How Serial Acquirers Retain Talent

As M&A activity heats up, new research highlights best practices for retention post-merger. The short answer? Plan to pay.

Drawing on over 800 deals and a global pool of serial acquirers, we studied the actual experience of designing and implementing talent retention programs within deals. Our 2020 M&A Retention Survey looked at retention periods and program design structures, the typical budget set aside for these payments within deals and the key deal objectives that drive such decisions. The survey results also revealed steps acquirers can take toward best practice.

In August 2020, we published an article on the effectiveness of employee retention tools in M&A transactions and launched an update to our periodic survey on M&A retention program design, last conducted in 2017. We anticipated the survey refresh would shed light on how market practices have evolved in 2020, taking into account the global pandemic and the increasing number of deals targeted to acquire new skills and transform businesses. We are pleased to report that 166 organizations across 18 countries and eight industry sectors — representing a combined total of 800 completed transactions in the last two years — participated in the survey. Most of the survey participants are large publicly listed serial acquirers that purchased smaller, privately held companies; about half of the transactions covered had a purchase price of less than $250 million, and many of these deals focused on the acquisition of key skills and talent.

Key features of retention programs used by serial acquirers

Overview: The most common retention tool remains a straightforward pay-to-stay approach, used by 84% of survey respondents. This is typically in the form of a time-based (as opposed to performance-based) cash bonus (as opposed to shares or options), denominated as a percentage of base salary (as opposed to a fixed amount) and paid 100% at the end of the retention period, which is reported as somewhat longer in 2020 than it was in 2017. In addition to cash retention bonuses, many companies also use a variety of financial and nonfinancial retention tools.

Budget and individual awards: Consistent with our findings in 2014 (but higher than in 2017), the median retention budget is 1% to 2% of total purchase price (Figure 1).

Figure 1. Size of retention pool as a percentage of total purchase price

Excludes 19% of responses without purchase price information

The percentage tends to be lower for larger deals. The median award is 60% of salary for senior leaders and 30% to 40% for others. However, practices range widely, with a significant number of companies paying senior leaders an award of two or more times their base salary (Figure 2A – Total retention value and Figure 2B – Annualized retention value).

Figure 2A. Total retention value – individual award value as a percentage of base salary for senior leadership and other employees


Figure 2B. Annualized retention value- individual award value as a percentage of base salary for senior leadership and other employees.

For example, an employee who receives 60% of salary in total retention value over two years has an annualized value of 30% of salary.

The median coverage is about 5% of the employees in a target organization, though a significant number of companies cover as many as 20% of the employees in a target organization (Figure 3).

The primary drivers of the retention budget are the need for employees to transition responsibilities and the acquisition of new critical skills the buyer doesn’t have. Similarly, the primary factor in selecting individuals is possession of key skills and/or critical market/industry knowledge. In other words, the extent to which the acquisition is for the purpose of acquiring employees, as opposed to technology or other assets, drives the retention budget and employee selection.

Retention period: The retention period is typically one to three years post-close, depending on factors such as seniority and criticality. Of note is that one-third of the survey respondents use a three-year period, and another one-third use a two-year period — both longer than the typical period seen in the last survey of one year or less. Using performance criteria in paying retention bonuses is not common. If used, they are typically in the form of earn-outs for owners of the acquired company. More often for senior leaders but still a minority practice, stock awards may be used in lieu of, or in combination with, cash.

Most serial acquirers are cautiously optimistic about the effectiveness of employee retention programs

Most surveyed companies expect more than 80% of leaders and employees covered by retention programs to remain until the end of the retention period; about half also expect them to remain one year after the retention period. The consensus among serial acquirers is that employee retention programs are designed to buy time so that integration and harmonization can be done right. This is evident when we dive deeper into the reasons that covered employees leave before they receive the full retention payment – and it is rarely about pay, benefits or the size of the retention award. Instead, the most attributed factors are cultural misalignment, disagreement with the company’s new direction, and dissatisfaction with the new role or manager.

Considering the significant investments companies make in employee retention programs, it is surprising that more than one-third of those surveyed do not track retention rates as a success measure for these programs. In fact, even among deals where retention budgets are at least 5% of total purchase price, one in five acquirers does not monitor the turnover of key leaders and employees who receive a retention award. This is particularly challenging after the first year, as the acquired business transitions from integration to business as usual. Differentiating between regrettable and non-regrettable turnover (i.e., those who are no longer critical post-integration) when assessing talent retention outcomes is even more of a challenge.

Don’t forget about other financial and nonfinancial retention tactics

Other financial tactics that survey respondents use are division-specific incentives, often in the form of earn-outs, and increases in base pay. Less frequently used is enhanced severance, which can convince anxious employees to give the new parent a try and costs nothing if the employees, generally the ones selected to be retained, are not terminated. Financial incentives can be very powerful, but we have learned from experience that it is only a portion of what employees look for from their companies. Serial acquirers understand the need for a comprehensive talent retention strategy that includes nonfinancial tactics, such as personal outreach by leaders and a compelling narrative on enhanced career opportunities after the transaction.

The lessons for future deal makers

Retention incentives are a key tool for deal makers, as they help buyers to secure key talent for at least a defined period following the close of an M&A deal. Experienced buyers use this additional time to focus on key priorities, whether transitioning key skills or engaging acquired talent in the future of the combined business post-transaction. The 2020 Willis Towers Watson M&A Retention Survey provides unique insight and deep data around the design of these programs, how they have evolved over the past decade and where even serial acquirers still have the opportunity to improve their approaches.