How To Retain Staff During Mergers And Acquisitions

When an employer’s boat is rocked by merger and acquisition activity, what’s the best way to retain employees? Edmund Tirbutt investigates.

If interest rates continue to fall, reduced borrowing costs should put UK merger and acquisition (M&A) activity back in the limelight, which will have significant retention implications. The uncertainty created by M&As can cause some employees to jump ship.

Retention surveys conducted by the financial services company Mercer show that 20% of critical talent from the acquired organisation leaves within the first three months after a deal. A further 20% leave in the next 18 months.

And it’s not just the C-suite that needs retaining. Among the most sorely missed can be operations, technical and sales leaders, as well as those who can help with the M&A process.

“Managers and leaders who can help through change are the most important people to keep an eye on retaining,” says Charlotte Schaller, managing director of Aon’s Assessment Solutions UK and EMEA. “They need resilience, good communications skills and the ability to show empathy and understanding.”

But while financial incentives can be used to help lock in key individuals, this is rarely affordable further down the ladder. Guy Ellis, founder and CEO at HR consultancy Courageous Workplaces, says: “The most common mistake is not to value everyone else highly enough, as they are the ones most likely to leave.

“The better ones leave if they don’t see a way forward while the remainder tend to get disengaged, which is bad for morale and productivity. People can be overlooked because you typically can’t announce anything until after the M&A has been formally approved, and because executives are so worried about their own jobs that they are not interested in helping others.”

Financial tie-ins

To retain employees when undergoing M&A activity, employers can use a financial tie in. Financial tie-ins can consist of performance-related or deferred cash bonuses, equity participation, or a combination. Much depends on the region, industry and size of business.

Mercer’s retention surveys show that CEOs get between 50% and 300% of base salary, C-suites between 31% and 273%, and all other employees recognised as being critical to integration get between 10% and 105%. Usage is typically restricted to those earning well over £100,000 a year, and to a two-year time period.

Tina Rahman, founder of the consultancy HR Habitat, says: “The term of the deferred bonus must be spelt out in the contract. There are no hard and fast rules, but you could face challenges going beyond two years.”

Cash bonuses are the most popular, but headhunters frequently get new clients to buy them out, and people can leave as soon as the tie-in period finishes. Equity stakes tend to be more effective at retaining people but are expensive and require equality laws to be negotiated.

Angus Miller, M&A partner at Deloitte, says: “I’m a great believer in equity for those considered sufficiently valuable to be a competitive threat, as they are less likely to leave. What value could be eroded determines the size and form of the financial tie-in.”

Whatever bonus structure is chosen, however, the key message is only to promise what you can definitely afford. Rahman adds: “A lot of contracts and policies say that bonuses are discretionary. This is a misconception because it doesn’t prevent employees taking them to a tribunal if they don’t pay, with little way out if it can be proved bonuses are custom.”

Other incentives

It’s unlikely that a business will be able to incentivise everyone financially. Even when bonuses are used, they should be complemented with attractive employee benefits packages and, for younger employees in particular, incentives like flexible working.

Non-financial benefits can also be crucial. Factors like the type of work, the clients that the organisation works with, and training opportunities can have more influence on retention than financial incentives.

“Interesting working opportunities trump cash, and even career progression,” explains Jana Mercereau, head of Europe M&A consulting at the insurance and risk business WTW. She added: “Good M&A will already have a broad indication of what jobs are going to be needed before doing due diligence.”

IT recruitment consultancy VIQU didn’t shed any of its own 23 employees or the 11 acquired employees when it took over fellow recruitment consultancy Consult Energy this summer, despite not using financial tie-ins. “Our competitive commission structure and benefits, and easy-to-navigate career path, were major retention factors,” says Melinda Queck, VIQU’s head of HR.

“We also made a big effort to ensure that all acquired employees were coming into a very welcoming culture. We laid on drinks, office lunches and other special activities.

“M&A is an unsettling time, so it’s about using as much empathy and understanding as possible. We used external consultants, as we had no significant experience of M&A.”

Managed services provider Croft, has made more than 20 acquisitions in the last three years. Only 5% to 10% of employees left within the first year. Croft has an internal team dedicated to integrating acquired companies. It focuses more on culture, and on making sure that the staff and customers moved over are happy, than it does on financial incentives.

Tania Muhith, Croft ’s HR and people integrations manager, says: “For the majority of acquisitions, the CEO, CFO and myself go to the acquired party on the day a deal is announced, and spend a whole or half day there. The key message we get across is that nothing has immediately changed but that employees will have more services and support for their customers and a greater team around them.”

Representatives of the digital transformation consultancy Equator recommend giving employees the opportunity to help restructure the business and its roles, rather than telling them what to do. Employees could, for example, be involved in workshops to design the work that is to be done in the new organisation.

Lesley Fordyce, Equator’s change director, explains that this approach can give staff a new sense of ownership. Fordyce adds: “People stay because they feel valued, not just because of the size of their remuneration. Offer them the chance to grow personally when the business builds.”

Practice makes perfect

Unsurprisingly, with such an extensive range of considerations involved, senior HR executives highlight that the M&A retention battle tends to get easier with experience. UK HR software provider Ciphr, which has made four acquisitions in the last five years, used to shed around 10% of acquired employees in the first year following a deal. But it only lost one during its last two acquisitions.

Claire Williams, Ciphr’s chief people and operating officer, says: “We learned from our first couple about what we did and didn’t do well, and invested a huge amount in the onboarding process. The new process focuses on everything we are going to do from day one. This includes welcome packs, FAQs, and a timeline setting out what to expect. We also try to do one-to-ones with everyone in the first week.”

Muhith acknowledges that the business is “miles better at [M&A] than when the acquisition drive started. But we are still learning”.

Organisations with no previous M&A experience should consider recruiting relevant expertise or involving external consultancies. After all, those who prepare properly clearly shed fewer staff than indicated by Mercer’s averages.

Thinking well ahead

Gallagher Insurance Brokers, which has made 13 UK retail acquisitions since 2017, has – excluding redundancies – never seen an uptick in staff turnover during an M&A period. Its extensive due diligence process, working with vendors to identify key talent, helps to explain this.

Andy Parsons, Gallagher’s HR director, retail (UK and Ireland), says: “We work out who the critical individuals are for retention and what incentives to use before we make the offer. Then we set aside retention reward money.”

Financial tie-ins typically consist of cash deferred bonuses. Whilst these can be used for the C-suite, key individuals tend to be considered more urgent. Many of these are involved with client connectivity or revenue control, have deep technical knowledge or have functions critical to integration.

But efforts are also made to ensure lower pay grades are kept happy through effective communication and career opportunities.

“We are very careful about middle management disenfranchisement and spend quite a lot of time ensuring they don’t feel disengaged,” Parsons adds. “We don’t rely on managers to contact people; we focus on them directly.”

 

Originally published on HR Magazine, https://www.hrmagazine.co.uk/content/features/how-to-retain-staff-during-mergers-and-acquisitions