Best Practices for Retaining Employees During M&A

Background

In this article series, Compensation Governance Partners explores various types of deal-related bonuses, their objectives, market practices, and different approaches to structuring payouts; with a focus on retention, transition, and transaction bonuses.

Key Highlights

• Retention bonuses are designed to ensure key employees remain engaged and operationally focused until a transaction’s closing date

• Transition bonuses aim to incentivize key employees to maintain high performance and contribute to the smooth integration post-merger

• Bonuses are typically calculated as a percentage of base salary and can be structured to align with specific milestones; typically, retention bonuses can range from anywhere between 70% to 100% of base salary for publicly-traded executives

Retention Bonuses

The term retention bonus is used loosely to refer to a payment at a future point in time to retain an employee. That said, for our analysis, we differentiate between a retention bonus and a post-merger transition bonus based on the transaction date.

A retention bonus is granted to key executives/employees to ensure that they remain engaged to execute operationally until the transaction closing date by the acquiree organization.

Objectives

• Retention bonuses are paid regardless of whether the deal concludes successfully, the timing of its completion, or the achievement of synergies

• Employees need assurance that their efforts, which might result in job loss, are valued and that they have some short-term financial protection

• Retention bonuses can also effectively unite the team towards a specific, strategic goal. If there is speculation within an organization of a potential sale, employees may worry about their job security during and after the transaction. Thus, a guaranteed bonus payout provides a greater sense of security so that employees can focus on daily business activity. Retention bonuses are viewed favourably by acquiring companies as it helps preserve the asset they are acquiring

Example – Paramount¹:

Paramount Global is offering $1 million retention bonuses to two senior executives, equivalent to 100% of each executive's annual 2024 base salary, according to an SEC filing. These bonuses are contingent upon the executives staying with the company until the completion of the Skydance Media merger.

Transition Bonus

A transition bonus is provided to key executives/employees to motivate them to stay with the organization post deal closure as they are considered integral for future operations. This can also be considered a transition incentive, as it may involve performance targets that must be achieved to qualify for the bonus.

Once an acquisition is finalized, the acquirer often introduces a transition bonus (after the transaction date) to retain existing employees. This initiative aims to mitigate cultural differences and underscore the value of current staff to the new organization. This becomes particularly crucial when companies from diverse sectors or industries integrate, as it helps retain specialized and knowledgeable staff who are vital for the new organization's expansion into an unfamiliar business landscape.

Objective

• To incentivize employees to maintain high performance following the merger

Example – Rogers-Shaw Deal²:

In early 2021, Rogers announced an agreement to buy Shaw in a deal valued at $26 billion, including debt. The deal finally closed in April 2023 after resistance from the Competition Bureau. While the value of this deal is exponentially larger than frequent M&A activity in the market, the value of the bonuses relative to base salary are informative.

• Tony Staffieri, CEO of Rogers, received $8 million in stock options when the deal closed subject to undisclosed one-and two-year milestones

  • Mr. Staffieri’s 2022 base salary was $1.4m so this transaction bonus was 5.7x his salary

• The other four executives named in the management information circular received stock option grants worth $2 million to $2.5 million tied to one-and two-year targets

  • These grants represented 2.5x to 4.5x annual salary

Market Practice

Based on CGP’s experience and industry knowledge, we have observed the following market practices for retention and transition plans:

• Bonuses are typically a percentage of salary or expressed in terms of months of salary

  • Despite being based on base salary, retention bonuses are considered extraordinary income and typically are not factored into subsequent annual incentive bonuses or LTI awards

• The awards generally extend over a period of up to two years and are disbursed periodically, typically with intervals of at least three to six months between payments

• Retention bonuses and transition incentives are often tied to specific milestones

  • For retention bonuses, these milestones may include events such as deal announcement, completion of due diligence, regulatory approval, and deal closing

  • For transition incentives, milestones may involve achieving financial objectives or facilitating smooth departmental transitions

A general review of proxy circular disclosure from S&P/TSX companies that provided retention awards to selected named executive officers (NEOs) revealed:

• The typical term of retention awards is 3 years

• The typical vehicle for retention awards is restricted share units, although some organizations attached performance conditions to their grants

• The typical vesting is cliff vesting, although some organizations used gradual vesting (1/3 after each year, or 1/3 after year 2 and 2/3 after year 3)

The table below indicates that the median market retention awards (P50) are 80% of base salary.

¹ Spangler, Todd. “Paramount Global Grants Two Senior Execs $1 Million Bonuses If They Stay on through Skydance Deal Close.” AOL, 21 Nov. 2024.

² Dobby, Christine. “Top Rogers Executives to Receive $17M in Bonuses Tied to Shaw Deal - Including $8m for CEO Tony Staffieri.” Toronto Star, 24 Mar. 2023.