Optimizing Compensation Programs after Merger/Acquisition

Post mergers &/or acquisition, C-suites & board have to face a number of logistical challenges to unlock the synergies derived from the combined /acquired entity. One of the most important aspects is how to integrate & optimise two diverse & distinctive compensation programs & policies. Harmonising two distinctive pay programs are good in theory but pretty difficult to implement practically. Implementing the best of both worlds will result in misalignment of compensation design & objective of the new organisation. Rather, the Board & C-suite should use this M&A transaction as an opportunity to design a green field compensation policy to drive business & leadership strategies of the new organisation.

The new organisation culture’s culture plays a vital role in framing the compensation policies & goal setting exercise. Culture will define the work habits & priorities. Given that the culture of both the companies( acquired & acquirer) are most likely to be different, realising these differences early would help C-suite & board to evaluate whether the value would be unlocked by embracing the acquired company’s culture or by killing it. Executive management should communicate the changes early. It is in human nature to delay sharing not so desirable news. It is the duty of the board of the new company to apprise employees of the acquired company of compensation policy changes so that they can plan their future action accordingly. If the acquired company is a high flyer, the acquirer company employees may question their own compensation policy. Even an acquirer company’s compensation policy should change since there has to be a marriage between the new implemented culture & pay policy.

Performance expectation is another important aspect. If the acquired company is a high flyer, its performance trend was captured in healthy acquired price. Accordingly new incentive & performance policy should clearly reflect those expectations. Failure to do so would result in paying twice for the same performance & would create ‘pay for performance’ envy. 

All the above assertions are strong reasons against harmonisation of pay policy & philosophy since it is very difficult to merge two distinctive compensation policies without damaging the culture that drives performance you have just paid to acquire. However, boards can create a real value if they can reframe & optimise the compensation program. This may mean designing & maintaining separate philosophies between organisations for indefinite periods of time or it may also mean selecting some specific elements of one approach over the other.

The key objective is to make sure that the design of each compensation program is guided by the overall business strategy of the combined entity. On a short to medium term basis, this essentially means small changes in policy for each entity based on factors such as changing the definition of market used to benchmark compensation practices & performance metrics embedded in incentive plans. From a long term perspective, it may be considered as a process since the compensation program & policy will be continuously evolving. Optimizing a compensation program will provide a basis for further evaluating & tailoring the program for next level of business opportunities. 

It is important to remember that culture is powerful but it is not static. Fast forward 3 to 5 years, you will find change in leadership, method for performance reviews & attitude about what is acceptable performance. 

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