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4 Tips for M&A Compensation Success

By Brian Sharp and Ezra Schneier, HRsoft   |  October 2015

Most employees have experienced a merger and/or acquisition during their professional careers. This article examines four points for compensation managers to consider in connection with planning for a transaction or the integration of two companies following a combination.

The number of mergers and acquisitions (M&As) currently taking place is on the rise. There is increased M&A activity across many parts of the economy. This includes technology, financial services, media, hospitality, manufacturing, energy, health care and even in the public sector.

Recent notable transactions include: CVS and Omnicare; Pfizer and Hospira; Kraft and Heinz; Charter Communications and Time Warner Cable; and Intel and Altera. The list is vast and covers mega-companies like these along with numerous local hospitals and businesses.

According to experts, this trend of a hot M&A market is likely to continue in the foreseeable future. The reasons vary and include:

  • The need for growth in order to take advantage of economies of scale and historically low interest rates available to finance transactions.
  • The desire to generate additional revenue
  • Gain access to products and technology
  • The need to expand in new markets.

A stated goal of many acquisitions is to add talent. But being mindful of compensation issues is necessary to retain talent and achieve success with any acquisition. Following are some tips on how compensation professionals can positively affect the M&A process.

1. Make Compensation Part of Due Diligence

All M&A transactions include a due diligence phase where information is reviewed about different aspects of the business being acquired. The acquisition team will usually include an HR professional to run the human resource part of the due diligence process. Compensation items should be included on the due diligence checklist and discussed in the diligence review meetings. The compensation manager may prepare a report on the findings, including any identified risk factors, for senior executives to consider.

Gaining a clear understanding of the compensation processes and details at the company being acquired is critical. Some of the items to request as part of the due diligence review might include:

  • Description of the compensation structure (base and overtime)
  • Copy of payroll schedule and description of the payroll process
  • Deferred compensation plans
  • Executive compensation plans
  • List of employees covered by salary /benefits agreements (copies of agreements)
  • Merit plan — Describe the merit plan deployed and merit increases by employee for the last year
  • List of previous year bonus payouts and description of bonus program(s)
  • List and description of incentive plans — eligibility rules, factors used to determine incentive payments
  • Sales (commission) plans
  • Job classification system and salary structures
  • Procedures for determining exempt status
  • Compensation issues relating to a change of control.

2. Setting Goals

It is a good idea for the compensation manager to establish clear goals for the compensation aspect of an acquisition. These should be written down and shared with senior management and the acquisition team, which can cover the due diligence phase and the integration process following completion of a transaction.

A central reason to have clear goals is to help senior management understand sought after achievements and to make sure there is consistency and alignment with messaging.

For example, as part of the integration plan, it may be the goal to create a unified compensation structure for the combined companies within one year after the closing and fully evaluate all the job grades and positions during that time. Another goal could be, within a certain period of time, to carry out a conversation between each manager and all of their employees to include a compensation review. Of course, the compensation department would work with managers to prepare for those discussions.

3. Communication

All employees involved with M&A want to know what it means to them in terms of compensation. It is best to address this head on. Explain what the compensation plan is in terms of integrating the companies and the associated timeline. Define when the serious discussions will take place and what the goals are from a compensation perspective.

Authentic communication with all employees will be appreciated and will give credibility to management. Recognizing it is a time of tension for all employees makes it critical to have meaningful communication. It is not good enough for management to say compensation is something being evaluated, or they don't know yet what changes may be in store. No one will believe that. And it just adds to the level of anxiety that can seriously damage morale and hurt retention.

It is difficult when combining companies have vastly different pay structures and perhaps even different compensation philosophies. Realistically, it might take some time to work through the issues. It is okay to establish a transition period to address all of the relevant issues. In those cases, it may be appropriate to communicate that the current compensation structures will stay in place for a set period of time while management does the necessary evaluation and work to create a unified plan. The goals of the unified plan should be:

  • Pay all associates fairly and equitably
  • Have opportunities for career development and growth
  • Support a pay for performance culture
  • Offer competitive compensation to retain top performers and attract great talent.

4. Compression

Compression is an important issue for compensation professionals when combining companies in a merger or acquisition. Examples of compression include:

  • When the compensation of one employee is the same or close to another employee in the same job who has greater seniority and experience.
  • An employee in a particular job category or level is paid as much as associates in higher-level jobs.

Compression can lead to employee dissatisfaction, turnover and lack of structure for compensation plans. It can also make it difficult to award increases in the future and can impact recruiting of talent.

During the integration process, the compensation manager will spend time understanding pay differentials and compression issues. Using market data and other resources to create pay ranges that are sensible and support the company's operational and talent goals can avoid compression.

Summary

Mergers and acquisitions are exciting times for employers and employees. New opportunities are created for future growth and success. Compensation managers and their decisions play an important role in achieving that success. As with many situations, a healthy dose of planning helps.

About the Author

Ezra Schneier is corporate development officer in the Philadelphia area and Brian Sharp is chief marketing officer for HRsoft in California.


Read the October edition of Compensation Focus.

Contents © 2015 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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