Don’t Let Compensation Disparities Drag Down Your Deal

One of the many seemingly minor issues that can become a big deal during an acquisition is the compensation of key employees. If either newly acquired or long-time employees are unhappy with the compensation decisions you make now, it has the potential to upset the integration process. So it pays to address compensation issues early in the M&A process — and to resolve them before your deal closes.

Recognizing differences

It’s actually quite common for an acquisition’s management and key employees to be compensated at higher rates than those in the buyer’s organization. A target also may offer financial incentives to rank-and-file workers while the buyer offers them only to a limited group of elite employees.

There are several reasons for such disparities. Target companies usually are smaller and younger than their buyer, and generally place more responsibility in fewer hands. Start-ups, in particular, typically reward employees with stock options and similar financial incentives. What’s more, start-ups often “poach” key employees from their rivals, luring these key employees with hefty paychecks.

Let’s say your company pays its senior employees with six years’ experience between $100,000 and $120,000 and you’re in the process of buying a business whose employees with similar experience earn between $130,000 and $150,000. If, to equalize compensation of the two groups, you reduce the acquired employees’ salaries, your new employees are likely to cry foul and start looking for a new job. Even if these people remain to help with postmerger integration, they’ll have little incentive to work hard during a difficult period that’s critical to the success of your deal.

Finding solutions

It may seem like you’re between a rock and a hard place. Either you disappoint and alienate your acquisition’s employees or anger your own. But there are ways to bridge compensation gaps and keep everyone happy.

Start by bringing your target’s employees into the conversation before your deal is final. Explain the situation and let them know that you welcome suggestions for achieving better compensation parity between the two employee groups.

Also propose your own ideas. For example, you might offer to reclassify nonmanager key employees as managers to justify their pay scales. Tie such promotions to new supervisory or other duties and review the new managers’ performance in six months. If you’re disappointed in what you see, reduce their salaries accordingly.

Or treat their current higher salaries as incentive pay. To retain their premerger compensation levels, employees might be asked to fulfill a set of tasks in a specified period. These could include raising their productivity by a certain percentage, increasing client numbers or mastering new skills in the next year. If they don’t meet these goals, their pay levels will fall.

Note that your current employees will almost certainly hear about any incentives given to newly acquired employees. So you need to consider offering them the same opportunities — including pay hikes — as you offer your target’s key people.

Looking for alternatives

What if offering greater compensation for employees performing similar jobs isn’t feasible for your company due to cost or other factors? Acquired employees may be willing to accept valuable benefits in exchange for a pay cut.

For example, your company may have a more generous health care plan with lower premiums or deductibles than the target company offers. Or you may offer a larger match for 401(k) plan contributions. Many employees accept additional vacation and other types of paid time off, such as sick or parental leave, in exchange for salary.

Tackling the challenge

Make no mistake: The wrong compensation policies can damage your deal, possibly irrevocably. The sooner you start thinking about these issues and looking for solutions that will satisfy all of your employees, the better.