Neil Patel

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Working out employee benefits strategies in M&A deals during the negotiation stages is crucial for successful integration. Close to 70% to 90% of M&A transactions result in failure because of various reasons. Issues with employee retention and dissatisfaction are some of the typical causes.

As expert M&A advisors reveal, whether in fundraising or M&A deals, the team slide has significant weightage. When you want to attract investors or potential collaborators, demonstrating top-notch skill sets and talent can make or break deals.

Post-merger, you absolutely don’t want to deal with employee turnover and attrition. This is why, most high-value deals always have HR teams to help employees navigate the transition and ensure smooth integration. That’s how they ensure the transaction proceeds smoothly, whether cross-border or cross-country mergers.

Employee compensation and benefits packages are always a prioritized concern for workers and the management. Successful integration is also reliant on how well dealmakers can align packages to ensure maximum employee satisfaction.

Legal and regulatory compliance is also a concern as is ensuring equitable and fair treatment to workers of both companies. A balanced compensation structure helps institute an integrated culture and operational practices so the legacy company continues functioning efficiently.

Read ahead on how to achieve this balance in employee benefits strategies in M&A deals.

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Equitable Treatment Needs Meticulous Planning

Companies transitioning through an M&A transaction must understand that any discrepancies in treating employee compensations can influence integration. This is why, you must align the salary structures against the surviving company’s goals and culture.

Without meticulous planning, you risk conflicts and dissatisfaction. The first step in the right direction is to ensure open communication lines and have representatives from both companies at the table.

For instance, Company A may have a compensation structure based on performance and KPIs. However, Company B may award salaries based on the employee’s time in the company. To ensure harmony, the new reward system will have to create a balance between the two.

The acquirer must evaluate the target company’s benefits packages and salary policies while also understanding potential liabilities. For instance, the target’s existing retirement and pension plans and health and dental benefits plans made available to workers.

Any option pools the seller may have given to the workers need to be transitioned into the buyer’s company. Alternatively, the acquirer may have to transform the stock options into collateral benefits. Then again, merges often involve eliminating duplicated and redundant positions.

If that happens, dealmakers must work out the severance packages and ensure compliance with regulations. Some of the main applicable laws include the Internal Revenue Code (IRC), Employee Retirement Income Security Act (ERISA), and Affordable Care Act (ACA).

Employee Benefits Strategies in M&A Deals – Start by Mapping Out the Existing Plans

Aligning existing plans in both companies is an intricate process, so start by listing the compensation, benefits, and incentives. Compile information about both companies paying special attention to any unique perks that they provide. For instance, paid time off, PTO, paid vacations, and sick days.

If any company permits work-from-home days and awards pensions to the spouses of deceased workers, be sure to include that. Your HR team will check for the rules that apply to both companies to ensure compliance. Also, add the primary benefits that federal employment laws mandate:

  • Title VII of the Civil Rights Act
  • The Immigration Reform and Control Act
  • The Americans with Disabilities Act
  • The Equal Pay Act
  • The Fair Labor Standards Act
  • The Family and Medical Leave Act (“FMLA”)
  • The Pregnancy Discrimination Act
  • The National Labor Relations Act (“NLRA”)
  • The Occupational Safety and Health Act
  • Executive Order 11246.
  • Statutory benefits as outlined by the US Bureau of Labor

Conduct a Comparative Analysis

When conducting a thorough analysis, you could place compensation packages side-by-side while also evaluating other criteria. You’ll account for each employee category’s qualifications, the scope of the tasks they do for the company and other eligibility.

At times, employers may also factor in the time the employee has spent in the company. For instance, the founding teams who have been instrumental in getting the company off the ground. Awarding them special compensation is a reasonable practice.

You’ll also identify any plans that are now redundant or inapplicable because of the company’s shift to other operation practices. Checking for packages the company can no longer afford is also crucial.

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Devise Customized Compensation Packages

Once the analysis is complete, you’ll work out a new format that is implemented across the board. And, that includes the top tiers of the management and C-Suite executives. At this time, you’ll create unified packages that are best suited for the company’s different levels and arms.

A customized approach will ensure that the workforce continues to function in coordination and that incoming employees assimilate well. Don’t overlook the possibility of leveraging tools and applications to help with the task.

Retaining the services of well-experienced HR teams will help in the decision-making process. You’ll free up time and bandwidth to focus on the other nuances of the post-M&A integration.

Health Insurance Benefits for Employees

Navigating employee benefits strategies in M&A deals doesn’t involve many pitfalls when you’re working out PTO policies and vacations. But health benefits are a whole different ball game since it will also include calculating paid sick days.

When creating the framework for health insurance benefits, you’ll scout around for economical plans that offer maximum coverage. You’ll evaluate the features and perks of different insurance providers before settling for the one that aligns best with the company’s goals.

Most importantly, the features should effectively offer quality care to your employees. Be mindful of the regulations under the Federal Insurance Contributions Act (FICA). This tax law mandates that both employers and employees must contribute to Social Security and Medicare programs.

Accordingly, you’ll factor in the payouts the company must make for the acquired company. You’ll also calculate the contributions employees must make and work out the entire salary deduction process. Per the law, you’ll withhold Medicare tax at 1.45% of gross salaries payable to employees.

Further, if the employee’s salary structure is more than $200,000, you’ll deduct an additional 0.9% of the salary more than the threshold amount. In short, deductions will depend on the employee’s filing status.

Reorganizing Health Insurance Benefits for Uniformity

Chances are that the targeted company’s existing structures are entirely distinct from your own. In that case, you’ll make tactical decisions to find a common ground to align the two. These decisions will cover a range of issues such as the optimum health plans, coverage criteria, and contributions.

For instance, your company has a higher percentage of employees closer to retirement since it is a more established brand. Accordingly, your health plan coverage will reflect coverage for age-related chronic conditions and have a more conventional approach.

However, if the targeted company has a younger age demographic, their deductibles are worked out according to their lower salaries. Given that the incoming workforce demographic and its needs are different from your company, the entire healthcare framework will need to be reworked.

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Continuation of Health Coverage (COBRA)

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is designed to provide continued health benefits to workers and their families. You’ll consider this law in case you intend to lay off some of the workforce post-merger.

The law requires you to inform the employees and coverage providers in advance so they can apply for an extension. Let’s assume the targeted company has sponsored group health plans for 20 or more employees.

If you lay off some of them, the workers can avail of the opportunity to get a temporary extension of health coverage. This temporary extension provides coverage until the time the workers can find new jobs. This rule also applies to employees whose work hours have been cut during the transition.

Even if you are integrating employees from the target company into your own, you’ll ensure that their benefits continue uninterrupted. Also, ensure compliance with the relevant laws and regulations.

When discussing the merger’s terms and conditions, dealmakers should also work out the timelines for making premium payments. The seller and buyer should be clear about who is responsible for covering costs during the transition period.

If the company is providing health coverage to retired employees as part of their retirement plans, that detail should also be worked out. Dealmakers should also stay on top of making deductions toward retirement plans and making timely contributions.

Here again, they must work out how to remit payments all through the transition period so there are no lapses. Managing these issues needs thorough planning so that there are no disruptions and health coverage is maintained.

Retirement Planning and Stock Option Pools for Employees

As mentioned in the foregoing sections, the law mandates that employers and employees must contribute toward the Social Security Fund. As the acquirer, you must work out how to handle the retirement plans and any option pools employees have.

You’ll have the option to combine retirement plans and option pools into the legacy company. Or, you can maintain ongoing plans as is, and continue with the contributions and deductions. Canceling the plans and option pools is an option but then, you may have to compensate with collateral benefits.

Freezing the retirement plans is also an option by which no further payments need to be made. Whatever the path you choose, expect regulatory compliance checks.

At the same time, know that the law allows for retirement plans to continue under the existing terms for a grace period. Any anti-discriminatory regulations are waived for this period. Keep these factors in mind when planning employee benefits strategies in M&A deals.

Managing Option Pools

You may also have to change the company’s capital structure to allow for option pools. Both the buyer and seller must ensure that vesting schedules are compatible and perhaps, revise the criteria for exercising them.

For instance, you’ll account for the hire dates of the target company’s employees since that will influence the vesting dates. Also, factor in the employee’s performance and stock options given by way of rewards per KPIs. You may have to review and analyze how the options will work post-merger.

Investors and potential acquirers understand the importance of a great team and the value it brings to the company. When determining the salary structure for the team, understand what investors look for in founding teams. This information will help you work out the skill sets you absolutely need in the company and how to make sure you retain them. Check out this video in which I have explained how to do that.

Collateral Benefits Explained

Employment laws have provisions for collateral benefits that employers can offer to employees as part of their severance packages. You can leverage this provision if you’re breaching the seller’s employment contacts with their employees by way of the merger.

Collateral benefits are also called compensating advantage problems or collateral benefit problems. You can offer this added compensation to employees if they haven’t received reasonable notice about their employment termination.

As the acquirer, you’ll also provide this benefit in lieu of any other benefits the employee was entitled to receive.

These additional benefits may include payment for surrendering securities, a lump sum cash advance, or a salary raise. The seller may have committed to these payouts as a reward for their services before the M&A transaction.

Consider Profit-Sharing Programs to Reward Employees

Restructuring compensation and salary packages and employee benefits strategies in M&A deals is a time-consuming process. In the interim period, you’ll need to institute measures to maintain employee morale and engagement.

A good strategy is to go with profit-sharing programs that reward workers based on their performance in the company. Maintain uniform rewards across the board to infuse a sense of camaraderie and achievement.

Your objective is to project the advantages of the mergers and how everyone gains from coordinated and efficient teamwork. This is possibly the best incentive to keep workers focused on common goals.

Giving out these incentives is straightforward and does not involve complex planning and calculation but keeps recipients motivated. That’s how you’ll ensure the workforce’s buy-in and merger’s success.

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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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