In knowledge-intensive businesses, it is often said that the key assets walk out the door of the building at the end of the working day. In a merger or acquisition, therefore, it is vital to take stock of the intellectual capital of the business being acquired and to ensure that the key human assets are retained in the new entity.
Employing so-called golden handcuffs, where key staff are highly incentivised to stay with the business for a specified period, can be a vital tool in these situations.
Golden handcuffs can take many forms, ranging from equity and stock options to retention bonuses and non-financial incentives such as funding expensive education programmes.
One of the most common forms of golden handcuffs in a merger or acquisition is a retention bonus, notes Paul O’Donnell, chief executive of HRM Search Partners.
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“It can be vital to have knowledge of the structures and processes of the business during an integration phase that might typically last around 24 months, so you may want to have key executives in place for that period at least,” says O’Donnell.
“Retention bonuses can take the form of a specific percentage of salary or a specific cash offer to be paid out over a set period. There may be milestones along the way where you might be paid a portion of that amount.”
An increasingly popular incentive is to pay for a big educational qualification, such as a MBA, or a. high-cost technical qualification – for example, in the case of an engineer. The understanding here is the company will pay for the programme but only on condition that the employee stays for its duration.
“Supporting an employee in this way tends to generate a sense of appreciation on the part of the recipient‚” says O’Donnell. “They feel the company has backed them and it tends to be paid back in increased loyalty. It’s a very progressive way of rewarding people.”
The use of golden handcuffs to retain key staff can have advantages and disadvantages for both the employer and the employee, notes David Kavanagh, partner in employment, at law firm Dillon Eustace.
“After any merger or acquisition employers may look to apply golden handcuffs to key staff who contribute to the growth and profitability of the company,” says Kavanagh.
“The advantage for employers is the ability to have business continuity, with loyal staff who are familiar with the day-to-day running of the business. In addition, the incentives offered may result in a reduction of staff turnover and can increase the motivation within the workforce.
“Different incentives can be offered to employees who are at different stages of their career. While an end-of-year bonus, a company car or additional holidays might be more attractive to some employees, equity in the company, through share option schemes, may be more appropriate or attractive for those seeking a long-term career within the same organisation and/or senior management with many years of experience within the organisation.”
A share option scheme typically provides employees with the option to subscribe for shares at a future date and at a specified price that is usually attractive at the time the offer is made, Kavanagh explains. The agreement will often include a clause providing for the lapse of rights to such options should the staff member cease to be employed by the firm.
It is important that incentives are carefully considered in the wider context of the workforce too, Kavanagh advises.
“Offering a select number of employees attractive incentives, to the exclusion of others, can sometimes result in employee resentment and/or demotivation amongst those employees not in receipt of such incentives,” he warns. “Such employees can begin to feel under valued.”
Gavin O’Flaherty, partner at Eversheds Sutherland, agrees that in a merger or acquisition it is vital to assess the human resources capital of the assets being acquired and to have appropriate incentives in place.
These can take many forms but in general it is important that people have visibility on their pay and bonus arrangements and the security of knowing that they and their loved ones will be looked after in the event of illness or tragic events.
Some of the key employees will also be shareholders so some form of contractual commitment can be sought in the negotiation stage of the merger or acquisition that they would not compete with the business.
Typical options here include allowing them to retain a shareholding in the business and addressing their employee arrangement either by living with existing arrangements or putting a new one in place with provisions and commitments appropriate to the role and its importance to the business. This could tie them to the business for a fixed term or it could be open ended, says O’Flaherty.
Where employees wish to leave, it is important that they maintain their status as a “good leaver”, as breaches of agreements with their employer can results in penalties, he adds.
Non-compete agreements, meanwhile, can be hard to monitor and enforce but they do have teeth, says O’Flaherty.
“Companies don’t always want to wash their dirty linen in court but ultimately [such agreements] have been enforced in situations where people are blatantly reaching out to clients and trying to on-board them into their new place of work,” he adds.
O’Donnell notes that the word handcuffs has negative connotations, regardless of whether companies feel that they have the upper hand with staff.
“It implies that you are trapped against your will,” he says. “It’s not the overriding motivation you want people to have for sticking with you. You want them to be married to the culture and purpose of the business rather than simply hanging in for financial reasons only.”