Keys to effective talent retention agreements

Persuading key talent to stay on after a merger or acquisition can be crucial to the success of the new venture, but an ideal retention strategy remains elusive, according to a recent survey report.

The Towers Watson 2014 Global M&A Retention Survey suggests that while retention agreements can help encourage essential staff to stay on in their roles over the transition period, employees tend to move on soon after the agreement expires.

The study gathered insight from 248 respondents in 14 countries, focusing on a merger or acquisition their company had been involved in within the past two years.

Sixty-eight per cent of respondents said that more than 80% of the employees who were asked to sign a retention agreement stayed at the firm for the full retention period stipulated. Yet, one year after the retention period had expired, only 43% of respondents’ companies had maintained an 80% retention rate.

Concern about changes in organisational culture was the primary reason employees left before the end of the retention period.

The degree of success a company had in retaining core team members also had repercussions on the level of satisfaction they reported with the deal in general terms. Those companies reporting higher retention rates also reported greater satisfaction that the transaction had fulfilled the organisation’s strategic objectives than those who had retained fewer key staff members.

The report highlights some of the most effective practices observed in the study.

Deciding which employees to extend a retention agreement to is crucial, and the most successful companies focused on those who would affect the success of the transition. Researchers recommend that the process begin as early as possible in the deal and involve input from the target company’s senior management.

The survey found that those companies with higher retention rates were more likely to have taken this leadership insight into account during the selection process. Companies with lower retention rates were more likely to have relied on data from the target organisation’s HR systems and job description details.

Rather than dividing the retention budget amongst a large number of staff to retain as many people as possible, most of the companies surveyed invested the funds in providing significant incentives to key individuals.

Offering target company executives a defined personal stake in the success of the venture is also important. Ensuring that they are committed to the goals and strategies of the acquisition is critical to the engagement and retention of the employees they manage.

Cash bonuses were found to be an effective element of agreements. Of those companies reporting high retention rates, 80% offered cash rewards for senior leadership, and 89% to other employees. The figures for low-retention companies were 50% and 55%, respectively.

The more successful companies also offered high rewards. For example, the median value of retention plans was 60% of base salary, compared with 35% in low-retention companies.

As well as stipulating a time period, organisations should add a performance metric to the agreements, the researchers suggest.

“Being rewarded with a cash bonus for remaining in place for a pre-determined period of time appears to be effective in retention, but the executives must also be encouraged to excel,” Jon Finlay, Towers Watson’s executive compensation practice leader in Australia, said in a news release. “The trick is to get the balance right between cash incentives for retention and good salaries, with enough genuine opportunity to win big when big results are delivered.”

Related CGMA Magazine content:

“Take Two: Reinventing Culture After an Acquisition”: When John Mahtani, ACMA, CGMA, partnered to acquire a film-processing lab, one of his first priorities was to change the company’s strategy. He describes the steps he took to inspire a sceptical workforce.

“Employee Loyalty Is a Rare Commodity”: Employee loyalty is an increasingly rare commodity, according to research by the American Management Association. And while companies recognise the consequences for their businesses, such as low morale and increased absenteeism, tackling the trend is not a major focus for the majority of organisations.

—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.