Back in the merger mania of the 1990s, companies bought and sold workforces as much as they scooped up or divested tangible assets. In their haste to expand, acquirers coveted personnel — especially executive talent and technical personnel — as much if not more than property, plants, or equipment. To keep that talent in place, the deals often included lucrative retention packages.
Times sure have changed. Mergers are just starting to recover from the deal-making drought that befell the market after the equity bubble burst. And with stubbornly high unemployment cooling competition for talent, acquirers are being much more parsimonious about whom they target and how they retain them.
In fact, according to the Society for Human Resource Management, only 14 percent of employers offered retention bonuses for executives in 2004. Just 10 percent offered them to nonexecutives. Moreover, the packages being offered are nowhere near the amounts seen five years ago.
Of course, “there are key employees at every organization,” says Lawrence Gennari, a partner at Boston-based law firm Gadsby Hannah LLP. Also, what is paid to retain them varies by position. Overall, however, there has been a 20 to 25 percent decline in the size and duration of retention bonuses in the past two years, he says. “Where we used to see retention bonuses covering 12 to 18 months, now it is 9 to 12 months. And where it used to be 12 months of salary, now we are talking [half that] for a key employee,” says Gennari.
The economics of the equation are obvious. “Supply is greater than what we had in the boom market of the 1990s,” says Marc Baranski, senior vice president at Sibson Consulting. “So what’s happening is that companies are focusing on the right people as opposed to everybody.”
The “right people” doesn’t necessarily mean those at the top. Consider the recent acquisition of Hall Kinion by Kforce Inc., a specialty staffing company in Tampa. Kforce chose not to retain any of the executive team, but held on to most of the target’s 250-person workforce. Ashley Read, CFO of venture-capital firm Blueprint Ventures, notes that she has witnessed founding teams broken apart in several recent deals. “At the end of the day in this market, the buyer calls the shots. And buyers have become much more savvy in their negotiations [about people] up front,” says Read.
What Caution Requires
In fact, deciding who to keep is as important as how much to pay. And that requires greater care in evaluating talent. “We are much more careful about keeping only those people who fit within the culture of our organization,” says Kforce COO Bill Sanders, who has completed 25 acquisitions in the past eight years. Adds Harlan Plumley, CFO of BIO-key International Inc., a provider of biometric technology and fingerprint readers: “In every case, there’s a vetting process — and it is much more clinical these days.”
That means more due diligence. Although he won’t admit to using them, Plumley notes that “background checks are an important element in the process.” But the process is about more than looking carefully at the credentials, performance, and experience of individuals. Baranski explains that firms are being more explicit in segmenting the employee population in light of a deal’s justification. “If a company is expanding into a new geography or buying new products, it is critical to hold on to [a large part] of the people base,” he says. If a company is simply buying for size, however, “they usually segment the population into people that they want to keep permanently, people that they need to stay on through a transition, and people that are not critical.”