How Transaction Bonuses Drive M&A Success

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

• Transaction bonuses help key employees maximize deal value and ensure successful transactions

• Transaction bonuses can be in the form of a deal support bonus awarded to employees as part of achieving deal-related performance goals or value sharing awards given to executives to reward their contribution to the company’s equity value

• Flexible structures such as hybrid or pool-based models help align bonuses with employee roles and deal performance

• M&A Activity in Canada has shown a fluctuating trend; comparing Q3 in the last 5 years, deal count peaked in 2021 with 1,568 deals, while deal volume reached its highest in 2022 at $158 billion

  
  

Transaction Plans

A Transaction bonus is provided to key executives/employees to maximize deal value or ensure the deal is successfully completed.

Transaction bonuses are critical to organizations wanting to maximise deal value. According to an article by McKinsey¹, organizations that implemented financial incentives linked directly to transformation outcomes resulted in a total shareholder return (TSR) increase almost five times greater than companies without a similar program. Specifically, McKinsey referenced an example of a $50 million investment in incentives resulting in $1 billion in recurring value due to an increase in business performance: showcasing the importance of deal related bonuses to maximise deal value.

Objectives

Transaction bonuses can also vary based on different objectives and we have grouped them as follows:

1. Deal Support Bonus

   • Awarded to employees who have met specific goals that contributed to successfully concluding a transaction

   • Typically distributed as a cash bonus based on a percentage of the base salary or a percentage of equity

2. Value Sharing Award

   • Usually given to executives who have a direct impact on maximizing shareholder or deal value

   • Often a cash bonus provided as a percentage of the deal value, a fixed dollar amount, or a number of shares

Type of Structures

Based on our experience and industry knowledge, we have identified two common structures: hybrid models and pool-based models based on sale premiums.

Hybrid

CGP has seen plans that address both retention and transaction objectives with a hybrid approach: a transaction incentive bonus for certain employees and a retention bonus for others.

Employees are divided into tiers which receive a different multiple of current compensation based on their contribution towards the deal. Given the CEO’s position as the highest-ranking role, they typically receive the greatest multiple of compensation.

Pooled

An alternative approach to structuring transaction bonuses involves the organization determining a dollar amount, which is based on the sale premium, to allocate towards funding the transaction bonuses. The sale premium is the difference between the actual sale price and target sale price.

The total bonus fund is then divided into incentive pools by tier. For instance, incumbents classified in Tier 1 are part of the larger bonus pool, signifying their greater importance to the transaction.

The organization distributes funds in each pool using a structured approach, such as:

• A flat amount for each employee within a tier, or

• Based on job level, or

• As a percentage of salary

Trends in M&A Activity

M&A Data Source: Bloomberg Finance L.P.

The first graph illustrates the M&A deal count in Canada for Q3 over the past six years, while the second graph depicts the corresponding volume of these deals. In 2021, the deal count peaked at 1,568, representing $87 billion in volume. In contrast, 2019 saw 1,068 deals, accounting for $152 billion in volume. M&A activity has shown a fluctuating trend, with notable disruptions in 2020 and 2021 due to the pandemic, which led to an increase in deals driven as the companies experiencing accelerated growth acquired companies facing operational challenges. In 2024, we observe a rising trend from 2023, with both high deal count and volume. This suggests that as M&A activity continues to grow, the proportion of deal-related bonuses is likely to increase as well.

¹ Bachmann, Hugh, et al. “The Powerful Role Financial Incentives Can Play in a Transformation.” McKinsey & Company, McKinsey & Company, 19 Jan. 2022.