership and 42% (versus 23%) using both for the salaried population. The most common time-based approach to retention award vesting involves cliff vested payments, where payments are made all at once after the entire retention period has passed. The other common approach is to make payments on an intermittent basis, where payments are made evenly across the retention period.

For retention awards that have a performance-based component, there are a variety of types of performance metrics used. For senior leaders, the metrics used most typically focus on the financial metrics of the entire company or the acquired business exclusively. Other performance metrics for senior leaders may relate to the deal itself, including the length of time required to complete the acquisition or the achievement of cost synergies. For other employees, the focus is on financial performance — either of the entire company or the acquired business — although manager discretion is also relatively common.

As well as the approach to vesting and performance conditions, the length of the retention period matters. The spectrum of retention periods varies based on the circumstances of each deal with an even split for European respondents between retention periods of up to 12 months after close and those over 12 months and beyond. Regardless of retention award values, vehicles used to pay retention awards are similar across employee groups. Cash retention bonuses are the most common form of award, used by over four out of five organizations for both senior leadership and salaried employees. Stock-based awards, most commonly in the form of restricted stock units (RSUs), were used in over half of European respondent companies for senior leadership.

Retention award values

About half of respondents offer retention awards in amounts expressed as a fixed percentage of salary for both senior leadership and salaried employees with the typical retention payment values offered by European companies like those offered globally. The annualized retention payment value for senior leadership positions is typically over 50% of base salary and around 30% for the remaining salaried population. While important, retention awards are not the only tool used to retain employees. Respondents also identified other monetary and non-monetary tools as effective for talent retention. For example, 30% of respondents identified increases in base pay as effective tools for retention. Non-monetary retention tools such as career enhancement opportunities and personal outreach by leaders and managers were also used.

Perceived effectiveness of retention awards

Despite the significant amount spent on retention awards and the importance of employee retention to the success or failure of many acquisitions, over 50% of respondents report that they do not track retention rates.

Only a quarter of European respondents (24%) report tracking retention rates through the end of the period to measure the success of their retention strategy and a small minority, only 8% of European respondents continue to track retention beyond the end of the retention agreement. Failure to measure this outcome means that many respondents are unable to track the true effectiveness of their retention agreements or to establish their return on investment.

Respondents reported positive expectations of the number of employees who received retention agreements who would remain through the end of the retention period. Over half of respondents expected at least 80% of both senior leadership and other salaried employees to remain through the end of the retention period. This percentage declined for both groups one year after the end of the retention period. However, over 60% of respondents expected approximately three out of five employees from these groups to remain for a full year after the end of the retention period.

The most cited reasons for attrition during a transaction include discomfort with the changing organizational culture and misalignment with the direction of the new company. Some respondents cite participants’ dissatisfaction with their new role or manager. The above factors create uncertainty among employees and, in turn, greater attrition risk. Therefore, it is not surprising that competitors also view this time as an opportunity to approach employees from both organizations involved in the transaction. Where employees left before the end of the retention period, 97% of European respondents reported that awards for those employees who left were not reallocated.

Conclusion

Mergers and acquisitions create a great deal of uncertainty for employees at both firms involved in the transaction, and this uncertainty can impact engagement, productivity and retention. Given the importance of human capital considerations in the success or failure of transactions, it is not surprising that organizations spend significant amounts on retention pools for executives and other employees to tie them to the organization for considerable periods of time. Organizations’ use of retention awards may be time or performance-based, depending on the purpose of the retention program and the facts and circumstances of the deal. Measurement of success is important; however, many organizations find themselves unable to methodically determine the impact of their programs. Organizations could refine measurement of their results to understand the impact of monetary awards and whether greater use of other non-monetary tools may be effective to retain and engage employees through these periods.

5 things to consider:

• Think beyond the senior team - are their critical skills or job functions that need to be retained?
• Consider nonmonetary rewards - would enhanced career opportunities boost retention?
• Think beyond the initial allocation - consider reserving a portion of the pool for adhoc retention needs
• Have success measures in place - track retention rates for your agreements
• Consider performance measures - these can be a useful tool alongside time based vesting