Bob Romanchek
Mike Withey
In this episode of the “Executive Compensation Podcast,” we delve into executive compensation issues in the context of mergers and acquisitions (M&A). Joined by experts Bob Romanchek and Mike Withey, the discussion navigates the complex challenges and strategic considerations companies face when aligning executive compensation with M&A activities. This episode touches on how to retain key talent, align incentives with shareholder interests, and manage the nuanced legal and tax implications of M&A transactions. The following summary captures the key points and insights shared by the guests.
Main Discussion Points:
1. M&A and Executive Compensation Challenges: Mergers and acquisitions (M&A) present unique challenges for executive compensation. Key issues include retaining talent during the uncertainty of M&A and ensuring that M&A objectives align with shareholder value.
2. Importance of M&A Readiness in Executive Compensation: Despite a recently quiet M&A market influenced by factors like interest rates and inflation, companies should proactively prepare their executive compensation programs for potential M&As.
3. Long-Term Incentives (LTIs) in M&A: Evaluating LTI treatment upon a change-in-control is a crucial first step for retaining talent during M&A.
4. Conflicts in Legal Documents: Potential conflicts in legal documents (omnibus plans, individual award agreements, and employment contracts) need to be addressed to ensure consistent treatment of LTIs.
5. Annual Incentives and M&A: Many companies lack formal legal documents for annual incentive plans, leading to problems during M&A. Establishing clear change of control provisions in these plans is important.
6. Severance Arrangements in M&A: Enhanced severance is common in M&A due to increased risks for executives. The severance arrangement should address the excise tax implications, with a focus on alternative cap language versus gross-ups.
7. Communication of Protections: Effective communication of compensation provisions is critical to prevent executives from considering opportunities elsewhere.
8. Special Retention Incentives: For critical talent, special retention incentives, often in the form of cash payments, are used. These are targeted at a select group of employees essential for the organization’s success.
9. Deal Incentives: Although less common, deal incentives are sometimes used for employees directly involved in the M&A transaction, especially for those doing extra work due to the transaction.
10. Tax Implications (280G and 4999): Understanding the tax implications of compensation in M&A is crucial. Executives may face an excise tax on parachute payments, which includes severance and LTIs. Strategies such as non-compete considerations and accelerating payments can be used to mitigate tax impacts.
Key Takeaways:
• Proactive Preparation: Companies should proactively prepare their executive compensation programs for M&A, considering the economic landscape and potential changes in the market.
• Balancing Interests: Executive compensation in M&A must balance the interests of retaining key talent, aligning with shareholder value, and adhering to legal and tax requirements.
• Strategic Communication: Clear and strategic communication of compensation plans to executives is crucial for retention and smooth transition during M&A.
• Customized Solutions: Companies may need to develop customized retention and incentive solutions, especially for critical personnel not covered by standard compensation packages.
• Legal and Tax Complexity: Navigating the legal and tax complexities of executive compensation in M&A requires careful planning and potentially specialized advice.
This episode provides a high-level review of how executive compensation is impacted by M&A transactions and offers strategies for companies to navigate these challenges effectively.
Listen to the full podcast here: Executive Compensation Actions You Should Be Taking Now To Prepare for a Merger – Meridian Compensation Partners (meridiancp.com)
The Executive Compensation Podcast is available on all major podcast directories including iTunes, Spotify and Google Play.