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Applying Total Rewards comparability provisions in M&A

December 03, 2021

Serial acquirers often include comparability provisions in a deal agreement that provide a target’s employees similar Total Rewards.
Mergers and Acquisitions|Ukupne nagrade

In our first article about M&A transaction comparability provisions, we explored the rationale for including a provision that employees will receive rewards after the close of a deal that are comparable, for a period, to the rewards that they received immediately before a deal closes. We based that article on research with attorneys in the U.K. and U.S. In this article, we explore in greater detail market practices for applying these provisions based on our experience with serial acquirers.

Measuring the gaps

In spirit, the comparability terms in a deal agreement are intended to ensure that total compensation for transferred employees remains similar, for a period, following the deal close. Typically, program values are determined on a “compensation-equivalent” basis to allow for easier comparisons across programs. There is no consistent market practice for the calculation approach, leading to significant variability across companies and, at times, even by deal within a given company.

Once the data is collected and reviewed during due diligence, a qualitative (and also, for some buyers, a quantitative) assessment usually is undertaken, often with a side-by-side comparison of the buyer’s and target’s programs. If the deal proceeds, this assessment will give insight to both the integration opportunities (or challenges), the items to include in (or exclude from) the comparability provisions, and the ease (or difficulty) in administering the comparability provision.

We suggested in our prior article to approach the process pragmatically, especially when a deal involves multiple countries. For example, a single-country deal might allow for the time necessary to be very specific in terms of the programs to include and the analysis undertaken. However, deals involving multiple countries might not allow for such a thorough process.

A way to address comparability, regardless of deal size, is to have a documented policy. And the first step in designing the policy is to determine the approach to be followed based on the size of the country, often by size of the population, as this will inform the granularity of the rest of the analysis.

While size of population is a valid guide, companies have exceptions. One key exception is the future state of that country. For example, what might be considered a “small” country might be treated with additional rigor if that “small” country ends up being a key growth market once the deal is completed.

Once the country size tiers are defined in the policy, the next step is to determine how these tiers will be treated for measurement purposes. Items to consider include:

  1. 01

    Employee data

    This can range from individual-level data or data grouped in age and service bands to a single, average employee profile.

  2. 02

    Programs included

    As mentioned in our first article, the items included will often not be clearly defined but include such items as

    • Annual salary
    • Annual incentive opportunity
    • Paid time off
    • Health, life and disability insurance
    • Retirement plans
    • Other benefit programs
  3. 03


    This often varies by the type of reward included in the analysis. Compensation-related rewards and defined contribution plans are often simplest as it is the cash, or, in the case of long-term incentives, the value, earned during the year. Time off, such as vacation and holidays, is also quite straightforward as it can be calculated as the daily pay rate multiplied by the number of days off.

    Complexity increases with health and welfare benefits, often using the average premium for the coverage tier selected, though some employers reflect the cost that the employee pays. Risk insurances, such as life and disability, can be either the premium cost, adjusted for salary level (for benefits based on salary) or benefit value to be received upon incidence of the event multiplied by the probability that the event occurs, but this latter calculation starts to get actuarial in nature and might be difficult to communicate to the employee (in case a gap payment is necessary).

    Most complicated is the calculation for defined benefit pension and post-retirement health and welfare benefits (and these are already complicated benefits for some employees to understand). The calculation can be the annual service cost recorded in the company’s financial statements or a simplified version of it based on the annual benefit earned multiplied by a present value factor. Like the calculation for risk insurances, this might be difficult to communicate to the employee (in case a gap payment is necessary). Alternatively, buyers may use some form of “benefit valuation,” such as the Willis Towers Watson BenVal, to address retirement and benefits benchmarking, allowing for a consistent approach to comparing benefits packages using either standard or customized demographic profiles and assumptions.

  4. 04


    Unless specified in the deal agreement, assumptions are discretionary. These are of particular importance if the comparability provision includes defined benefit pension and post-retirement health and welfare benefits. While using financial reporting assumptions, such as International Financial Reporting Standards (IFRS) or U.S. generally accepted accounting principles (GAAP), is convenient, the economic assumptions under financial reporting vary due to market conditions and are often short-term in nature. Longer-term economic assumptions are also acceptable, noting the going-concern basis of the enterprise. For demographic/population assumptions, the buyer might consider using the target’s assumptions as those are readily available in the actuarial valuation report. We see some companies adjust these to using the buyer’s assumptions, recognizing that the buyer may change culture and/or rewards programs that will change employee turnover.

It is through the analysis that you can measure and assess the gap, often shown as follows:

Example gap analysis between buyer’s and seller’s compensation and benefits.
Figure 1. Example gap analysis between buyer’s and seller’s compensation and benefits.

Whatever is done, as stated in our first article, be pragmatic with the calculation.

Addressing the gaps

Most organizations address gaps between seller’s and buyer’s programs through cash compensation as companies are generally reluctant to change their existing programs to accommodate acquisitions. Based on our experience with serial acquirers, calculations in the U.S. usually refer to aggregate/average program calculations while other markets, due to acquired rights or constructive dismissal, tend to be at the individual level.

Most organizations address gaps between seller’s and buyer’s programs through cash compensation.

Companies use some tolerance when determining whether to compensate a gap. For example, if the gap is less than 2%, 3%, or even 5% in some situations, no compensation is paid to employees. It is important to seek input from legal counsel if there is any flexibility in this area and, once decided, document it in your M&A policy and apply it consistently.

Market practice for settling a gap includes:

  1. 01

    One-time salary adjustment

    A one-time salary adjustment may naturally fade away after two to three years through the regular salary review process. It is paid over time as employees render their services to the company. This is not very prevalent in the U.S.

  2. 02

    Lump sum

    This is perceived as the simplest approach as it does not affect the organization going forward. Because it tends to be more visible and variations from one employee to another may be perceived as significant, confidentiality agreements with recipients are often used. The challenge with this approach is that it might create a potential windfall for employees who leave shortly after closing. This practice is more prevalent in the U.S. than elsewhere.

  3. 03

    Individual allowance

    This is paid every pay cycle over a predetermined period of time‎ as long as the employee is still employed. Rationale is similar to salary adjustments with the advantage that it does not affect salary levels and internal comparability. The problem — beyond extra administration for the employer — is that it may send the wrong message to employees when the allowance stops. Also, be careful that it does not affect other rewards that are based on compensation (e.g., life insurance). This is usually considered when an ongoing relationship with the seller is maintained after close.

  4. 04

    Program adjustment

    These are difficult to implement in the pension area, but they may be possible under the health and welfare benefits plan where there are obvious short-term effects. For example, all or a portion of the gap settlement could be structured as a “phase in” to the employee contributions to health plans. This is not prevalent.

Some quick reality checks

It is rare for sellers to come back after the deal closes to test the buyer’s compliance with the provisions and whether comparability was achieved in practice. And when an entire company is sold, there is likely no independent entity remaining to assert a breach following close.

Also, it is important to note that the purchase agreement is between the buyer and seller and is not with the seller’s employees (or employee representatives). Therefore, the agreements often have a provision for “no third-party rights,” removing any ability to bring a claim against the buyer or seller for any damages under the comparability provision.

In some cases, the purchase agreement may be silent on comparability, particularly if layoffs within the target are planned. While this might be advantageous in that it gives the buyer flexibility to change compensation and benefits immediately after close (to the extent allowed by law), it leaves the HR team in the difficult position of being unable to answer employee questions about comparability, or at least unable to provide satisfactory answers, which has a negative impact on employee experience.


What might sound like a daunting exercise can be done pragmatically, especially if there is a clear understanding of the target’s (and buyer’s) Total Rewards programs and a stated policy for handling comparability. Most helpful is for HR to be involved early in the deal and in drafting the purchase agreement to avoid any unintended consequences of the comparability provision.


Managing Director, Global M&A Leader

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