Do’s and Don’ts of Post-Merger Pay Environments

The Art of M&A® / Integration: Harmonization of Post-Merger Compensation Plans
An excerpt from The Art of M&A, Fifth Edition: A Merger, Acquisition, and Buyout Guide by Alexandra Reed Lajoux

Editor’s Note: A growing number of M&A professionals are pursuing the Certified M&A Specialist, or CMAS® credential. To support these certification candidates preparing for the CMAS® exam, we are pleased to highlight a feature column, CMAS® Career Corner by noted author and expert, Alexandra Reed Lajoux. Each edition includes directly relevant content derived from Lajoux’s industry leading book series, The Art of M&A Fifth Edition: A Merger, Acquisition, and Buyout Guide (McGraw Hill, 2019). These columns cover one or more likely CMAS® exam question and will help you accelerate completion of this important career credential. 

Why would a newly combined company want to have different pay plans for its units?

• Because the units may have very different pay environments.
• Base pay may differ from industry to industry for similar jobs. Also, a company in a mature industry will have a greater percentage of pay in base pay as opposed to variable pay from bonuses or incentives.
• There may be regional differences in pay.
• Bonus pay may be hard to align following a merger between one firm with huge bonuses and another one with none.
• Incentive pay targets vary by type of company. Large public companies are generally expected to link their CEO pay to total shareholder return over one to three years, whereas a new start-up will tend to focus more on sales growth.
• Incentive plans may reflect differences in managerial philosophy, valuing the formal versus the informal, and the quantitative versus the qualitative.
• Benefits are another area where postmerger disparity may be necessary. Suppose that in the negotiation phase, the acquirer agreed to let the selling company’s senior management keep certain perquisites, knowing full well that it would not extend these same perks to its own senior team. If that was the deal, the acquirer has no choice but to live with these strings attached, and to explain them as a grandfather clause to the envious. Furthermore, there may also be regulatory restrictions on merging certain benefits, such as retirement plans.

All these differences can add up, resulting in sharp contrasts between companies and, once merged, units. For example, a mature, centralized, business with heavy capital investments, stable profit margins, little technological change, and few competitors should strive for the following:

• Senior management depth
• Predominantly fixed compensation
• Moderate incentives
• Moderate equity participation
• Discretionary evaluations

At the other end of the spectrum, a changing, decentralized business with low capital investments, pressured profit margins, significant technological change, and many competitors should strive for the following:   

• Little senior management depth
• Predominantly variable compensation
• Heavy incentives
• Heavy equity participation
• Objective evaluations

Aren’t there some general principles of compensation that apply in any type of company? If so, what are they?

Yes, there are universal principles for good pay planning. Here is a list of principles already widely accepted in corporate and compensation circles.

Do

• Encourage real share ownership at all levels
• Link pay to performance
• Reward executives for both shareholder value and quality of products/services
• Make sure that pay is competitive in local markets
• Communicate appreciation of an employee through promotion and recognition as well as through pay

Don’t

• Award excessive, repriceable stock options to senior management
• Keep increasing pay no matter what
• Use a variety of benchmarks, not just accounting measures (which can be manipulated) or stock price (which can be influenced by external events)
• Rely too heavily on benchmarks such as quartiles, which by their very nature keep rising as long as everyone tries to stay at the top
• Agree to compensation contracts that can pay very large amounts under some scenarios

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Learn More About Target Valuation at Our Two Upcoming Due Diligence Training Events:

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Lajoux, Alexandra Reed with Capital Expert Services.  The Art of M&A, Fifth Edition: A Merger, Acquisition, and Buyout Guide. United States of America: McGraw Hill, 2019. Pp. 857-859. Print.

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