The state of M&A retention agreements in 2017: smart, selective and strategic

Insights from the 2017 Global M&A Retention Study

October 16, 2017
| Brazil, Canada, China +7 more
  • France
  • Germany
  • Hong Kong
  • Japan
  • Mexico
  • United Kingdom
  • United States

By Scott Oberstaedt

In this, our third global M&A retention study since 2012, we surveyed 244 respondents across 24 different countries in Asia, the Americas and Europe, to better understand what employers do to retain key staff during a merger or acquisition. We examine the structure, use and effectiveness of retention agreements during an acquisition or merger, with a particular focus on the financial elements of those agreements.

The good news? The effectiveness of these agreements has improved over time. In 2014, nearly 70% of the participants indicated that they retained the talent who received agreements over the span of the retention period. This number has risen to about 80% in our 2017 study.

We also find that the most successful acquirers realize that retention agreements alone can buy time —but not loyalty. As a result, in addition to agreements, they use personal outreach and enhanced career opportunities throughout the desired retention period to convince key people to stay for the longer term.

What high-retention companies do differently

High-retention companies behave differently from others in four critical ways.

  1. Specialized selection: High-retention firms are more likely to target employees below the executive level with key skills than low-retention firms (61% versus 47%), while low-retention firms are more likely to give awards to those identified as high potential (33% versus 23%) or high performance (30% versus 21%).
  2. Early communication: At high-retention acquirers, 28% of senior leaders are asked to sign before the initial signing versus only 11% for low-retention acquirers.
  3. Standardized awards: High-retention companies are less likely to take values earned at sale (e.g., shares owned or accelerated stock awards) into account when determining retention values.
  4. Delayed vesting: High-retention acquirers are more likely to pay out in full only at the conclusion of the retention period (53% senior leadership/61% other employees), while low-retention acquirers use interim vesting/payment terms (35% senior leadership/39% other employees).

Best practices for retention in a merger or acquisition

  • Best practice star

    Best practice: Focus initial retention efforts on senior leaders.

    Start the retention process by focusing on senior leaders. First, they tend to be the group leading the transaction pre-close, and most responsible for getting the deal done. To make sure they are not distracted by concerns about their own futures, it’s critical to get them on board and aligned with the goals and strategies of the acquisition.

    Best practice star

    Best practice: Identify other retention candidates who matter to the deal.

    Senior leaders (54%) and employees below the executive level with key skills considered critical to the transition (55%) run neck and neck as the groups most likely to be offered retention agreements.

    Best practice star

    Best practice: Cash is king.

    While a combination of cash and other types of awards is common, cash continues to dominate with 77% of acquirers globally giving senior leaders cash awards and 80% giving cash to other key employees, about the same as 2014.

    Best practice star

    Best practice: Balance pay to stay with pay to perform.

    Since 2014, the use of time-based agreements for senior executives has grown from 35% to 48%, while performance-only plans have decreased from 14% to 8% for senior executives and from 16% to 6% for nonexecutives. The challenge is to get the right balance between encouraging top performance and setting reasonable performance metrics — that is, those that reflect the employee’s job level, role and skills, and the degree to which he or she can reasonably be expected to influence company performance.