This is the second in our six-post series discussing some of the challenges associated with combination planning and sharing key considerations for CEO and Private Equity Sponsors looking to grow through Mergers & Acquisitions (“M&A”). As we shared in our first post in this series, Vector Advisory Services has created a complimentary M&A Integration Planning Tool to assist business owners and sponsors in evaluating and resource planning for key aspects of business combinations. We previewed this 25-point assessment tool, which includes five critical elements across five common functional pillars, to help leaders focus and assess resource needs to successfully integrate a business. This post discusses the Human Capital, Leadership, and Culture functional pillar, and its associated five key elements:
1. Leadership & Organizational Design
2. Bonus Plan & Incentive Compensation
4. Performance Management & Retention
5. HR & Payroll
Leadership & Organizational Design: Often overlooked until after a deal closes, the organizational structure and changes to leadership resulting from the business combination must be defined. Depending upon the investment thesis, significant labor synergies may be expected but would be fully dependent upon a redesign of the structure. Many times, the seller joins the acquired organization without clarity on their future role. Tip – Ensure alignment is achieved with the seller and key leaders that will be critical to the success of the combined organization and to ensure no surprises by the former CEO of the acquired if there will be a substantial reduction in authority and responsibilities in the combined organizational structure.
Bonus / Incentive Compensation Plans & Benefits: Compensation and benefits are personal to everyone and will be top of mind for acquired employees. Accordingly, bonus and incentive plans must be thoughtfully compared with general timing of alignment for standardization (if that will be the goal) discussed with key leadership of the acquired, particularly if earnouts are in play and could be significantly impacted by changes. Changes to these plans can not only have negative consequences in behaviors but also the bottom-line financial results. Tip – Prior to closing, complete a “total rewards analysis” to compare all compensation and benefits under the two company’s plans and ensure that acquired team members are made whole.
Performance Management & Retention: Often overlooked from integration priorities, performance management and retention programs can contribute significantly to a successful business combination. Tying combination goals and objectives to integration leaders and their teams demonstrates the importance of successfully integrating people, process, and technology. Thoughtful consideration of retention programs and communications that solidify employee’s job and role security will go a long way to reduce the risk of turnover, following the announcement of the acquisition. Tip – A robust communication plan that anticipates and addresses questions of the acquired business’s employees will reduce the risk of losing employees at a time that can make them very anxious. Employee FAQs, welcome boxes with a little swag, and Town Halls are just a few examples that should be considered.
HR & Payroll: We believe that a company’s personnel are the most important and valuable company asset. Getting HR & Payroll combination steps right should be considered table stakes; however, that doesn’t mean it is always simple. Often a company’s culture is influenced initially in the recruiting process. Changes that are planned to be introduced to the tone of job descriptions, usage of personality tests, on-boarding and orientation are all areas to consider that can impact morale and motivation of an acquired workforce. Tip – Ensure employment practices are well understood and always inquire as to the existence of employees that are sponsored (e.g., H1B Visa). Don’t underestimate how changes to titles can impact a team. Standardization for the purpose of standardization should not be done.
Defining the vison of the integrated state for each functional area is critical and it should be outcomes oriented. The following is a set of example outcomes that your team may consider, revise, expand, and tailor as it relates to the Human Capital, Leadership, and Culture pillar.
1. Documented consolidated organizational structure, including leadership, span of control, and clearly defined roles and responsibilities
2. Standardized employee contracts
3. Standardized bonus plans, incentive programs, employee perks
4. Standardized 401(k) plans (e.g., vesting schedules, contributions, eligibility requirements) and insurance benefits (e.g., coverage, costs, eligibility requirements)
5. Standardized performance management processes (and system, as applicable)
6. Executed retention agreements for key employees involved in the acquisition
7. Standardized and centralized learning development systems and training requirements
8. Standardized Employee Handbooks and other relevant policies (e.g., standard holidays, paid time off)
9. Centralized and consolidated HRIS, upon data verification
10. Consolidated payroll processes (e.g., pay cycles, cut off dates) and systems (i.e., providers) to process payroll efficiently and accurately
We would love to hear your thoughts about any additional Human Capital, Leadership, and Culture critical integration activities. Stay tuned for additional posts regarding the remaining functional pillars included in Vector Advisory’s M&A Integration Planning Tool. You can also download and use the tool for yourself on our website here.
Contact us with any questions and for more information about Vector Advisory’s services.