Employee retention programmes are becoming more targeted, covering a wider span of employees and not just the executives at the top of the organisation. Top performers are expensive to replace and, in most transactions, buyers are vulnerable to key talent flight risk.
More than 70 per cent of deals in the sample we surveyed had a retention plan in place, a figure that we have seen rising in recent years, especially in Europe.
The European labour market offers two distinctive characteristics that influence employee retention plans – a shrinking labour force and often generous employment protection.
Europe’s labour market is stressed. More baby boomers are reaching retirement and there are not enough younger workers to replace them. Add potential immigration restrictions into the mix and the talent shortage could grow even worse.
There are minimum levels of severance pay for redundancy exercises across most of Europe. In the UK, however, the protection is somewhat less generous than in continental Europe. In Germany, roughly 60 per cent of organisations pay above the legally required minimum, making payouts there among the highest in Europe.
This environment poses unique labour risks for buyers. Since talent is at a premium, severance packages can inadvertently retain the wrong employees. Those unsure about their ability to find work may stay because of a potential large payout, while more qualified workers can easily move on.
SHAPING YOUR M&A STRATEGY AROUND PEOPLE
The need to secure top talent is driving buyers to develop retention plans that not only work in conjunction with severance packages, but also extend to key employees beyond top management. Among European buyers, 41 per cent are offering retention bonuses to employees critical to the company’s long-term success – those with key client or supplier relationships, or with knowledge about essential systems, for example IT. This is in addition to the more prevalent retention plans for top management.
According to Mercer’s recent global M&A retention research, retention budgets vary by industry, typically ranging between 0.5 and 2 per cent of deal value. However, this can soar to 5 or even 10 per cent with key people and knowledge-based industries.
Some sellers develop their own retention plans when their company is put up for sale, but this strategy can backfire. If a buyer does not see eye to eye with a seller on who should be retained, they may be unwilling to honour the plans put in place.
Likewise, the design of retention plans is important. Multinational buyers in particular need to ensure their global retention programmes are flexible enough to interact with local severance plans, especially where a restructuring is planned.
The common denominator consistently driving value is having the right people on board to execute the strategy after closing a deal
Strong retention programmes include multiple components. They reflect global principles, but include policies catering for local markets; the value of severance is embedded, based on time served and seniority, so it can be leveraged according to the performance of employees who may leave after a period; ongoing incentives are offered; and the new company’s vision, culture and available career paths are clearly communicated.
These components are especially critical for Asian buyers who normally do not offer equity-based incentives, but have a pressing need to retain local management teams. Sometimes they must reassure sellers and the general public that it will be business as usual following the sale.
The common denominator consistently driving value is having the right people on board to execute the strategy after closing a deal. Locking down talent at the top and including those “rising middle stars” who are critical for execution has never been more important globally for buyers and sellers wanting to drive shareholder value.
Effective retention strategies shaped around people can address the ultimate risk and prevent key executives, managers and rising stars from walking out the door. These strategies send a powerful message to vital employees about their value and importance to the organisation – something no seller or buyer should ever take for granted.
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