M7 - Mergers, Acquisitions, and Base Compensation Flashcards
HR Involvement in the Mergers and Acquisitions Process
HR Involvement in the Mergers and Acquisitions Process
How can HR get involved?
Most companies recognize people issues as being of paramount importance in successful mergers and acquisitions. However, HR departments generally play only a modest formal role in most cases. Many HR departments become involved after the planning and strategy-setting for the merger or acquisition has already taken place, which is the precise point at which a full assessment of the culture and key people at the targeted organization should be taking place.
Be proactive – If HR is aware of a transaction, take steps to get involved early such as:
- Sending a memo to senior management that outlines the advantages an HR perspective will bring to the transaction.
- Outlining why human resources should be involved, stressing how HR can advise and counsel.
- Suggesting a review of the deal for hidden liabilities, such as a “change in control” agreement.
- Noting the need to retain key employees and avoid labor union difficulties.
If all else fails and HR is still not involved directly, partner with someone on the team who will represent HR’s issues.
Key Priorities for HR in the Process
Key Priorities for HR in the Process
Ensure effective communications – Through the entire M&A process, effective communications are essential for success. In each phase, HR will need to deliver messages to various target audiences.
Communication to others regarding the transaction is often restricted. What can be told, to whom, and when are all questions to be addressed early in the process.
- Securities regulators
- Competition
- Stakeholders
- Employees
Transaction phase – Throughout the activities of putting the deal together, HR professionals will:
- Build, manage and participate on teams – Senior management is responsible for putting the teams together and determining what resources are needed.
- Perform due diligence – HR has the ability to shape both the deal and the price by identifying risks and liabilities.
- Plan the integration process early - as soon as the vision, mission, and business strategy are set, work can begin on planning how to make the deal work.
Integration Phase:
- Create a sense of involvement and security – HR can team with senior management to communicate and structure the total rewards program changes to create a sense of employee involvement and security.
- Promote opportunities in the change – When communicating changes, HR can stress the benefits of the transaction for employees.
- Achieve cultural alignment – Achieving cultural compatibility is viewed as a critical people issue for M&A success.
- Integrate employee total rewards programs – Programs and plans must be integrated and presented to employees.
HR Participation on Teams
HR Participation on Teams
If, after the initial discussions, the decision is to proceed, the transaction phase begins with a letter of intent that allows the buyer to conduct more detailed investigations. The senior management team then focuses on developing an in-depth understanding of the seller’s market, people, customers and products.
Two teams are formed – a transaction team and an integration team (sometimes called a transition team) that will do the work necessary to move forward into the transaction phase and on through the integration phase. These two teams are assembled to accomplish specific projects and must provide coordinated solutions to the issues and problems that arise throughout the deal. Upon completion of their projects, each team is disbanded.
The Two Teams
The Two Teams
Time:
- The transaction team begins its work early in the pre-deal phase and ends shortly after the integration begins.
- The integration team begins planning as soon as enough details of the transaction are available. The planning continues through the transaction phase and then the plan is actually implemented during the integration phase.
Responsibilities:
-Neither team works in a vacuum; they must continually share information to ensure success. For example, the transaction team must share the information gathered during due diligence in order for the integration team to make decisions concerning how total rewards programs will be integrated.
People:
-Depending on the size of the organization, the teams may consist of entirely different people, or they may include some or all of the same people.
The Integration Team
The Integration Team
The integration team includes those who will plan a strategy to carry through and make the completed transaction work. HR professionals play the major role in the integration of total rewards plans and cultural alignment.
Factors influencing selection of members include:
- The phase in the transaction time line – At some point, there will need to be representation from both companies.
- The organizational structure of the respective companies
- The structure of the transaction (i.e., merger, acquisition, other) – Representation from each company and the level of participation will vary depending on the situation.
Goal – to “make the deal work”
Plan the integration strategy – This is the plan by which the team will approach the integration process to accomplish the work necessary for the integration of the culture, employees and total rewards plans and programs into the new organization.
Integrating Compensation Plans
Integrating Compensation Plans
Integration options:
- Merging systems: The complexity of attempting to consolidate or integrate two different compensation systems, including salary reviews, structure, ranges, grades, performance management, etc., may be a formidable challenge.
- Separate systems: Separate systems may perpetuate the isolation of the two organizations from one another and create an “us versus them” mentality within the organization.
- New system: A new system, based on the characteristics and dynamics of the newly formed organization, created with input from both sides, may help to nurture a new company culture.
Decision Makers:
-It is important to select which group within the organization will be making the decisions regarding the integration. Typically this is done by a cross-functional internal integration team.
The integration of compensation programs for the broader population generally takes a lot of time. Typically, there is less urgency with the broader population than there is with the executives and sales team.
Pay Practices – Base Pay
Pay Practices – Base Pay
The key component of most compensation plans is base pay. The following must be considered when the decision is made to integrate compensation plans.
Objectives – What is the base pay program attempting to accomplish? What is the pay philosophy / position in the market?
Salary structures – formal / informal, number of job grades, number of pay structures, range spread / overlap / midpoint differential, broadbands
Salary administration: policies / procedures / practices that manage the base pay programs:
- Pay increases
- Timing (focal point, anniversary date, calendar or fiscal year)
- Merit increase guidelines, tenure, cost of living
- Performance appraisals / forms associated with increases / compensation, frequency, paid up-to-date
- Differentials: geographic, shift, hazard, etc.
- Salary survey data: What are the survey sources used to monitor and manage pay programs? What companies are the main competition or benchmarks?
Collective bargaining agreements – What is required of the base pay program? What about other pay practices and programs?
Employment Contracts
Employment Contracts
It is important to note that the prevalence of individual employment contracts outside of the United States is common.
Unions / works councils
- Review collectively bargained / union agreements
- Negotiated increases in wages and contributions
- Successorship issues
- Notice requirements before sale
- There is a greater prevalence of unions outside the United States. Unions have a role in local social and economic decision making.
Acquired rights
- Critical to review contracts within the concept of “acquired rights.”
- Any regular, repeated ongoing employment condition may become an employee-acquired right which may become a protected benefit.
- May be considered within the context of underlying employment contract
- Prevalent in Europe and Latin America
- May severely restrict acquiring company’s flexibility for design changes
Termination indemnities
Communicating Compensation Changes
Communicating Compensation Changes
When compensation information is communicated to employees, both the message and the messenger are equally important. The person who communicates compensation information should not be a fellow employee within the same department. Someone who has authority to speak for upper management, can deliver the message effectively and can answer questions should be chosen for the task.
Choosing the messenger – appropriate choices could be:
- Supervisor
- Manager
- HR Manager
- Director
Information to be communicated – What information should be communicated?
- The reasons for the changes in compensation
- How the decisions will affect the employees
- The time frame for changes to be made and take effect
- Whether there will be any one-time pay adjustments
- Any action required on the part of the employee
Compensation Issues
Compensation Issues
The effective communication of compensation information is vital to the success of both the buyer’s organization as well as the merged or acquired organization. As soon as it is feasible to do so, communication should begin to answer the many questions from employees throughout the organization. Group and individual meetings, FAQ handouts, and online information can be used to convey information. Use multiple means of communication but ensure message consistency.
Organization-wide questions
The compensation philosophy is used as a basis for making integration decisions. The philosophy should be communicated as well as specifics of the compensation plans including:
Downsizing – Will employees be downsized? How many and from which groups?
Severance – What severance packages will be offered? Will they contain a compensation component? Will a job placement service be offered?
Job grades – Are jobs assigned to grades based on internal value and/or market value?
Pay range structure – How many different pay structures are necessary for the organization?
Incentives – Will incentives be offered for performance “above and beyond” achievement of goals?
Competitive labor markets – Who are the new organization’s biggest labor competitors?
Others
Compensation Issues
Compensation Issues
Compensation is a very personal issue to employees and because of this, it is important to recognize that communicating with individuals regarding compensation changes is just as important, if not more so, than organization-wide communications. Individual employees will want specific information as it relates to their own compensation plan.
Individual Questions:
Downsizing – Will I be downsized? If so, why was the decision made to choose me?
Severance – What severance packages will I be offered? Will it contain a compensation component? Will a job placement service be offered?
Base pay – What is my base pay and how was it calculated?
Job grades – What job grade am I in and why?
Pay range structure – Where am I at in the pay structure and what factors were used to determine placement?
Compression issues – Will I be affected by salary compression?
Incentives – Will I receive any incentives for significantly contributing to, meeting, or exceeding my personal or organizational goals?
Competitive labor markets – Is my compensation plan competitive with the industry and geographical labor market?
Others
Q1: Why is it important for HR to be involved early in the M&A process? A) Compensation programs must be combined early in the process. B) HR must participate in the tactical work of integrating total rewards very early in the process. C) HR professionals need to align process and activities to the new organization’s business strategy. D) Hidden liabilities and other issues must be resolved in the pre-deal phase before the transaction phase can begin.
C) HR professionals need to align process and activities to the new organization’s business strategy.
Q2: Which of the following would raise a potential red flag during a merger or acquisition? A) Unions B) Use of market pay C) Job descriptions for most jobs
A) Unions
Q3: Which statement regarding communication of compensation plans during a transaction is most accurate? A) It should be limited to verbal communication of compensation plans until the transaction is closed. B) It is important to communicate with individuals as well as the whole organization. C) It is important to begin communicating compensation plans after downsizing has taken place. D) It is a good idea to save time by providing only group information meetings to communicate compensation plans.
B) It is important to communicate with individuals as well as the whole organization.
