Incentive Compensation Considerations for Mergers & Acquisitions

Mergers and acquisitions (M&A) can often bring complexity and confusion to a company, specifically with respect to incentive compensation strategy and execution. Here are our top considerations for your compensation planning process when dealing with a merger or acquisition:

KPIs, Goal Setting, and Organizational Focus 

Say you’re merging two companies: Company A and Company B. Company A focuses on a team approach for their compensation and issues annual bonuses while paying their teams a substantial salary. Company B focuses on individual performance and offers a lower salary with the opportunity for quarterly bonuses and commissions for each product sold.

So which is better? Here’s the tricky part: inherently, neither. It’s all about what your goals as an organization are and how to best align your sales strategy to those objectives. The compensation plans for Company A and Company B were each developed after a long consideration of what each organization prioritized and subsequent alignment of sales compensation structures to match company goals.

The compensation planning process will have to be revisited to determine the company’s priorities and goals after the merger is complete. Will your newly merged company prioritize number of products sold? How will KPIs like customer satisfaction play into your new incentives? What are the metrics that matter for your organization? These are the questions you need to answer to align the compensation details of the merger with your overall strategy.

Compensation Plans

Well-designed compensation plans have intricate and specific details that have been carefully planned for a single company’s particular needs and organizational goals. Combining two (or more) businesses and attempting to integrate sales compensation plans from these entities often adds confusion and complexity for both teams.  Balancing all compensation elements to set your reps up for success requires a substantial amount of planning and consideration in order to effect a smooth transition. So how do you successfully navigate this process when going through a merger? And during which phase of the merger should the new compensation plans be implemented?

You will need to start with the design of the sales organization and specific roles needed for the new combined organization.  Until you have a handle on the roles, you are better off leaving the existing plans in place while this strategy is defined.  Once the roles have been identified, then we suggest taking an in-depth look at what types of compensation incentives have been tried and tested for each company individually and determine what has been successful in the past. Then use this information to help decide which parts of each plan will stay, and which parts will be removed. Sometimes it will make more sense to scrap all previous plans and start over with a new design that aligns better with the newly merged company’s vision and big picture goals. No matter what is decided, it’s important to start designing your new sales compensation roles and structures early on in the M&A process.

Territory Overlap 

One especially important early compensation consideration for your sales teams is territory (or account) overlap. How are the territories and account assignments for each company currently defined? And how is this expected to change with the merger? This is a significant consideration in your quota setting and commission structures for employees.  But equally important is understanding how the new combined sales organization will interact with and service your customers.

Overlapping territories and ill-defined account coverage models can create an unwelcome competitive situation among your sales reps.  You may find yourself with a sales team that is competing for the same opportunity within the same account, which can negatively affect both employee and customer satisfaction as a result. Therefore, proper planning and seamless blending of existing or new territories is an imperative and necessary step for compensation that is often overlooked during the merger and acquisition process. Make sure to pay the necessary attention to this issue so that your new sales coverage plan has a balanced and fair re-distribution of sales territories for all reps, even if it requires some changes and compromises along the way.

Compensation Calendars

Companies often have unique fiscal and processing calendars with varying pay periods, bonus applications, and compensation payouts.  These differences can quickly complicate incentive compensation considerations in a merger among two or more companies that do not follow the same processing cadence or calendar. Aligning compensation calendars early in this process is an important step to simplify compensation mergers – but remember that quite often the biggest barrier to this alignment process is the limitation off source system data availability for financial period closure and processing.  Simply stated – you may want to align both parties to a new combined reporting and payment process, but the availability of the data that is required to do so may be a limiting factor in this integration effort.  Similarly, combining or starting a new payroll system is another compensation planning consideration when undergoing a merger. Payees will need to be on a consistent payment schedule without interruption during the transition.

Communication 

Planning for success with your compensation changes requires transparent communication to all reps involved, which is often overlooked. It’s natural for employees to be concerned about their roles and commission structures during a merger, which can compromise productivity and morale. How will you communicate upcoming changes? How will concerns be addressed surrounding these changes? Having an internal communications plan in place results in more satisfied and productive employees during the merger’s transition.  In the absence of clear communication, your sales teams will often assume the worst and unnecessary and unwanted attrition will be the unfortunate result.

Compensation Technology 

One of the most important considerations during a merger is what to do with your existing incentive compensation technology (or technologies.) What enterprise solutions are currently being leveraged by both organizations (if any)? Or, alternatively, are metrics and payouts calculated manually through spreadsheets or custom builds? Which technology should you use to facilitate the automation of your revised and combined compensation plans? By bringing in a team of compensation experts who can assess, implement, and maintain your incentive compensation solution, you can ensure timely and accurate payments and make sure that nothing is lost in transition.

Mergers and acquisitions are a natural phase in business and can be extremely complicated. By bringing in compensation experts who can walk through all of the elements outlined above you can make sure your sales strategy, roles, plans and coverage model suits the goals and objectives of your newly merged company. The success of your integrated sales compensation program can often determine the success of a merger and requires a lot of timely thought as well as a strategically planned and executed rollout.