Integrate Key Employees in a Merger

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Integrate Key Employees in a Merger

Overview of Key Employees

In any acquisition, the acquiree will have a key cluster of employees who are subject matter experts or rain makers who are responsible for the bulk of all sales. These employees are likely at the core of the acquiree’s central value proposition, and so are extremely valuable. In addition, they may be the key drivers behind the acquiree’s overall level of productivity and quality of work. The problem for the integration manager is that these people, because of their skills, are most likely to have held shares in the acquired entity, and may now have sufficient wealth to walk away from the company. If they leave, there may be a devastating decline in organizational knowledge and morale, along with a very high replacement cost.

Key Employee Retention

To retain this core group, the first task is to create a retention matrix, showing the impact of losing each key employee, what issues might cause them to leave, what tactics shall be used to retain them, and who is responsible for implementation. The integration manager uses this matrix to select the most appropriate retention tactics, and to assign responsibility for follow-up with the targeted employees.

Retention tactics can cover a considerable range of options, and can only be narrowed down to the most effective alternatives by talking to each key employee individually to determine their concerns. Here are some options:

Altered benefits. An employee may have a special need, such as short-term disability coverage, that is not addressed by the standard company benefits package. In many cases, these additional requirements are not overly expensive, and can have a profound impact on their decision to stay with the company.
Autonomy. This is one of the most cherished prerogatives of an independent-minded manager, but only allow it if the employee is still linked to highly quantitative goals.
Change reporting relationship. An employee may have conflicts with an oppressive manager, so switching to a different manager may not only improve retention, but also increase the effectiveness of the employee.
Culture. Employees may identify strongly with their company’s culture, and will leave if it changes. Culture issues may include a relaxed dress code, working from home, periodic beer bashes, and so on. The integration team should be very careful about altering any cultural issues that might alienate key employees.
Importance. Some employees are used to being crucial to an enterprise’s success, because of some unique skill. If so, retention may simply require the buyer to periodically reassure an individual that he is needed, and important to the company – and then prove it through whatever methods are needed to provide assurances to the targeted person.
Increased pay. An increase in pay will certainly gain the attention of an employee, but keep in mind that pay changes can be matched by a competing firm, and may also shift an employee into a pay level that is well outside of the normal range for his position.
Job content. Simply making a job more interesting can retain employees. This may require a process change, so that more tasks within a process are concentrated on one person.
Learning opportunities. An employee may want to obtain a technical skill or an entire college degree, so offer to either pay the entire cost or to share it with the employee. However, this situation sometimes results in the prompt departure of the individual once he has obtained the extra education, so require a payback agreement if he leaves the company within a certain period of time following completion of the training.
New location. Moving an employee against his wishes to a new company location is a prime method for losing him to a competitor. On the other hand, if there is another company facility where he might prefer to work, then allow the change and pay for a housing move, too – but only if the employee can be effective in the new location.
New title. While a new title is the ultimate in inexpensive perks, it is also easily matched by a competing company, and so does not help much to retain an employee.
Promotion. Promoting an employee to a higher-grade position with more responsibility is a strong inducement to remain, though there is a risk of promptly losing anyone who becomes uncomfortable in the new role.
Work from home. With the pervasive use of mobile communications, working from home, at least to a limited extent, is an excellent option, especially for those employees with long commutes or medical care issues.

Key employee desires may require some items entirely outside of the preceding list, so be open to other options that they may bring up.

Another solution is to give them enough additional shares to gain their attention, but only if there is a sufficiently long vesting period associated with the shares to retain them for a number of years. The most common approach is proportional vesting (e.g., 20% vesting in each of five years), but as key employees gradually gain vested shares, they have less inclination to stay with the company. As a result, some firms prefer to vest a larger proportion of stock near the end of a vesting period, as an incentive to keep key personnel for as long as possible. Also, there is a risk that employees will wait out their retention periods without adding any value to the company. To avoid this problem, consider tying any retention payments to a specific performance metric or deliverable.

While the discussion thus far has been about the retention of key employees, it is equally important to obtain their backing of the acquisition. These people are opinion leaders, so obtaining their “stamp of approval” for the transaction means that they in turn will sway the opinions of a number of other employees. While some key employees will make their decisions about the transaction right away (either negatively or positively), a few will be undecided for some time.

Dealing with key employees is similar to the political stratagems used by a candidate for political office – one must determine what promises are needed to create a majority of backers. However, and as is the case with a politician, it is not necessary, nor always desirable, to issue a vast number of assurances to obtain the support of all key employees. Some employees will be so disaffected or demanding that it is not economical or prudent to accede to their demands. Instead, the integration manager seeks to work with as many key personnel as possible, and to mitigate the negative opinions of a select minority.

When to Replace Key Employees

There will be cases where the opinions of key personnel cannot be swayed in favor of the buyer. This is most common in hostile takeovers, where vigorous defenses are raised against an acquisition attempt, and public statements may extend to smear campaigns against opposing managers. In these cases, the buyer may have no other choice than to replace a large proportion of the acquiree’s staff with new employees who do not hold prior allegiances within the organization, or who have been brought in from other buyer locations.

Summary - Dealing With Key Employees

This discussion has been about how to retain and sway the opinions of key acquiree employees. However, when the success of an acquisition is contingent upon the retention of a single individual, then there are much greater odds of failure. This is a simple case of probabilities – circumstances may easily arise that lead to the departure of that one person, and which may be totally outside of the control of the buyer (such as a death in the family). Thus, it is better to acquire companies having multiple key people, on the grounds that a buyer would be hard put to it indeed to alienate an entire group of employees.