2017 Global M&A Retention Study

Transcription

1 2017 Global M&A Retention Study Financial Services Firms 2017 Willis Towers Watson. All rights reserved.

2 About the Willis Towers Watson Third M&A Retention Study (2017) 244 / 41 Employers Financial Services firms 24 Countries Survey participants responded in terms of one particular merger or acquisition their companies had initiated and/or completed within the past two years. Survey data collected between March and May 2017 Less than to 999 1,000 to 2,499 2,500 to 4,999 5,000 to 9,999 10,000 to 14,999 15,000 to 29,999 More than 30,000 Number of full-time workers employed by acquiring organization 38% 18% 5% 2% 7% 9% 1 1% 26% 18% Respondents by industry groups 5% 12% 17% 1 Energy and Utilities Financial Services General Services Health Care IT and Telecom Manufacturing Public Sector and Education Wholesale and Retail 1

3 Global results at a glance Acquirers continue to use retention awards as a way to retain leaders and other key talent 79% of acquirers using retention plans retained at least 8 of targeted employees for the full desired retention period These plans tend to be targeted toward acquired company leaders and those whose skills are critical to the transaction The most effective source used to identify the right participants remains the target company s leaders Compared to 2014 findings, 2017 findings show a modest increase in individual target values as a % of salary For senior executives (i.e., top executive and direct reports), the median retention award = 55% of salary, versus 48% in 2014 For other employees, the median retention award = 31% of salary, versus 27% in 2014 The overall size of the retention budget pool has declined The median total retention budget pool as a % of purchase price decreased from 1.9% to less than 1. in this year s study Acquirers continue to rely on cash retention bonuses as the primary award vehicle 77% of acquirers use cash bonuses for senior leadership; 8 for other employees Use of stock-based awards (i.e., full-share awards and/or stock options) has decreased in prevalence since 2014 Vesting schedules for senior executives tend to be longer than for other employees Median full vesting for senior executives occurs at 18 months versus 12 months for other employees Exclusively time-based vesting is more common than setting performance conditions for all or part of the award 2

4 What are high-retention acquirers doing differently? 79% of respondents were able to retain a high percentage of targeted employees (more than 8) for the full retention period How do the plan designs at high-retention acquirers (those with 8+ retention success) vary from those at lower-retention acquirers (<8 retention)? Specialized Selection High-retention firms are more likely to target employees below the executive level with key skills than low-retention firms (61% vs. 47%), while the low-retention firms were more likely to give awards to those identified as high potential (33% vs. 23%) or high performance (3 vs. 21%) Early Communication At high-retention acquirers, 28% of senior leaders were asked to sign before the initial signing vs. only for low-retention acquirers Standardized Awards High-retention companies were less likely to take values earned at sale (for example, shares owned or accelerated stock awards) into account when determining retention values Delayed Vesting High-retention acquirers are more likely to pay out in full only at the conclusion of the retention period (53% senior leadership/ 61% other employees), while low-retention acquirers used interim vesting / payment terms (35% senior leadership/39% other employees) One design element that is not aligned with higher retention target award values Senior leader high-retention company retention median values = 5 of base salary, vs. 7 for low-retention companies Other employee retention median values = 30-35% of base salary for both high-retention acquirers and low-retention acquirers 3

5 For Financial Services firms, job title/level was the main factor for retention agreement eligibility Employees below executive level with key skills in the context of the transaction Information from seller defining "leadership team" 55% 44% 54% 49% Job title/level 48% 56% Job function/department (e.g., Finance, Legal) Other recommendations from seller, below leadership team High-potential status Management discretion High-performance status Other factor(s) 17% 13% 15% 27% 25% 24% 23% 24% 22% 27% 37% 37% All Respondents (n=241) Financial Services (n=41) High-retention companies (61%) are more likely to consider employees with key skills than low-retention companies (47%) Base: Total respondents 4

6 Information from target s leadership is the primary source of information; other sources are not considered to be as useful Information from target's leadership 55% 88% Organization chart 5% 45% Reporting level/salary grade information 5% 38% Market/industry knowledge and information, including insider information (e.g., from current employees, ex-employees) 15% 35% Information from target's HR specialists Performance ratings/evaluations Other source(s) 3% 8% 15% % 2017 vs results: Globally, information from target s senior leaders, now used by 9 of acquirers, increased in use vs (76%) Used Most useful Base: Financial Services firms giving a valid answer (percentages exclude None of these and Don t know ) n = 40 5

7 Senior leaders are asked to sign retention agreements at an earlier stage of the deal than employees Before the initial signing 6% 21% At the initial signing 3% 18% Between the initial signing and the close 34% 44% At the close 6% After the close 38% Other time 5% 3% Senior leadership n = 38 Other employees n = 34 At high-retention acquirers, 28% of senior leaders were asked to sign before the initial signing (versus only for low-retention) Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 6

8 Cash bonuses are by far the most common financial award used in retention agreements Cash retention bonuses 77% 79% Time-vested full shares/share units 24% 37% Stock options 6% 26% Increases in base pay 17% 12% Guaranteed payment of regular bonus Division-specific incentives (i.e., earn-out plan) Performance-vested full shares/share units 6% 3% 17% 21% 14% 2017 vs results: Globally, the use of stock options as a retention tool fell significantly in the 2017 survey (32% of senior executives received options in the 2014 survey, vs. 16% now) Other type(s) of financial awards 6% Senior leadership n = 35 Other employees n = 34 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 7

9 Bonuses are most commonly set as a percentage of base salary for both leaders and other employees As a percentage of base salary 33% 44% As a fixed amount 22% 22% As a percentage of annual bonus 7% 19% As a percentage of total compensation (i.e., salary plus annual bonus) 15% 19% Other method 7% Senior leadership n = 27 Other employees n = 27 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 8

10 Nearly half of those that use stock options or shares for retention set target values as a fixed value that is converted to a number of shares or options As a fixed value converted to a number of shares/stock options 33% 47% Target value set as a percentage of salary/converted to a number of shares/stock options 24% 22% As a fixed number of shares/stock options 18% 33% Target value set as a percentage of total compensation (salary plus annual bonus) and converted to a number of shares/stock options 6% Other method 6% Target value set as a percentage of annual bonus/converted to a number of shares/stock options Senior leadership n = 17 Other employees n = 9 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 9

11 Over half of senior leaders receive target values equal to at least 6 of salary, compared to less than 4 of other employees Less than 1 1 to 2 21% to 3 31% to 4 41% to 6 61% to 8 81% to % to % to 24 Greater than 24 4% 4% 8% 8% 12% 15% 15% 22% 26% 27% 27% Senior leadership n = 26 Other employees n = 27 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know/prefer not to say ) 10

12 Two-thirds responded that values that employees earned at sale had no effect on retention awards 23% Those with higher payments at sale received higher retention awards in order to provide better enhancement to stay Payments received at sale had no effect on the individual retention awards 66% Those with higher payments at sale received lower retention awards, because the need to provide high compensation was diminished due to the value gained from the sale Base: Financial Services firms giving a valid response (percentages exclude Don t know/prefer not to say ) n = 35 11

13 Less than half of Financial Service firms have a retention budget of less than 1% of the total transaction cost Less than 1% 46% 55% 1% to 1.99% 19% 19% 2% to 2.99% 4% 7% 3% to 4.99% 6% 8% 2017 versus 2014 results: 5% to 9.99% 7% 8% Globally, median value as a percentage of transaction cost in 2014 was 1.9% results are lower by about 5. 1 to 2 5% 15% We believe this reduction reflects greater average deal values due to a rising equities market, without a corresponding total cost increase in retention awards. Greater than 2 Individual award values are up modestly vs All Respondents (n=146) Financial Services (n=26) Base: Those giving a valid response (percentages exclude Don t know/prefer not to say ) 12

14 Over two-thirds of buyers covered retention costs in full 7% Costs were 10 borne by the seller 23% Costs were 10 borne by the buyer Costs were partially borne by the seller 7 Base: Financial Services firms giving a valid response (percentages exclude Don t know/prefer not to say ) n = 30 13

15 A combination of both time-based agreements and performance metrics are the most prevalent for senior leadership Combination of both 15% 47% Time-based agreements 39% 74% Performance metrics (individual- and/or company-based) 13% 12% 2017 vs results: Other Globally, the use of time-based agreements for senior execs has risen from 35% in 2014 to 48% now Performance-only plans have decreased in prevalence from 16% in 2014 to 14% now Senior leadership n = 38 Other employees n = 34 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 14

16 Financial Service firms using time-based metrics establish a longer retention period for other employees 2017 versus 2014 results: Less than three months after the close 4% Globally, the time frame for senior leaders has lengthened median time frame in 2014 was about 15 months post-close vs. 18 months now Non-executive median retention time frame remains about 12 months post-close Three to nine months after the close 12% 10 to 18 months after the close 26% 28% More than 18 months after the close 33% 36% Other period 26% 24% Senior leadership n = 27 Other employees n = 25 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 15

17 Half of respondents pay out retention awards in full at the conclusion of the retention period Pay out in full at the conclusion of the retention period 5 57% Payments were prorated evenly across the retention period 25% 4 Payments gradually increased over the retention period Other vesting schedule 3% 4% 7% 14% High-retention acquirers are more likely to pay out in full at the conclusion of the retention period (53% senior leadership/ 61% other employees) than low-retention acquirers (35% senior leadership/39% other employees) Senior leadership n = 30 Other employees n = 28 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 16

18 Financial performance of the acquired business is the primary factor in determining payouts for senior leaders Financial performance of the acquired business exclusively 33% 45% Management discretion 27% 44% Financial performance of the division that assumed responsibility of the acquired business Length of time required to complete the transaction 23% 18% 22% Cost synergy targets achieved Retention rates 14% 18% Financial performance of the entire company Other metric(s) 9% 2017 versus 2014 results: Globally, full-company performance goals for senior execs are less common 41% in 2014 vs. 17% in 2017 Senior leadership n = 22 Other employees n = 9 Base: Financial Services firms giving a valid response (percentages exclude Not applicable and Don t know ) 17

19 More than two-thirds of Financial Services respondents were able to retain a high percentage of employees (more than 8) for the full retention period Less than 2 4% 1 21% to 4 3% 5% 41% to 6 61% to 8 2% 5% versus 2014 results: Globally, companies are more successful in meeting their retention goals 68% of companies reported more than 8 retention in 2014, vs. 79% in 2017 More than % All Respondents (n=145) Financial Services (n=20) Base: Those giving a valid response (percentages exclude Not applicable and Don t know ) 18

20 Over a third of the Financial Services employees who left before the end of the retention period were uncomfortable with the new culture They were uncomfortable with the new/changing organizational culture 35% 44% They were more aggressively recruited by competitors Other reason(s) They did not like their new role(s) 25% 25% 29% 36% 4 4 They did not agree with the focus/direction of the company 1 18% They did not like their new manager(s) 12% 15% Their retention package was not generous enough They were displeased with the new pay structure They were displeased with the new benefit structure All Respondents (n=113) 7% 5% 4% 2% Financial Services (n=20) Base: Those giving a valid response (percentages exclude Not applicable and Don t know ) 19

21 Personal outreach was the most common tactic used, in addition to retention agreements Personal outreach by leaders and managers 53% 6 Enhanced career development opportunities Participation on one or more task forces related to the integration Promotions to more senior level 44% 42% 39% 37% 42% 5 Lateral moves to new roles 31% 39% Assigning a mentor to help them through the transition Identifying the right network(s) for key talent to plug into Moves to different locations Other 21% 17% 17% 17% 16% 14% All Responses (n=227) Financial Services (n=36) Base: All respondents 20

22 Write-in comments regarding what respondents might have done differently in retrospect Retention agreements were only considered after closing. It would have been helpful to plan for this prior to close so details could be finalized earlier in the process. Build a closer relationship with the key talent from the beginning. Reducing the incremental workload on key team members during and after close period. Resourcing more adequately would have helped. Should have engaged key employees earlier to get input on what was important to them, instead of statistically setting up a plan. Each transaction is different, and we have to be flexible in our approach to retention. Lengthen the retention period and be more active in communication about the strategy, culture and future plans of the new company. Increase connections to the new organization; ensure top leader role design is on target; balance the challenges of moving from a small company to a big company (autonomy, small fish/big pond). We had a very aggressive program that I believe was highly successful in retaining talent. We front-loaded a decent amount of the payment at the insistence of the selling company, and it would have been better for the buyer (and more cost-efficient) if it was more back-loaded, but this was the price of doing the deal. You can also never invest enough in the softer side of things engaging teammates in the new culture, supporting leadership through change, etc. 21

23 Transaction history in the past two years Acquired another organization 93% Merged with another organization 12% Been acquired by another organization 2% Base: Financial Services firms n = 41; multiple responses permitted 22

24 Participant Profile 23

25 Transaction size US$10 billion or more 9% US$5 billion to US$9.9 billion 6% US$1 billion to US$4.9 billion 15% US$500 million to US$999 million 15% US$250 million to US$499 million 21% Less than US$250 million 33% Base: Financial Services firms giving a valid response (percentages exclude Don t know/prefer not to say ) n =

26 Ownership structure Publicly held 33% 68% Private 2 56% State/government-owned 2% 3% Other 8% 1 Acquiring company (n=41) Acquired company (n=39) Base: Financial Services firms 25

27 Company head count Less than 500 7% 38% 500 to 999 2% 18% 1,000 to 2, % 2,500 to 4,999 8% 15% 5,000 to 9,999 2% 3% 10,000 to 14,999 5% 1 15,000 to 29,999 3% 12% More than 30,000 5% 41% Acquiring company (n=41) Acquired company (n=40) Base: Financial Services firms 26

28 Headquarters location Brazil Canada China France Germany Hong Kong Japan Mexico United Kingdom United States Other 3% 2% 3% 2% 5% 5% 5% 8% 15% 12% 17% 18% 22% 34% 5 Acquiring company (n=41) Acquired company (n=40) Base: Financial Services firms 27