1. PerspectiveExecutive Remuneration Perspective
Retaining key individuals at the management level is a critical issue for
organisations going through ownership transactions – mergers, acquisitions,
divestitures and private equity investments – either to close the deal or
over a longer period post integration. This Perspective describes the factors
an organisation should consider in establishing a management retention
programme, and highlights the features in the design process that can
support transaction objectives.
Management retention programmes at a glance
When designing a management retention programme, the following key
factors should be considered:
Europe ■ Issue 2 ■ 2008
Management retention programmes
during major ownership transactions
In this issue, answers to:
Do we need a management retention
programme?
What should we consider when building
a case for a management retention
programme?
How can the type of transaction affect our
retention programme strategy?
How can we design an effective retention
programme?
Why should we measure the success of
our management retention programme?
Business case ■ Is there a need to retain key executives?
■ Will existing incentive arrangements retain the required executives
or encourage them to leave?
■ What is the cost-to-benefit value of the proposed retention
programme?
■ Are there any corporate governance or legislative issues to consider?
Transaction type ■ Merger: Do we need two retention strategies, pre- and post-merger?
■ Acquisition: Do we need to retain executives after the transaction?
■ Divestiture (total liquidation, sell-off or spin-off): How do we retain
key management until the transaction close?
■ Private equity: Is the estimated value at IPO or exit enough to retain
key executives?
Retention ■ Eligibility: Which executives are critical to retain and should be eligible
for the retention programme?
■ Size of award: How should the size of award be determined for each
executive?
■ Retention period: How long does each executive need to be retained?
■ Payment timing: Should the payment be made in one or several
instalments?
■ Form of payment: Should retention awards be made in cash or shares?
■ Performance: Should the retention programme have a performance
feature?
Measuring success ■ Did the retention programme meet objectives, and what was the
financial gain from retaining the executives?
Feature Key issues for consideration
programme design

2. Do we need a management retention programme?
Management retention programmes are a common feature of ownership
transactions because, for partners on all sides of the deal to realise their
vested interests, executives affected by the transaction usually need to be
retained for at least some period of time.
For example, a target company typically wants to ensure that the transac-
tion is completed successfully and therefore will provide retention awards
to encourage executives to stay until the deal is finalised. An acquiring
company typically wants to increase the benefits of the transaction and
therefore will provide additional incentives for key executives to stay for a
longer period after the deal is closed – perhaps a year or more, depending
on the business objectives.
What should we consider when building a case for a
management retention programme?
As with any commitment of company resources, a management retention
programme needs a business rationale. The business case for a manage-
ment retention programme, and the design features of such a plan, will be
influenced by the type of transaction and required retention period for key
executives. The following key questions should be considered in building a
business case for a management retention programme:
‘Stability of the
management team is
typically necessary to
completing the transaction
and, depending on the
nature of the deal, to
fully delivering on its
expected value.’
‘Mergers often necessitate
two distinct retention
strategies that vary based
on whether or not an
executive will continue
in a similar role in the
new entity.’
2 Mercer
Acquiring a high-performing executive team may be a key reason for a
particular ownership transaction. However, some transactions are designed
to gain market share or to expand geographic scope – and there may be
no need for a second management team beyond the transaction period.
In order to optimise the new executive team, we recommend undertaking
a full review of each executive position required in the go-forward organi-
sation. Mapping the executives into the new organisational structure can
help to identify the individuals who are critical to retain.
Companies often have programmes in place – such as incentive plans,
severance arrangements and change-of-control agreements – that can
help retain executives during an ownership transaction. Companies should
assess whether these existing programmes alone provide enough incentive
to retain the executives or whether an additional programme is necessary
to increase the probability of retention.
Existing programmes may have the effect of encouraging executives to
leave the organisation following certain events. Companies should care-
fully consider the value of equity vesting or any other award being paid
out at the time of the transaction that may encourage executives to leave
before the desired retention period.
The cost of the management retention programme needs to be determined
relative to the overall cost of the transaction and the estimated benefits
gained by retaining the specific executives.
In the case of listed companies, another dimension to consider is the
corporate governance and/or legislative landscape. Participation of Main
Board Directors in a management retention programme is normally a dis-
closed item in Europe (although the level of disclosure may vary according
to each country), and as such, may attract shareholder scrutiny. Assessing
likely shareholder reaction from the outset is key, as it may have an impact
on the programme design. For example, in the UK, institutional share-
holders strongly oppose transactional payments for Main Board Directors,
especially if performance conditions are “weak” or not in place.
In addition, depending on the structure of the plan, shareholder approval
may be required, which may have a significant impact on the overall cost
and timing of the programme.
Key question Programme evaluation considerations
Do we need to
retain the
executives?
Do our existing
programmes
effectively retain
the executives?
Do we have any
programmes in
place that will
encourage an
executive to leave?
What will the man-
agement retention
programme cost?
Are there any
corporate gover-
nance/legislative
implications for
listed companies?

3. Transaction type influences programme design
Retention arrangements are a risk management tool, appropriately
managing the human capital risk that the organisation faces in a transac-
tion. As such, the business case for a management retention programme
is closely connected to the type of ownership transaction under consider-
ation and how the various executives fit into the transaction process and
the new organisation.
The following outlines general retention programme guidance by transac-
tion type:
■ Merger: Mergers often necessitate two distinct retention strategies that
vary based on whether or not an executive will continue in a similar
role in the new entity. Executives who will be holding positions in the
new entity commonly receive long-term retention awards. Others, who
will not be retained in the new organisation and whose focus is geared
to an effective transition, will commonly receive an award in connection
with their helping to facilitate the close of the deal or to integrate the
two entities.
■ Acquisition: The need for a management retention programme during
an acquisition depends on whether the long-term success of the
transaction hinges on maintaining the executive team. For example, in
cases where an acquisition is pursued for executive talent, a retention
programme will be key requirement. However, an acquisition that is
pursued to gain market share or expand geographic scope may be
successful without retaining the executive team, diminishing the need
for a retention programme.
■ Divestiture – total liquidation: Total liquidations often require a
management retention programme to encourage the executive team
to stay in place as it winds down the enterprise.
■ Divestiture – sell-off: Selling a division often causes a great amount
of uncertainty for the division’s executives and creates a strong case
to implement a retention programme to keep the team in place at
least through the close. The acquiring organisation may, in turn, offer
an additional retention award to maintain the executive team over the
long-term.
■ Divestiture – spin-off: The autonomy
gained through a spin-off from
a larger entity typically provides
enough incentive for an executive
to stay with the new organisation,
reducing the need for a management
retention programme.
■ Private equity: Private equity trans-
actions may not always require a
management retention programme
as the economic opportunity that
an executive would receive through
ownership in the event of an initial
public offering or other exit event
provides enough incentive for the
executive team to stay.
3Executive Remuneration Perspective
‘The need for a retention
programme increases
with business impact,
likelihood of leaving
or both.’
B A A
C B A
D C B
High impact +
low retention
risk
High impact +
medium retention
risk
High impact +
high retention
risk
Medium impact +
low retention
risk
Medium impact +
medium retention
risk
Medium impact +
high retention
risk
Low impact +
low retention
risk
Low impact +
medium retention
risk
Low impact +
high retention
risk
High
Low
Businessimpact
Retention risk
Risk they will leave
Business impact/retention
risk framework:

4. Designing an effective retention programme
Once the business rationale for the management retention programme
has been firmly established, the next step is to design an effective reten-
tion programme.
Basic design features to be considered include the following:
■ Eligibility
Companies typically base eligibility on four main factors:
– The impact the executive has on the business
– The likelihood of the executive leaving the organisation
– The difficulty of replacing the executive, especially if they are
prominent, externally or internally
– Whether an executive is responsible for a critical project or task
during the integration or transition period
Often, companies conduct an internal assessment to identify the
executives that meet a combination of these criteria. As can be seen
in the business impact/retention risk matrix, the need for a reten-
tion programme increases with business impact, likelihood of leaving,
or both. Executives falling in the A boxes are excellent candidates to
include in a retention programme, while those in the D box can safely
be excluded from a retention programme.
■ Size of award: The size of a retention award is most commonly defined
as a multiple of base salary. The actual level can vary dramatically
from one transaction to the next but typically depends on the following
factors:
– Prominence: The importance the executives will hold in the
go-forward entity affects the level of award granted. For an executive
team that will hold high prominence, the team is often carved out
from all other retention programme-eligible recipients and granted
a premium award level. For an executive team that will not hold
a significant level of importance but is still critical to retain, they
typically receive an award that is similar in value to any other line
functions.
– Tiers/levels: Executives are often grouped into tiers, with higher-
level executives receiving larger awards than lower-level executives.
Establishing tiers is most common when the prominence of the
executive team is high and the need for differentiation important.
– Retention period: Generally speaking, the longer the retention period,
the higher the award.
■ Retention period: Managers who will hold executive-level positions or
positions with a high level of business impact are usually targeted to
be retained over the long-term, typically 12 to 24 months. Executives
responsible for getting the transaction completed or for a critical project
are usually targeted to be retained through the integration or transition
period, typically less than 12 months.
■ Payment timing: Payment timing is closely linked to the retention
period goal. Executives who are eligible for a long-term retention award
may receive their payment in two to three instalments, whereas exec-
utives eligible for an integration or transition-based retention award
typically receive their payment in a single instalment.
Key retention programme
design features:
■ Eligibility
■ Size of award
■ Retention period
■ Payment timing
■ Form of payment
■ Performance measures
Due to the uncertainty
of employment for the
current executive team
following the transaction,
a key objective of the
programme is to retain
and motivate relevant
executives and to
recognise and reward
the additional effort and
add-on responsibilities
during the period leading
up to the sale.
4 Mercer

5. ‘Measuring the success
of a management
retention programme
is a critical, yet often
neglected, aspect of most
programmes.’
5Executive Remuneration Perspective
■ Form of payment: Companies typically use cash rather than equity
because cash often has a higher perceived value. When equity is used,
it is typically in combination with cash.
■ Performance: Whether performance conditions are used depends on
the type of transaction and the length of the retention period. A “stay
to close” retention plan typically does not have performance measures
attached to the vesting of awards as many companies choose, for
philosophical reasons, not to incorporate such features as they may
undermine the effectiveness of the retention award by placing too
much of the award at risk. An integration bonus following a merger or
an acquisition will normally tend to incorporate synergy milestones for
executive-level positions, for whom measures and goals are often easier
to define.
Measuring success of the retention programme
Measuring the success of a management retention programme is a
critical, yet often neglected, aspect of most programmes. Without a
post-retention programme evaluation, companies cannot assess the
business impact of their investments. This information could provide
rich insights into improving not only the results for future ownership
transactions but also their approaches to retaining key management
talent over the long-term.
A FTSE 250 UK Travel & Leisure company was merging with the Tourism Division of a German
conglomerate. The combined entity would be one of the global leading travel groups, and move
to the FTSE 100, with a combined market value of around £3bn.
Although the new entity would operate a core package of “standard” long-term incentives, it
was considered that an additional plan would be necessary to focus management on delivering
significant synergy benefits over the next three years following the merger and to enable them to
share in the resulting additional shareholder value created.
Mercer worked with the company to design a synergy plan for the new Board of Directors and
the members of the broader management team, whose businesses had been identified as critical
to the delivery of synergies.
Shareholder approval was required as the Main Board of Directors were participants in the plan.
As there were existing market competitive remuneration arrangements in place for these execu-
tives, the company had to demonstrate that the additional plan was necessary to provide a more
robust linkage between the levels of potential rewards and deal-specific performance targets.
To align the rewards with the company’s integration plan, a three-year horizon was used, with
three equal payments to be made annually based on the level of synergy benefits achieved. The
first two tranches would be paid out in cash and shares in equal proportion with the final tranche
paying out fully in cash. All three tranches would be performance-contingent, linked to level of
annual cost savings achieved and subject to a minimum annual earnings margin. The rationale
for using the earnings margin underpin was to ensure that the cost savings were passed on to
shareholders directly in the form of increased profits.
In addition, the share payments relating to the first two tranches would be deferred until the
third year with their release subject to a three-year overall synergy target.
While the plan is still in its first year of operation, the immediate gains have been demonstrated
by an increase in both top and bottom line numbers, with excellent progress made against the
various integration milestones.
Case Study – Objective: UK company merging with one of its major competitors
based in Germany

6. Executive Remuneration
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Conclusion
Stability of the management team is typically necessary to completing a
transaction and, depending on the nature of the deal, to fully delivering
on its expected value. Ownership transactions by their very nature create
a period of uncertainty that can affect the transaction value – through
reduced motivation and, in many cases, greater talent turnover at the top
of the house. To fully realise the value of the transaction, companies must
address management retention early in the due diligence phase and/or
during the post-integration period. This includes candid communication
about the nature and objectives of the transaction, the executives’ roles
going forward and ongoing remuneration opportunities, as well as specific
remuneration programmes.
Well-designed retention programmes often achieve the required objective
of retaining executives for the established period of time. However, to
effectively retain and motivate executives over the longer-term this
requires a more holistic approach that considers all aspects of each execu-
tive’s remuneration package and career opportunities during and after the
retention period.
Perspective Authors
Leena Beejadhur
+44 20 7178 5271
leena.beejadhur@mercer.com
Piia Pilv
+41 22 9181004
piia.pilv@mercer.com
Velma Roberts
+353 1 6039732
velma.roberts@mercer.com
Additional information
For more insights into executive remuneration in Europe, please
visit www.mercer.com/execremeurope. To see our other European
executive remuneration perspectives, please visit www.mercer.com/
erperspectiveeu.