Doing the deal is only the beginning
Deal Deliberations
Retaining top talent post M&A
Talent is an increasingly frequent deal driver in M&A transactions. Our 2022 M&A Study suggests that 36% of all European deals in 2021 could be linked to the acquisition of know-how or employees, up from 31% the year before. When you are essentially paying for highly skilled management, a successful sales team, or technical experts, ensuring a deal is successful ultimately comes down to retaining and incentivising those employees. Financial and contractual considerations are crucial, but businesses would be well advised not to ignore corporate culture.
When acquiring a company, cultural fit is as important as financial incentives in retaining top talent.
Incentives
Short term retention
If the objective is short term retention, for instance to ensure the stability of the workforce or an effective handover, a retention bonus ensures that the employee stays for a certain amount of time. In this regard, we often see employees signing settlement agreements with a deferred termination date. Part of the termination payment can possibly be paid tax free up to GBP 30k if certain requirements are met. The company must ensure that all notice pay (or any payment in lieu of notice) is fully taxed and that certain conditions, such as satisfactory performance, are not attached to the payment.
Talent is an increasingly frequent deal driver in M&A transactions.
Medium to long term retention
Employees staying on for the medium-to-long term will require an appropriate incentive package. One option is to put in place a bonus scheme using the appropriate metrics to drive the management team and other employees in the direction the new owners want.
ESG metrics
One question we are seeing more of is whether businesses should use ESG metrics, in relation to diversity, health & safety, environment, and so on. ESG metrics seem a good idea and have been adopted by many companies. There is however some debate about their necessity and effectiveness as they often align with existing metrics. ESG metrics are also new and no universally understood standards have yet emerged.
ESG metrics are also new and no universally understood standards have yet emerged.
Compliance
Any incentive scheme must be consistent with the UK Corporate Governance Code and/or the various remuneration codes issued by the financial services sector regulators (if applicable).
Covenants buy time and make it difficult for employees to leave.
Equity stakes
Share awards can be structured in many different ways, but an optimal plan design requires clarity on the rationale - is it retention, alignment with new shareholders, or otherwise incentivising the team? A long-term incentive plan entitles employees to acquire shares in the company in the future, if certain conditions are met. More senior employees are typically given the opportunity to acquire shares in the company and participate as shareholders going forward, leading to stronger alignment with the business.
Service agreements
The key points here are relatively straightforward. Firstly, notice periods should be sufficiently long (usually a minimum of six months), so there is enough time to find a replacement and so that an employee can be put on garden leave for the right amount of time, if needed. Secondly, it is important that robust restrictive covenants are in place to provide breathing space while the departing employee is out of the market and unable to compete or poach staff and customers. Covenants buy time, thus making it difficult for employees to leave.
