Boards Should Pay Attention to Executive Pay in Deal Situations

The board should be careful to consider key aspects of executive pay when engaged in acquisitions, according to a recent NACD blog post. 

The article’s conclusions are based on the view that keeping a strong management team in place is key to ensuring the success of a transaction. This is a task made more difficult by the current tight labor market and the normalization of remote work, both of which increase the bargaining power of executives. As the article points out, boards need to carefully balance the interests of multiple stakeholders when evaluating executive pay plans associated with a deal:

• Ensure seamless cultural integration - crucial to ensuring business success following the close of the transaction.
  
  
• Connect strategic metrics to overall strategy – avoiding a “one-size-fits-all” model to the question of whether and how to incorporate ESG metrics.
  
  
• Balance the need for retention with other factors – considering the input of all stakeholders when designing retention packages for executives.
  
  
• Integrate HCM into business strategy and executive pay – considering how HCM relates to the new company’s business strategy and how to integrate HCM into incentive plans.
  
  
• Evaluate the impact of inflation and market volatility on executive pay – recognizing that performance-based incentives and equity awards may be less attractive in a volatile market with uncertain outcomes and fluctuating stock prices.

While the blog post provides a starting point for understanding the factors influencing executive compensation in a transaction, effective pay design also depends on understanding how the deal will create value and the degree to which the target company will be integrated into the purchaser. Often, the retention of management talent is essential to the success of the deal. But in some industries, the value of a transaction comes from assets such as patents or proprietary technologies, not people. In those cases, retention of an intact management team following the closing of a transaction may not be a top priority.

Similarly, understanding how a business will operate after the transaction is key to knowing whether aligning cultures is important. A “seamless cultural integration” may be unnecessary and even inappropriate for a business that will be essentially allowed to run independently following the closing of the transaction.

Designing effective executive pay programs during a transaction is a challenging task, as boards must ensure that programs enable the successful execution of the deal, support the ongoing success of the organization, and balance the often-competing interest of multiple stakeholders.