Transaction and retention bonuses - ensuring good value for your spend
The thorny question of “deal bonuses” (or “transaction incentives” or “deal retention awards” – there’s no agreed terminology) poses a challenge to any organisation contemplating any form of corporate activity. This is because:
- They are urgent (no one makes the best reward decisions when there is no time to think).
- There is little useful data out there as to what and how much to pay (if you read the “special reports” on transaction incentives, they are somewhat “qualitative” in nature).
- Very few people draw breath post deal and evaluate whether the spend was efficient or effective.
Accordingly, practice is mixed. And somewhat confused. A simple model may be adopted to assist in planning and improving outcomes as follows:
Step one: note your deal type
The answer on a divestiture will be different to an acquisition. And different again in a merger scenario. The answer for the acquisition of a start-up will be different to the acquisition of an entity with overlapping skill sets to the acquiror. So, there can be no single approach. But the features applicable to each deal type should be similar. So, if you have identified your deal type, you can adopt the approach best suited to that form of transaction.
The answer will differ in terms of amount spent (you will spend less on a divestiture than an acquisition) and the time frame a retention concern exists over (if you have people synergies to locate, you will, logically, focus on the integration period only). It may also impact any conditions you apply to payments made.
Step two: agree whether your primary need is “Retention”, “Reward” or “Incentive”
If you want people to stay, you need a retention deal. If you want to reward them for getting the deal over the line you need a reward deal. If you want to incentivise them to get the best price, then you need an incentive deal. Most people try to achieve all the above with one approach. Which will never produce the right answer. So, you need to agree what the primary need is that you are servicing is – the rest is “nice to have”.
For example, if you have announced a deal and want to keep the management team together as it is negotiated, or goes through competition clearance, say, then your retention deal needs to be time-framed – as in (for example) “we will award 4 equal payments in 6-month steps over the next two years of £x”. Note that:
- whether the deal happens or not (or its timing) is irrelevant.
- whether the deal delivers on its synergies is irrelevant
These factors are not pertinent to retaining an employee. The employee needs to see what happens if they stay.
Step three: work out your spend by reference to existing “Locked in” incentive quantum
You don’t care how much it costs to retain someone per se. You only care about how much it costs to retain someone over and above what they are currently sitting on in terms of existing locked in incentive quantum.
Meaning that an employee sitting there with 10 years’ worth of options that will vest on a deal needs a smaller retention award than a new employee with one grant under his or her belt. This is where your incentive deal becomes counter to normal practice. You will end up awarding more to those with less history with the organisation. Of course, this is the opposite to what often usually happens.
Step four: you don’t need to retain everyone
Keeping people in the business is best looked at in 2 tranches. C-Suite first. Followed by the individuals with the required skills and capabilities you need to preserve value over the key post deal period. This is not best looked at by work level, or time served, or number of direct reports or size of P&L looked after. It is an assessment of where the value in the business rests and who is responsible for it.
In a business of scale, there may be no consistent view of what the answer to this question is. But the area usually forgotten includes those individual contributor roles that offer little in terms of leadership capability – but are enormously valuable in terms of knowledge, proficiency, and corporate DNA. Such roles tend to sit outside of traditional LTI eligibility. But they hold the keys to value creation/preservation.
In short, you need a matrix – which assesses skills against value.
Step five: beware unintended consequences
Incentivising people to sell a business requires great care. Agency theory tells us that alignment of interest is required to ensure people are working to the same priorities. But agency theory has its limitations.
We will all have war stories about where this has gone wrong. But at its simplest, if you incentivise someone to get a deal over the line, then you shouldn’t be surprised if they move heaven and earth to do so. Whether it’s a good deal or not, is a separate question.
Deals are complex things. But first off, the conversation needs to be focussed on:
- Your deal type;
- What you want to pay for;
- How much you should pay, net of what you are already paying/are already committed to paying;
- Who should get it; and
- Who is paying for it.
Remember, when the deal is done, the hard work begins. So you need to make sure you have (and keep) the right people at the table making things happen.