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When it comes to M&A retention payouts, the cost-benefit analysis has changed

March 22, 2024

More and more, retention awards are tied to improved business performance. And shorter retention periods mark one way that companies can cut retention-related costs.
Executive Compensation|Mergers and Acquisitions

Inflation, tight labor markets (particularly around critical skill sets), rising interest rates and related financial challenges have changed the cost-benefit analysis when it comes to retention payouts during mergers and acquisitions (M&A). More and more often, retention awards are tied to improved business performance, and shorter retention periods mark one way that companies can cut retention-related costs.

These trends could affect how retention bonuses are structured this year, when M&A activity is predicted to rise based on more favorable market conditions, a need for companies to strategically transform their business models and an increasing appetite for deals.

According to WTW’s 2024 M&A Retention Study, which included nearly 160 respondents (both buyers and acquired companies) worldwide, 78% of whom had closed more than one acquisition in the past two years:

  • In 2020, companies reported that it took 10 months from initial contact until the deal closed, while in 2023, on average it took 14 months from preliminary discussions until deal closure.
  • Companies also shortened the length of retention periods for top executives between 2020 and 2023.
  • Cash still rules when it comes to retention bonuses, but more than half of respondents also reported offering restricted stock units (RSUs) to senior leaders to enhance ownership mentality from the beginning.

In a year that was characterized by rising interest rates and other financial challenges, the study results demonstrate that firms have become more economical in allocating money to retention goals. Overall, retention pool size continues to decline, with nearly 70% of respondents that track and set aside a retention pool reporting that the retention pool was less than 2% of the purchase price for the acquired company.

In a similar vein, fewer companies reported retention pools above 5% of the purchase price, compared to three years earlier. The type of deal or the purpose of the deal is a primary driver of retention pool size. For example, emphasizing the acquisition of a target to strategically acquire human capital assets may require a larger retention pool budget than the acquisition of a company with a deal thesis more focused on other assets.

Shorter retention periods, lower costs

Companies that have completed prior M&A deals know that keeping key executives and employees can be the difference between success and failure in a merger or acquisition. The challenge comes in weighing cost-effective measures against retention agreements that offer enough incentives, both financial and nonfinancial, to motivate key employees to remain, and to remain productive, as long as their services are required.

In 2020, two-thirds of companies that participated in WTW’s retention study reported retention timelines of two or more years for senior executives. Currently, fewer than 30% of participants reported structuring retention periods to last longer than two years, with the median lying between 13 months and 18 months. Shorter retention periods may reflect pressure to retain employees for only as long as necessary during the transition, which may cut costs for retention packages.

Rather than assigning the entire retention pool upfront, about three in 10 of the surveyed companies report reserving a portion of the retention pool for ad hoc grants. Such a reserve serves as “dry powder” to extend retention timelines for key executives, as needed; to shore up critical employees or groups during the transition; or to deal with other unforeseen circumstances. In short, leaving some of the retention pool unallocated allows companies more flexibility in setting the length of retention periods, and in identifying and rewarding employees who might stay with the new company past the initial transition period.

Pay for performance on the rise

The study also makes clear that performance pay is climbing, and the focus is shifting from cash bonuses alone to a mix of cash, stock options, RSUs and other awards that account for measurable metrics of success for the target or combined companies.

This move toward performance pay almost certainly reflects the character of the purchasing companies. More than 70% of respondent buyers were publicly traded companies, with 66% of the acquired companies held privately. With shareholders and other stakeholders focused on the newly merged company delivering increased value, both in the short term and over time, it makes sense that key executives at the acquired company would be rewarded for meeting specific performance goals.

Also, by tying retention benefits to explicit outcomes, employees have a better understanding of the targets they’re expected to meet and the incentives awarded upon achieving those goals. Such measurable metrics can also create a higher sense of engagement and purpose for senior leaders and critical employees during the transition to a new employer.

Nonfinancial motivation matters

Most respondents anticipate that more than 80% of employees will stay through the end of their retention period. However, remunerative rewards aren’t enough to generate loyalty to a new employer. Cultural misalignment and disagreement with the direction of the newly combined company remain the most commonly cited explanations why employees leave before the end of the retention period.

Companies that want to identify and retain critical leaders and employees past the initial retention period must provide a human touch to the employee experience during integration. The most effective nonmonetary levers include one-on-one outreach from leaders and managers; employee participation in integration discussions, when possible; and opportunities for career advancement for employees who remain.

By understanding how employees feel about the transition, and then helping them understand how they fit into the new company’s vision and broader plans, the acquiring company can rebuild some of the trust that can be lost during M&A transitions. In doing so, the new company not only generates value, but also creates an environment that keeps key talent engaged and productive well past the retention-award vesting date.


A version of this article appeared in Workspan on March 14, 2024. All rights reserved, reprinted with permission.


Senior Director, Executive Compensation and Board Advisory (San Francisco)
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Director, M&A
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