Effective retention strategies are vital to ensure seamless integration of merging entities and keep indispensable talent on board. These packages motivate key employees to stay post-acquisition, safeguarding the company against losing talent and maintaining uninterrupted business operations.
However, the current economic climate has influenced the structure and size of retention packages. Financial constraints have led to smaller retention budgets, so companies must rethink their approaches to keeping key players engaged. Furthermore, broader market dynamics — including increased employee turnover, reduced immigration and a rising number of individuals exiting the workforce — underscore the importance of robust retention strategies during M&A activities.
It’s not just anecdotal information. We have set out below trends seen in recent deals, underscored by the findings from WTW’s recent retention survey.
Increasingly, companies are tailoring retention packages to meet the specific needs and circumstances of key employees taking the nuances of the deal into account. This customization often includes a mix of financial incentives, equity stakes and nonmonetary benefits such as career development opportunities and flexible work arrangements.
Another significant shift highlighted in the survey is the use of performance-based retention incentives, a practice virtually unheard of the last time we conducted the survey in 2020. Most companies that buy businesses still use time-based bonuses to keep employees. But almost one-third of respondents said they used some combination of performance- and time-based conditions to give out bonuses, even for workers below the top management level. This shift reflects a growing demand for more accountability tied to acquisitions and the target’s performance than in the past.
Our survey results note that 55% of retention agreements for senior leadership are time-based, a trend that rises to 73% among other salaried employees. This underscores a traditional preference for time-bound commitments in retaining top talent.
Cash continues to dominate retention strategies, but equity is increasingly used if the acquiring company already uses equity as part of its pay program, such as U.S.-listed publicly traded companies. While over 80% of acquirers still prefer cash for all levels of employees, there’s a noticeable trend toward combining cash with equity options, leveraging the strengths of both.
An interesting development is the more flexible use of a retention budget to address needs during periods of uncertainty. Traditionally, retention pools were reserved for acquisitions; we increasingly see that these pools are also used in divestitures and spin-offs. This strategic flexibility allows companies to maintain stability and retain key talent across various corporate restructuring scenarios.
Buyers often view a purchase as not worthwhile if the senior leadership team doesn’t come on board. Once senior leaders are retained, they have the most influence in locking up other critical employees — serving as the deal’s cheerleaders, if you will — and impacting integration success. This explains why more than 50% of senior leadership receive retention agreements.
Once leadership is on board, these executives are crucial in pinpointing other key employees necessary for the merged entity’s success. According to our findings, 77% of respondents stressed the importance of insights from existing leadership to effectively identify which employees are crucial to retain. This approach ensures that those intimately familiar with the company’s core competencies and strategic needs are directly involved in shaping the retention strategy.
Our survey also showed that an employee’s knowledge and functional skills are more influential than past performance. Seventy-five percent of serial acquirers cite job function/department as critical to influencing eligibility, with 77% highlighting the importance of senior leadership roles.
Successful acquirers take a broad view of all aspects of their retention programs and customize values, design, and nonfinancial tactics for each deal. In some cases, this might mean prioritizing the overall value of the retention package. In contrast, in others, the emphasis might shift toward the design of the package or the inclusion of nonmonetary benefits. The goal is to create a well-rounded offer that addresses the different needs and preferences of key employees.
At the heart of any retention strategy is the individual. It's crucial to clearly and regularly communicate that employees will receive competitive compensation for their roles. Eligibility for equity and the broader compensation mix play significant roles in how employees perceive their value within the company. Equity eligibility and receivership also factor into employees’ overall pay experience. Even if the math is right on the pay mix, employees will still care about job security and what would happen if they find themselves not the right fit for the acquirer. Companies should consider how severance programs balance retention programs. Employees will want to know what kind of restrictive covenants are in place, particularly if they will be subject to a non-compete. This is just the start when it comes to planning to keep the right people before, during and post deal.
By customizing retention strategies, tying incentives to performance, extending vesting periods and focusing on cultural integration and employee well-being, companies can better navigate the complexities of mergers and acquisitions. This approach recognizes the different needs and goals of key employees and aligns them with the long-term goals of the combined entity.
