Hewitt Survey Shows Strategic Importance of Total Rewards in Successful M&A Transactions

Provided by Hewitt Associates (www.hewitt.com) – Press Release September 29, 2010

As corporate merger and acquisition activity continues to increase around the world, a new survey by Hewitt Associates, a global human resources consulting and outsourcing company, found that how companies leverage their compensation and benefits programs during these transactions plays a critical role in retaining key talent and ensuring the overall success of the deal.

Findings from Hewitt’s July M&A survey of 103 companies around the world showed that just 44 percent of organizations that participate in M&A activity met or exceeded their stated transaction goals. Hewitt’s survey also revealed that total rewards—which include compensation and benefits programs—is one of the main levers that organizations can use to drive deal success. In fact, of the companies in Hewitt’s survey that exceeded their transaction goals, almost all exhibited four key characteristics for how they approached their total rewards strategies:

Focusing on Liabilities in Due Diligence

According to Hewitt’s analysis, companies that exceeded their transaction goals (“Overachievers”) gave extra attention to total rewards elements in due diligence that are most likely to create liabilities. These areas included employment contracts, change-in-control and severance agreements (95 percent); executive compensation (90 percent); defined benefit retirement plans (79 percent); and executive benefits and perquisites (74 percent).

“During a transaction, Overachiever companies have a laser-like focus on total rewards liabilities and leadership, while organizations that fail to meet their goals spread their attention across a variety of due diligence topics,” said Elizabeth Fealy, global leader of Hewitt’s Corporate Transactions and Transformation Consulting practice. “Overachiever companies are simply better at evaluating their total rewards pre- and post-merger, mitigating potential risks and leveraging the cost savings they uncover.”

Looking at Total Rewards in Aggregate

During the purchase agreement stage, Hewitt’s survey found that more than two-thirds (67 percent) of successful organizations provided compensation and benefits similar to those of the acquired company for a set time after close. This broad commitment helped ensure employees didn’t experience a loss in the value of their rewards because of the acquisition—a core concern of most employees. These organizations were also more likely to make similar commitments for their employees in a divestiture situation (69 percent).

Most successful companies (63 percent) also examined compensation and benefits together and as part of a larger reward strategy after the deal closes. These companies looked for tradeoffs that enabled increases in some areas of benefits and compensation to be offset by decreases in other areas.

Being Deliberate About Talent Retention

According to Hewitt’s survey, more than three-quarters (77 percent) of all companies identified retention packages among the most effective tools in retaining top talent during a transaction. However, successful companies typically developed packages that were contingent upon the achievement of post-closing metrics and in all instances, the retention bonuses were payable within three years. These packages were also often offered much deeper within the organization—below the senior executive level. Beyond specialized retention packages, our survey shows that companies that exceeded their deal objectives also paid more attention to areas such as role selection and identification of high-potential talent.

“Overachieving companies understand that retaining key talent is critical to the success of the company post-deal,” said Dave Kompare, North American leader of Hewitt’s Corporate Transactions and Transformation Consulting practice. “But they also recognize that there’s more to a retention strategy than pay—they structure their retention programs in a way that employees are rewarded not just for staying, but also for contributing.”

Being Well Equipped, Highly Focused and Effective

More than half (58 percent) of companies that exceeded their deal objectives had highly capable, globally experienced teams that were especially adept at executing effective total rewards initiatives in transactions. Most importantly, these organizations were very effective at retention planning, addressing retirement benefits and addressing executive compensation plans.

“Bottom line, companies that are successful in exceeding their transaction goals are simply smarter about managing their money,” adds Fealy. “They are saving money in due diligence by identifying liabilities within their total rewards programs and by implementing performance driven, cost-based program designs. At the same time, they are spending money on well-designed, timely, ‘stay and play’ retention approaches. This approach leads to a retention rate and transaction success that is materially higher than their competition.”

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