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By: Marcia Urban at BMO Wealth Management
It happens often in the business world. A private company owner is selling the business, and the financials, capital assets and employees will merge into another entity. It can be an uncertain time for existing employees of the merging business as they contemplate their role and value in a new, likely unfamiliar company.
Top talent especially needs to be incentivized to stay on. It’s important for business owners and CFOs to give them skin in the game so these strategic employees want to make the transition to the new company—rather than pursue new, possibly more lucrative opportunities elsewhere. Here’s what you can do to retain top talent during an M&A.
Identify the Talent you Want to Retain
The selling owner and their CFO have their pulse on their rock-star performers. They know their management teams., the revenue growers., and the big thinkers. Make sure to consult with the selling owner and CFO to identify their top talent so they, in turn, become your top talent.
Offer Attractive Compensation
Top talent likely knows their worth. But they may be uncertain whether the acquiring company sees eye-to-eye. It’s not the time to low-ball a compensation offer when trying to attract and retain top talent. In fact, rely on outside consultants to help you determine market-competitive compensation. Then, if possible, increase that salary to help ensure your offer is the one that’s accepted.
Provide Short-Term Incentives
Paying annual bonuses in addition to a market-competitive salary can help attract and retain talent. Bonuses are typically based on performance, and since we’re talking about top talent, bonuses should be healthy enough that the employee wants to stay. The award can be structured based on revenue, specific performance goals or company profits.
Apply Long-Term Incentive Strategies
A mix of equity and non-equity compensation can go a long way toward acquiring and retaining top talent in a private company. Restricted stock awards, which provide ownership in the company, or even phantom stock, which doesn’t provide a share award, are good incentive programs for talent retention. For example, you could offer phantom stock that is vested over a specified time so the employee must remain at the company to receive the award.
Align Benefits with Industry Standards
The benefits package you’ve had in place for years might not be on par with what other companies currently offer or the benefits offered by the merging company. A good benefits program should align with the merging company and other businesses in the space. Though not necessarily as lucrative as the pay and incentive part of a compensation package, this may be a differentiator that tips the scale for the employee.
Offer Nonqualified Deferred Compensation
Nonqualified deferred compensation allows highly compensated talent to plan for their future by deferring more money for later. This type of retirement plan enables the employee to defer a larger amount than they could with a qualified plan—while still enjoying tax advantages.
Always Plan Ahead
The market for top talent is extremely competitive today, and talent has more employment options than ever. Research firm Statista reports that offering financial retention packages was one of the top three factors in 2021 for retaining critical talent after M&A deals.
Retaining top talent during an M&A has many advantages. These instrumental employees have a deep, often irreplaceable understanding of the business. Top talent also likely has strong working relationships with their colleagues—who may follow them to a new role at a different company. If in a sales role, their client relationships are invaluable to the ongoing business success.
Whether you’re the CFO of a company that’s merging or the business that’s acquiring, regularly consult with your wealth management advisors to help ensure you’re well positioned to attract and retain top talent. Bring in the business owner and have frequent conversations about employee retention, making it a routine part of evaluating the company’s overall health. Identify the talent you want to mentor and grow early, and regularly assess whether you have the right players in the right seats. Also, make sure you have strong financial incentives in place that help you stand out in a highly competitive employment market.
Marcia Urban, Senior Wealth Planning Strategist, BMO Wealth Management
Urban has 35 years of taxation and wealth management planning experience, helping business owners and their CFOs navigate complex tax requirements and prepare for a post-sale transition. She also serves as an adjunct professor at the University of Minnesota’s Carlson School of Management, teaching fiduciary income tax in the Master of Business Taxation Program.
