Rethinking Your Total Rewards Programs During Mergers and Acquisitions

Rethinking Your Total Rewards Programs During Mergers and Acquisitions
Insights for HR

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Mergers and Acquisitions

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March 28, 2023 7 mins

Rethinking Your Total Rewards Programs During Mergers and Acquisitions

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Business leaders should take a close look at their reward programs during a merger or takeover to help retain talent and ensure a cohesive pay strategy.

Key Takeaways
  1. Economic uncertainty and a tight labor market make decisions around total rewards in an M&A deal even more important.
  2. Begin your total rewards strategy by focusing on the business goals of the transaction.
  3. Companies may face risks such as pay imbalances when integrating total rewards for a combined, acquired or newly spun off entity.

The talent environment today is a precarious one. Since the pandemic, companies are challenged to hire the skilled talent they need amid low unemployment, higher turnover and a reprioritization of employee values. Meanwhile, an uncertain economic future is influencing organizations’ total rewards strategies.

When thinking about the market in the context of a major disruptive event like a merger and acquisition (M&A), divestiture/spinoff or joint venture, these total rewards and talent challenges become even more prominent. An M&A transaction often involves not only a change in ownership, but also strategic direction. If business philosophies and objectives don’t align with HR and total rewards strategies, retaining talent becomes that much harder. Understanding what the transaction is all about — and determining if your reward program supports your specific objectives — is essential to help employees feel secure and valued during unsettling times.

Ensure your M&A is on track for success by being aware of common talent risks and focusing on key areas of your total rewards strategy.

Avoid Risk with a Strong Total Rewards Analysis

There are several common risks associated with M&A and total rewards:

  • Disruption to payroll or essential benefit coverage – One way to undermine employee trust is to make an error in their paycheck or otherwise disrupt their benefit coverage. Ensure a seamless transition of payroll and benefits by considering all interdependencies (e.g., legal, finance, payroll, benefits administration, etc.) that support overall effectiveness and communication of change.
  • Differences in reward philosophies – The alignment of disparate reward programs (e.g., differing base pay levels, differing incentive opportunities and eligibilities) can result in significant costs and disruption amid internal equity concerns and challenging communications. Identify differences in reward philosophies early in due diligence to ensure that alignment costs are factored into the pricing model and necessary alignment activities are incorporated into the integration plan.
  • Uncovering existing gaps or widening pay equity gaps in the M&A process – Looking at components of your business in a new light can uncover various errors and discrepancies. Inconsistent classification of exempt and nonexempt employees, constantly evolving regulations around pay transparency and different salary ranges for the same position are just a few of the challenges that often arise when organizations combine. These challenges may spark companies to fix previously unknown issues, which could result in wider gaps across the combined organization if not properly addressed. Consider implementing a pay equity analysis to guide you along the way. Learn more about the problems that can occur when pay ranges are not adhered to in our article, “New Hire Salaries are Rising — Along with Concerns About Pay Equity.”
  • Clashing total rewards philosophies in the same industry space – Employees are acutely aware of differences in rewards — particularly within similar roles or industry segments. While there may be valid competitive reasons for these differences (e.g., deeper equity eligibility for technology employees, increased childcare support or time off for onsite employees, etc.), differentiation requires careful considerations of the business rationale for unique rewards.
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Harmonizing Total Rewards

Change events like M&A transactions can be disruptive to your workforce. Let’s face it: People usually don’t like change that’s out of their control. That’s why it’s imperative to understand the impact M&A transactions have on your employees.

Here are a few points to consider from a total rewards standpoint to keep your talent feeling motivated and confident, while also driving business outcomes:

Understand the deal’s business objectives and determine the impact they will have on your total rewards programs. Set milestones for relevant rewards changes to align with business objectives. If a transaction is focused on growth and adding new talent, it is important to address competitive pay and retention incentives. If a transaction is aiming to drive efficiencies and eliminate costs, the focus switches to staff selection and severance program design. If a transaction is focused on divesting a business for sale, address the stand-up of rewards for the stand-alone business. Once business objectives are understood (typically through the review of deal materials or leader interviews), determine the appropriate approach to rewards.

Ensure you have clear metrics and identify any gaps that may exist. Organizations are increasingly focused on metrics to understand the effectiveness of their reward programs. Since no single metric can measure overall effectiveness, companies typically use multiple metrics to gauge success. These might include time to fill open positions, turnover, spend and engagement.

Establish a strong change communication strategy. Communication is often the most neglected element of reward transitions. It is impossible to realize the value of an organization’s rewards investment without your employees truly understanding the value of their rewards and how upcoming transitions will impact them.

While these principles are universally relevant, they will need to be adapted for each transaction, type of deal and business geography. For example, in Europe, Works Councils and acquired rights impose specific conditions on the transition of rewards. These rules don’t exist in the U.S.; however, other regulatory challenges may apply. Across Asia, the comparability of pay or benefits can vary significantly in the potential impact of constructive dismissal and severance obligations.

Case Study: $140B Merger of Two Fortune 500 Leading Fintech Companies

A recent transaction between two leading fintech firms identified challenges related to varied work cultures and growing mistrust among employees. The compensation philosophy and approach to benefits unveiled differences to address in the combined organization’s go-forward total rewards design.

  • Our M&A team began the partnership by analyzing, recommending and supporting the implementation of compensation and benefits programs in 44 countries, including compensation redesign scenarios and estimated costs to achieve synergy objectives.
  • Following C-suite approvals, we developed a preliminary compensation structure and created a communication and change plan to ensure understanding and buy-in throughout the project. We also identified synergies and helped the client optimize compensation and benefit spend for over 30,000 employees.
  • Most importantly, we partnered with our client to design harmonized rewards that best meet the needs of the combined population, generally within a year of the deal close, to align colleagues globally as one organization and keep them engaged.

Next Steps for Driving M&A Business Outcomes Through Total Rewards

“While the total rewards transition might not seem like the most strategic part of M&A, the first and lasting impression many employees will have of the new organization is how their pay and benefits were handled,” says Dave Kompare, a partner in Aon’s People Advisory practice.

Whether accessing new products and talent to grow your business or driving efficiencies to reduce costs, getting total rewards right is a key part of the journey towards M&A success. Begin with a clear understanding of your business outcomes, the metrics you can use to assess these outcomes and a strategic plan to leverage rewards for an even stronger business future.

To speak with a member of our team about navigating total rewards strategy during M&A, please write to [email protected].

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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