Merging Compensation Strategies

HR's efforts to integrate compensation strategies and practices are a key component of successful mergers and acquisitions.

In today’s whirlwind of mergers and acquisitions (M&As), everyday HR issues such as employee compensation may get blown aside as countless financial and legal priorities take center stage. However, recent research suggests that HR could play a greater role in successful M&As, and, the earlier HR gets involved, the better.

Depending on the circumstances of the deal—and the compensation policies of the merging companies—HR may be called on to splice disparate payment plans into a program that fits the new organization, or HR may have to discard the original plans and then create a program from scratch that complements the merged entities. Either way, old and new employees will be concerned about what is happening with their pay, so HR also must develop an effective communications plan to inform and reassure them.

More organizations—and HR professionals—are likely to face this challenge as the economy improves. A handful of industry-changing newsmakers drove the market last year, but M&As among mid-size companies also saw increased activity in 2003, according to FactSet Mergerstat LLC, a global mergers and acquisitions research firm in Santa Monica, Calif. The company’s data predicts M&A volume will continue to rise this year. (See “Big Deals.”)

Behind the headlines that such corporate marriages generate are rough tactical and strategic waters that HR and compensation professionals must navigate. The journey is by no means simple, but the destination is worthy: the union of two sets of employees and pay structures that can ultimately influence the success of the merger and its return on investment (ROI).

The more capable an HR department is, the greater the chances of M&A success, studies show. Yet too many employers involve their HR professionals too little—or too late—in the M&A process.

The most common responsibility given to HR during M&As is to provide ad hoc advice to senior managers, rather than carrying out a structured and formal role, according to a 2003 survey of 132 senior executives worldwide by professional services firm Towers Perrin of Stamford, Conn., called “The Role of Human Capital in M&A, 2003.” (See “Most Common HR Responsibilities in M&As.”)

And a 2001 survey of more than 440 HR professionals conducted jointly by Towers Perrin and the Society for Human Resource Management (SHRM) Foundation found that HR involvement in the critical early stages of M&As is uneven. This study, “How the Human Resource Function Adds value During Mergers & Acquisitions,” formed the basis of a book, Making Mergers Work: The Strategic Role of People (SHRM Foundation, 2002).

In addition, HR’s involvement often comes too late in the merger process. Of the four stages in the life of M&A deals—pre-deal, due diligence, integration and implementation—HR tends to have a big role only in the later stages. However, research suggests that by getting more involved during the pre-deal and due diligence processes, HR can better carry out the vital functions it performs, such as:

• Reviewing the target company’s compensation policies to compare organizational philosophy and cultural fit.
  
  
• Educating financial and operating executives about possible risks and costs.
  
  
• Mapping job descriptions at the target company.

Merging Old Plans

The importance of giving HR an early role in mergers was borne out when Church & Dwight Co. Inc., a Princeton, N.J.-based manufacturer of household and personal care products, acquired in 2001 the consumer-goods business of Carter-Wallace, a Cranbury, N.J., manufacturer of consumer and pharmaceutical products.

Church & Dwight’s acquisition of Carter-Wallace added significant product lines and manufacturing capability. The $739 million purchase, in partnership with a New York-based private equity group, Kelso & Co., also doubled Church & Dwight’s employee population. As a result, HR had to migrate the new employees into Church & Dwight’s original compensation plan.

The target company’s employees brought knowledge and experience in areas where Church & Dwight was lacking, says Jim Levine, director of HR and compensation at Church & Dwight. However, combining the staffs raised some difficult employee compensation issues: Carter-Wallace paid high base salaries and bonuses with few long-term incentives, whereas Church & Dwight’s compensation packages placed much more of an emphasis on long-term incentives.

Employees at Carter-Wallace who were not on a bonus plan had few transition issues: In general, these positions also were not eligible for bonuses at Church & Dwight, Levine says. “On average these people tended to be paid more than their counterparts at Church & Dwight, but not significantly so, and issues could be addressed through the normal merit review process.”

There were, however, significant concerns for highly paid employees, as Carter-Wallace relied on base salary and short-term incentives, while Church & Dwight uses those programs as well as stock options.

Eventually, “Church & Dwight made the decision to maintain our pay system and transition Carter-Wallace employees to it,” Levine says. “We are firmly committed to the philosophy of tying employees’ rewards to the same yardstick that our shareholders have. The process that we used was to develop a number of possible transition scenarios, review employees’ compensation on an individual basis, and then use the appropriate transition plan based upon each employee’s unique circumstances—current base pay against our salary range and extent of short-term incentives.”

Church & Dwight achieved the business goals it set when the deal was made, Levine says.

“Compensation issues and our ability to retain employees were vitally important—and they became a significant consideration in the language of the deal itself and in the ultimate success of the transaction,” he says.

Harmonizing the pay systems of merging companies is a complex and difficult process. But it’s also an opportunity for HR to create new and improved systems, which in turn can dramatically affect both the culture of the new firm and retention success.

“Acquisitions are an opportunity to do things you haven’t done before,” says Dave Kompare, senior consultant in the corporate restructuring and change department of Hewitt Associates LLC, an HR consulting firm in Lincolnshire, Ill. “It’s a good time to rethink your overall strategy in terms of competitive compensation.”

Barring any legal pacts to the contrary, companies usually have the freedom to make changes to many elements of the total compensation package, which comprises base salary, short-term incentives (such as an annual bonus or profit-sharing), long-term incentives (such as stock options), benefits and other perks.

Starting from Scratch 

Sometimes, the compensation policies of the merging companies are so different that the best approach is to throw them out and start over. “It’s unbelievable how frequently you have two companies come together with so many similarities but [with] totally different compensation plans,” says Stephanie Penner, senior compensation consultant in the Philadelphia office of Mercer Human Resource Consulting LLC.

For example, when two then-Baby Bells—Bell Atlantic Corp. and Nynex Corp.—announced their $23 billion merger in 1996, HR and other executives determined that the uniting organizations’ pay plans were so distinct that the best solution was to start over.

To start the process, a team of compensation professionals, HR and company executives took a complete inventory of the two companies’ compensation policies, including executive management and general salary structures, job titles, performance evaluations and incentives.

The goal was to determine guiding principles, says Catherine Beck, director of compensation policy in the Arlington, Va., office of Verizon Communications, the telecommunications giant created from Bell Atlantic’s 2000 merger with GTE Corp. Beck was manager of compensation planning at Bell Atlantic then. During both mergers she was merger project manager for general management compensation.

What the team found was a very different set of salary structures and incentive measures, Beck says. The sheer magnitude of the differences called for a large-scale change.

“There was no way to reasonably map employees to a combined salary structure given the difference in the number of pay grades. And one company used a team approach to incentives, while the other used an individual approach,” Beck says. “So we essentially decided to throw everything out in favor of a completely new compensation system—a soup-to-nuts revamp.”

Completed in 1997, the mega-merger encompassed some 30,000 management employees—and also a team of union workers who came on board with existing collective bargaining agreements in place. Integrating the new compensation plan took about a year, Beck says.

The evaluation and rollout process was repeated just a few years later when Bell Atlantic announced its merger with GTE in 1998—a deal that involved about 60,000 management employees and made Verizon the second-largest telecommunications firm behind AT&T. But this time, there were many more shared similarities between the two companies’ compensation plans. “The level of change wasn’t as huge as before, and, overall, it was a smoother transition,” Beck says.

Once the policy decision has been made, the administrative complexities of implementation can be enormous. For example, in the Bell Atlantic-GTE merger, the broad parameters of the sign-on bonus policy were established early, but it took six to eight months to incorporate and finalize that policy because two separate payroll systems had to be integrated and there were other administrative process delays.

“You can’t underestimate how long it takes and how complex it can be,” Beck says of the integration and implementation process. “There are so many things that are touched by compensation matters.”

Communicating the Changes

Whether you merge compensation plans or create a new one, big changes are in store for employees. To ease their uncertainty and fear, and to squash rumors, consultants and HR professionals agree that a prompt, straightforward communications strategy is critical.

The problem: Information may be limited, because—even after an announcement—the sharing of certain data is restricted for antitrust reasons or until due diligence is completed.

“After an M&A announcement, there’s often concern, fear and trepidation among employees, customers and the public, too,” says Ravin Jesuthasan, principal and practice leader of rewards and performance management consulting in the Chicago office of Towers Perrin. “Communication is often the most important part of a merger, yet it often falls between the cracks.”

Insecurity over compensation issues such as earnings and benefits can negatively affect morale and productivity. As a result, companies experience a loss of momentum that may be difficult and time-consuming to recoup.

“It’s important to manage the messaging right away,” agrees Mercer’s Penner. “If you don’t form the message, it will be formed for you.” That can fuel the disruptive rumor mill, she says.

When Church & Dwight acquired Carter-Wallace, the company tailored specific communications to all employees based on their current compensation and how their transition would be handled.

“We communicated with employees as soon as we were able to,” Levine notes. “We began with presentations at the various facilities conducted by the CEO and head of HR.” This was followed by written communications in the form of questions and answers, and more local and specific meetings conducted by functional vice presidents.

The goal was to show employees that everyone was focused on the success of the merged companies, Levine says.

“Historically, the big mistake is for companies to say ‘we don’t know’ or ‘we haven’t made any decisions yet,’” says Hewitt’s Kompare. “The worst thing is to say nothing. Whatever decisions you do know, tell them as soon as possible. For those you don’t know, describe the factors involved in the decisionmaking and give employees a best estimate for having an answer.”

Once the deal closes and compensation plans are completed, decide how best to present them to employees, says Penner. “Many companies use a combination of approaches to get the word out,” she says. “The important thing is to have a consistent response.”

Commonly used tools include town hall-type meetings, one-on-one meetings, site presentations and training, written or web-based question-and-answer explanations and newsletters.

Communicating compensation changes to Bell Atlantic and Nynex employees involved face-to-face meetings and training sessions, personal letters and periodic newsletters describing the policies, Beck says.

Yahoo! Inc. in Sunnyvale, Calif., uses several communications vehicles during acquisitions, says Libby Sartain, SPHR, senior vice president of HR and chief people Yahoo. During 2003, the Internet services company acquired Inktomi Corp. of Foster City, Calif., and Overture Services Inc. of Pasadena, Calif.—both providers of web search services.

“Pre-close, we would provide answers to [frequently asked questions] to the company” being acquired, Sartain says. “This information would be general and not detail-oriented. Our objective would be to let the new employees know we are concerned about their well-being and to say, ‘We know there will be issues, and we are working on those and will have answers at the appropriate time.’ ”

After a deal closes, Yahoo! provides letters to employees that explain their new role and any compensation changes, Sartain says. In addition, the company also holds meetings for all employees to outline basic compensation information, she says.

“We also hold meetings with managers to explain the Yahoo! compensation philosophy and our guidelines,” she says. Compensation and reward guidelines are posted on the intranet.

Paying attention to communications during such times of change can pay off in better acceptance of the terms associated with pay, according to a recent survey of employee sentiment. Employees tend to believe their company’s pay policy is fair if HR professionals fully explain compensation packages to them, according to a 2003 survey, “SHRM/CNNfn Job Satisfaction Series: Job Compensation and Pay Survey Report,” conducted jointly by SHRM and CNNfn, the financial network of the CNN News Group in New York, and released in February.

Nearly half of the employees who were dissatisfied with the communications explaining how their pay was determined also reported dissatisfaction with their total compensation package. Conversely, when employees understand how compensation is determined, they tend to be happier with their pay and jobs overall, the survey concluded.

Susan J. Wells is a business journalist based in the Washington, D.C., area with 18 years of experience covering business news and workforce issues.