Agenda – Precautions and Pitfalls in M&A Pay Strategy

Mergers and acquisitions have risen to unprecedented levels over the past four years. Opportunities presented by an expanding global economy are partially responsible for this activity, but more fundamental matters drive it as well. At a time when technology and globalization are upending value chains and competitive models in a host of industries, M&A becomes an important tool for companies to assemble the strategic platforms they need to grow the value of their business over time.

No matter how brilliant the investment thesis, however, implementation is more important to the success or failure of an M&A deal than pure strategy. Board directors routinely report that the key to the success of most transactions is talent and culture. While strategy is generally well vetted in the early stages of the deal process, talent and culture are more personal, are harder to measure, involve difficult conversations, and often are left to the 11th hour in negotiations.

A critical aspect of talent and culture is compensation. Compensation strategy, levels and programs are key ingredients in retaining critical talent and mobilizing the organization to execute against post-transaction objectives. How should companies go about assessing compensation systems during the M&A process, and how are compensation systems best configured after the transaction is completed?

During Due Diligence

Most board directors agree that it is important to do a deep-dive analysis of the compensation systems of both parties in the early stages of the due diligence process. Yet directors also complain that these analyses all too often trail in the process. Key steps, best taken early on, include:

– Read the fine print on plan documents, agreements, policies and disclosures pertaining to compensation.

– Do a side-by-side assessment of organizational design, compensation levels and design, risk orientation, change-in-control (CIC) provisions, pay-and-performance calibration, goal setting, special awards and historical incentive payouts.

By Robin Ferracone