Executive summary
Failure to retain key executives and employees can negatively impact an otherwise successful merger or acquisition. Retention agreements can play a critical role in keeping talent, whether at the acquirer or at target companies, both during and after the transaction. Structuring retention agreements and determining which executives and employees should be offered them is a consistent challenge for acquiring companies.
In most transactions completed by the respondents over the past two years, the buyer, typically a larger publicly traded company and the seller, typically a smaller private organization, have been in the same industry and market. However, approximately one-third of transactions involved buyers and sellers in the same industry, but in different markets or regions.
These transactions, defined from the start date of preliminary discussions until the deal closes, can be time-consuming. The typical transaction took six months from preliminary discussions to the execution of a letter of intent and then an additional six months from the execution of the letter of intent until the deal closed. Typically, larger transactions take longer and the average time from preliminary discussions to the execution of the letter of intent and the time from the execution of the letter of intent and deal closure are each over seven months long for a total length of about 13 or 14 months on average.
Mergers or acquisitions often represent a significant period of disruption for employees, particularly at the target organization. From the moment a deal is announced (or sometimes even suspected) these employees face a sense of uncertainty about the impact of the transaction on their own career prospects. This uncertainty often lasts well beyond the deal’s closure.
Organizations often use retention agreements as rewards to help retain eligible employees through this period of disruption. About 70% of acquirers track or set aside fixed budgets for retention pools. Although these pools can be quite large, they are typically less than 2% of the purchase price. However, the actual pool depends significantly on whether the target company is purchased primarily for human capital as an asset, or as one of many assets.
72% of respondents track or set aside a fixed amount for a retention pool
The buyer typically bears the cost of retention pools. Fewer than one in five transactions see the seller bear the entire cost of the retention pool through a reduction in the purchase price. Aside from deal size, several other factors drive the magnitude of retention pools. Most commonly cited factors are related to the perceived importance of human capital to the success of the deal. For example, respondents often cited the need to retain certain employees to transition core responsibilities or to acquire new critical skills that the buyer doesn't have. Similarly, organizations entering a new market through the acquisition commonly cite the need to retain employees because of their expertise in that market.
A common challenge for acquirers is understanding how engaged the employees are and what impact the transaction will have on their engagement level and their intent to remain with the new organization. One obvious area of concern will be the impact of the transactions on existing long-term incentive plans. For example, retention problems are likely to be more severe when management and other employees receive significant deal proceeds or accelerated equity awards, reducing their impact on retention. Such circumstances make it necessary to create a new retention agreement to provide additional incentives to remain, leading to increased retention pools overall.
A company’s retention strategy may have an impact on employees who were selected for retention awards. Three out of four organizations said that they relied on information from the seller’s leadership when deciding who to include in the retention awards.
Organizations are most likely to offer retention awards to employees who have key/critical skills or market/industry knowledge. Individual characteristics, such as being identified as a high-potential employee or having a record of being a top performer are significantly less likely to impact the probability of receiving a retention award. Respondents were evenly split on whether the entire pool was spent for an initial list of key employees or whether some portion of the total pool was reserved for later use, including 30% of respondents who indicated that money was reserved for use after the close of the deal.
In practice, these factors contribute to the result that over half of the C-suite executives at the acquired organization are eligible for retention awards at 44% of respondents that offer retention agreements. On the other end of the spectrum, fewer than 10% of executives are given retention agreements at over one third of the same respondents. In contrast to the all-or-nothing (at least most-or-almost-nothing) approach often taken in executive eligibility decisions, eligibility decisions for salaried employees tend to focus on a relatively small portion of salaried employees. Most respondents reported that fewer than 5% of salaried employees were eligible for retention awards.
In addition to eligibility for retention agreements, there are also significant differences between senior executives and other salaried employees in the timing of these agreements. Senior leadership is typically asked to sign retention agreements earlier in the deal process than other employees. For example, respondents were more than twice as likely to say senior leadership was asked to sign a retention agreement before signing the deal, while other salaried employees were more than twice as likely to do so at or after the closing.
Turning from the who and when of retention agreements to the terms of retention agreements, we can see similarities and differences in the terms of these agreements for different employee populations. Retention agreements are almost always time-based — although in many cases these agreements also include a performance-based component. Thirty-six percent of respondents report using a combination of performance metrics and time-based components for senior leadership and 23% report using both for the salaried population. The most common time-based approach to retention award vesting involves cliff vested payments, where payments are made all at once after the entire retention period has passed. The other common approach is to make payments on an intermittent basis, where payments are made evenly across the retention period.
For retention awards that have a performance-based component, there are a variety of types of performance metrics used. For senior leaders, the metrics used most typically focus on the financial metrics of the entire company or the acquired business exclusively. Other performance metrics for senior leaders may relate to the deal itself, including the length of time required to complete the acquisition or the achievement of cost synergies. For other employees, the focus is on financial performance — either of the entire company or the acquired business — although manager discretion is also relatively common.
It's important to note that the length of the retention period matters. Typical retention periods are between 13 to 18 months for all employee groups. However, the spectrum of retention periods varies based on the circumstances of each deal.
Regardless of retention award values, vehicles used to pay retention awards are similar across employee groups. Cash retention bonuses are the most common form of award, used by over four out of five organizations for both senior leadership and salaried employees. Stock-based awards — whether in options or full-valued shares — are also used for both, although the use of stock options is more common for senior leaders.
The amounts for these awards are usually set as follows:
However, within these general parameters, the actual aggregate and annualized values provided vary substantially depending on role or job level. For example, average total retention value as a percentage of salary ranges from approximately 40% for salaried employees to 140% for the CEO, with annualized retention values ranging from approximately 25% for salaried employees to 90% for the CEO.
While important, retention awards aren't the only tool used to retain employees. Respondents also identified other monetary and nonmonetary tools as effective for talent retention. For example, 30% of respondents identified increases in base pay as effective tools for retention. Nonmonetary retention tools such as career enhancement opportunities and personal outreach by leaders and managers were also used.
Despite the significant amount spent on retention awards and the importance of employee retention to the success or failure of many acquisitions, almost 40% of respondents report that they don't track retention rates. While over half of respondents (62%) report tracking retention rates through the end of the period to measure the success of their retention strategy, only 15% of all respondents continue to track retention beyond the end of the retention agreement. Failure to measure this outcome means that many respondents are unable to track the true effectiveness of their retention agreements or to establish their ROI.
Respondents reported generally positive expectations of the number of employees who received retention agreements who would remain through the end of the retention period. Over half of respondents expected at least 80% of both senior leadership and other salaried employees to remain through the end of the retention period. This percentage declined substantially for both groups one year after the end of the retention period. However, over 60% of respondents expect approximately three out of five employees from these groups to remain for a full year after the end of the retention period.
The most commonly cited reasons for attrition during a transaction include discomfort with the changing organizational culture and misalignment with the direction of the new company. Some respondents cite participants’ dissatisfaction with their new role or manager. The above factors create uncertainty among employees and, in turn, greater attrition risk. Therefore, it isn't surprising that competitors also view this time as an opportunity to poach employees from both organizations involved in the transaction. Many respondents reported that employees left as the result of aggressive recruiting by competitors.
Mergers and acquisitions create a great deal of uncertainty for employees at both firms involved in the transaction, and this uncertainty can impact engagement, productivity and retention. Given the importance of human capital considerations in the success or failure of transactions, it isn't surprising that organizations spend significant amounts on retention pools for executives and other employees to tie them to the organization for considerable periods of time. Organizations’ use of retention awards may be time- or performance-based, depending on the purpose of the retention program and the facts and circumstances of the deal. Measurement of success is important; however, many organizations find themselves unable to methodically determine the impact of their programs. Organizations could refine measurement of their results to understand the impact of monetary awards and whether greater use of other nonmonetary tools may be effective to retain and engage employees through these periods of dramatic change.
The 2024 Mergers and Acquisition Retention Study was conducted September through November 2023 and was completed by 159 respondents, with headquarters in over 20 countries. Respondents represented a variety of industries, most commonly including manufacturing, IT healthcare and financial services.
