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Total Rewards in M&A: Don’t Confuse ‘Integration’ with ‘Harmonization’

By Leena Menghani | February 07, 2022

As a buyer prepares to integrate a target, the transition relies heavily on the due diligence findings, but also requires a step back and level-set period to recenter on the deal goals.
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Total Rewards in M&A: Don’t Confuse ‘Integration’ with ‘Harmonization’

Total Rewards impact people and their families directly, making them intensely personal for employees. Too often, buyers approach Total Rewards integration disconnected from the overall deal goals and as a result experience business disruption and loss of productivity. In this four-part series, we will discuss how organizations should approach Total Rewards integration.

When acquiring a business, the starting point of a successful Total Rewards integration strategy requires understanding what both organizations provide today and why they provide those rewards. But don’t forget the importance of understanding the role of Total Rewards in the new organization.

There are many factors that likely will impact the new Total Rewards program, including the purchase agreement, synergy goals, labor agreements and other stakeholders. All these components help to create the business rationale needed for discussions with leaders and efficient decision making.

Often the temptation is to jump straight to analyzing differences in individual programs and picking winners. This misses a crucial step: setting the stage. Unfortunately, as the deal closes many buyers focus on immediate benefits of the acquisition while losing sight of the big picture.

Setting the stage

I know what you might be thinking: There’s simply no time for a long, complicated strategy process or theoretical concepts and policy statements. No one has the patience for that when we have so much to do to bring the organizations together. But setting the stage doesn’t have to be a drawn-out process. In fact, a well-designed single discussion can bring significant efficiency to the rest of the Total Rewards integration process.

There’s another reason people jump right into comparing individual programs: Total Rewards is one HR workstream that often has more access to the data needed to start integration planning during due diligence.

Labor costs can be one of a company’s largest expenses. Typical due diligence processes, therefore, often provide quite a bit of information on the reward programs offered to employees. Because these programs are not individual-person-level data; information flows slightly more freely into data rooms. Experienced dealmakers use this to their advantage to have a better understanding of the value of the business.

Questions during due diligence

The due diligence process should be answering three questions:

  1. Is this target a strategic fit for our business goals?

    The focus of the first question is entirely on the business strategy and whether acquiring this target will enable your company to achieve its business goals.

  2. What are we willing to pay for the target and under what terms and conditions?

    With the second question, the focus shifts to the full analysis of financials, operations, legal, HR, IT and other functional areas to identify the enterprise value of the target and risks of the acquisition. For HR, understanding a target’s incentive and reward programs while evaluating material plan costs, liabilities and surpluses are important in addressing this question.

  3. What does the eventual ownership look like, and how are we going to achieve the deal goals?

    The third question is formulating the initial integration strategy. This is where due diligence includes understanding the current structure and costs of rewards at the target for all programs (including the ones that are non-material), and a side-by-side comparison to the buyers’ programs. Answering the third question also requires looking at how the rewards program contributes to the talent strategy and business goals.

A common leap at this point is to assume that because due diligence includes a comparison of the target’s and buyer’s programs, decisions have been made and the plan is ultimately to fully harmonize or transition the target’s employees to the buyer’s programs. However, due diligence is a process that is run without full access to the target company. Regardless of how much detail you can gather in due diligence, the integration planning is still preliminary and intended to be built upon and refined.

The importance of setting the stage

In due diligence, you may find out what there is, but you’re unlikely to find why it’s there and what purpose it serves. Because of this, integration strategy post due diligence should have a step-back-and- level-set period to revisit the strategy process and fill in the gaps to set the stage. This should include:

  • Testing what you thought in due diligence preliminary integration planning
  • Adding more about what you know post-close
  • Engaging with key stakeholders to understand their expectations for the business

With this additional information the integration strategy process can continue in the right direction.

Stage setting defines the parameters such as integration goals (based on deal goals) and guiding principles, decision makers/stakeholders and their expectations, desired culture of the combined organization, constraints and conflicting priorities, and timing requirements. Don’t forget the communication and change management strategy elements. Consider the following questions:

  • What has already been said to the broader employee population?
  • What do we want to say?
  • How will we deliver those messages?

If the deal includes more than one country, this is also the time to determine how the integration work will prioritize individual countries, due to local requirements such as works councils and employee representative groups, and also the timing of other functional integration critical to the business.

The transition from due diligence to integration is crucial

Remember that the goal of due diligence is to ensure that the deal is sound and establish the value proposition. The purpose of integration planning is to define the blueprint for all aspects of the combined organization. The transition from due diligence to integration involves building on due diligence findings and ensuring the mindset of the team is calibrated to the goals of integration.

Read on in our next blog where we’ll give a glimpse into what “integrated” looks like if it’s not “harmonized.”


Associate Director, Integrated & Global Solutions – M&A
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