Authored by Cliff Mansfield, Kristi Hendricks, Sydney Julian, and Tracy Miller
Let us walk in the shoes of Maya, who joined an innovative startup, PearlCo, after college and has worked her way up to principal software engineer/lead over the past two years. She believes in the company’s purpose-driven mission and sees real opportunities for growth. Her cash compensation is lower than the market rate, but she has received multiple stock option grants with the promise of a big payout. She has devoted countless hours and long nights to help grow the business to receive a piece of the success. The day comes, and the founder announces that PearlCo is being acquired. But there is bad news. Due to recent market downturns, the company is selling for less than it anticipated, and the employee stock options are all “under water.” Maya will not receive any money from the transaction, and messages from the acquirer are unclear on whether there will be any replacement.
Situations like this are becoming more common in deals given current economic conditions. And even the good stories—where employees receive large payouts in light of a transaction—bring employee retention risks. In mergers and acquisitions (M&A), HR leaders must play a strategic role in battling compensation-related issues, such as varying compensation philosophies, equity award treatment and future grants, and differing job architectures, in order to elevate the employee experience and retention rates.
Let’s explore the role total rewards play in an M&A transaction across the deal life cycle and how it impacts Maya when mapping out her compensation experience:
Read further to see if anything can be done to retain Maya and boost her employee sentiment:
- Target screening
When drafting the purchase agreement, the organization buying Maya’s company, MermaidCo, elected not to involve HR. Consequently, MermaidCo Corporate Development only worked with the cofounders of PearlCo, who only allocated 10% of the rollover equity to team leaders and key talent. Had MermaidCo HR been involved, they would have advised the team about the inadequacy of the allocation, as it was misaligned with employee expectations set by the previous compensation philosophy and was likely to create an employee retention risk.
Maya is disappointed that she will not receive a significant equity grant as a new member of the combined organization. She is beginning to feel left behind by the deal and is starting to explore job options elsewhere.
- Due diligence
Luckily for Maya, HR was brought in during due diligence and shared their frustrations around the equity decisions. To “make things right,” they elect to grant one-time cash retention bonuses to key talent—an appreciated gesture, although it does put a dent in the company’s cash reserves. Thankfully, the team can finish this in time to include it in the deal structure. HR is anticipating this to be a popular move—after all, who doesn’t like a cash bonus?
When Maya receives her offer, she is pleasantly surprised by the cash bonus despite the lack of equity.
- Integration planning
During the sign-to-close phase, MermaidCo HR performs a quick compensation level assessment and determines that PearlCo pays approximately 15% below market for engineering roles.
Consequently, at close, Maya receives an offer letter that includes a base pay raise and a new documented nondiscretionary performance-based bonus, something she greatly appreciates. She feels valued and is beginning to feel very pleased with the deal.
Following the deal close, HR begins to work through a formal job architecture. This turns out to be a lengthy process, complicated by the fact that the founders of PearlCo did not have a formal job architecture, instead opting to give title bumps to boost morale at key moments in their company’s development.
Unfortunately for Maya, she receives an email that she has been aligned from principal software engineer/lead to staff engineer I/II because she has two years of experience and limited knowledge of MermaidCo’s programming languages. Even though this does not impact her compensation, she is familiar with typical engineer job titles and perceives this as a title demotion. The email she receives offers no insight into who made this decision or why they made it in the first place. Maya does not know who to reach out to, and she feels dejected and devalued—not to mention demoted.
Maya decides to restart her job search, knowing that she can now leverage having MermaidCo on her resume to land a new higher-paying role.
- Elevating the employee experience
While the email that Maya received about her title change was not a positive experience, the MermaidCo HR team prepares her manager and functional leader to have a conversation with her and each of her team members one-on-one to discuss the title changes. Maya’s manager, Dan, approaches her with empathy—having experienced a title change himself. He apologizes to her, sharing that PearlCo did not have a true structure when it came to titles—and while she was very important to the team, MermaidCo was more structured and needed to be fair to existing employees who also worked hard, a fairness Maya received in her compensation adjustment. One of the other benefits of being at MermaidCo, Dan said, was the opportunity to build your career path in new directions. He sets up time for them to talk with their function leader about possible key projects available to Maya.
Maya has never felt so necessary or cared for, even when working long hours developing new features on aggressive PearlCo timelines or receiving her prior title bumps. Even when one of Maya’s interviews pans out into a new offer, she graciously declines it in favor of staying at MermaidCo.
While Maya is one illustrative example, her situation is by no means unique. Deals can be challenging for employees. In addition to the inherent sense of uncertainty, complex decisions are often made quickly in silos, overlooking the impact on the employee experience. To avoid common pitfalls, HR professionals should keep the following considerations top of mind:
- Be proactive: Regardless of pending deal activity, discuss your organization’s overarching M&A compensation strategy and philosophy with your corporate development counterparts to support consistency and compliance for future deals.
- Hit the ground running: Early decisions can set the tone of the deal—make sure HR has a seat at the table and is equipped with the right information to make informed compensation decisions.
- Know your talent and meet them where they are: Understand who is critical to the future of the organization and be quick to develop and execute employee retention plans at all levels of the organization, not just your executives.
- Engage your stakeholders: Where possible, bring leaders along the journey and empower them to make informed decisions. Leaders must understand and be bought into the “why” and understand how to effectively communicate good or bad news with their teams.
Focusing on the above will help to manage the process in a way that optimizes deal value and preserves employee sentiment.
Our Human Capital Mergers, Acquisitions, and Restructuring (M&A/R) team connects with HR professionals focused on M&A/R work (aka Human Capital “DealMakers”) across every industry. During these sessions we discuss topics that are top of mind for them as they support their companies. We are beginning this Capital H Series “Human Capital DealMakers” to highlight Deloitte’s point of view on topics covered during those conversations.
If you, or someone on your team, is focused on HR M&A/R work and are interested in joining our monthly calls, please reach out to the Human Capital DealMakers Mailbox.