- A stressful time for employees. Workers may assume their jobs are in jeopardy or experience higher workloads while the sale or merger of a company is pending.
- Incentivize workers. Providing incentive compensation such as retention bonuses, equity awards and performance-based awards is an effective way to keep morale and productivity up during this uncertain time.
- Tax and legal considerations. Employers should consult with legal counsel when designing incentive compensation strategies to ensure compliance with Section 409A of the Internal Revenue Code.
After the sale or merger of a company is announced, it can take months before the transaction closes. This in-between time when the sale is pending can be extremely stressful for employees. They may feel like they are in a holding pattern until the sale goes through, which could lead to reduced productivity and morale. Or, they may be part of the team preparing for the transaction, in which case they could be working longer hours and experiencing heavier workloads. Other employees may assume that their jobs are in jeopardy and start jumping ship, causing the company to lose valuable talent and possibly putting completion of the transaction at risk.
Learn: Creating a Dynamic Incentive Modeling Tool
To prevent these negative impacts on employee performance and retention, management can use a number of different compensation measures to incentivize employees to stay with the company and continue performing at high levels. These tools — which can and should be combined, when appropriate, to achieve the different objectives they are designed to meet — include the following:
- Retention bonuses. A retention bonus is a lump-sum cash payment that an employee earns by remaining employed through a specific date or event. The payment date for a retention bonus can be expressed in a variety of ways. For example, a retention bonus could be structured to pay out only if the recipient is actively employed on a date three months from the date of the grant, on the closing date of the sale or 30 days after the sale takes place. Retention bonuses should be used with those employees who are essential to the success of the transaction.
- Transaction bonus. A transaction bonus is similar to a retention bonus in that the individual needs to be employed in order to receive it. However, a transaction bonus is only paid out if and when the transaction is complete. Transaction bonuses provide an incentive not only to stay with the company but also to work toward the successful completion of the sale.
- Equity awards. Generally speaking, restricted stock and stock option awards help to align employees’ interests with those of the owners of the company. Employees can easily measure their potential benefit based on the price per share paid in the transaction. When used in the context of the pending sale of a company, equity awards should be structured so that they only vest if the recipients are employed on the closing date of the sale.
- Phantom equity. There may be a variety of reasons an employer is not able to grant equity awards to employees following the announcement of a sale. For example, the company may not have an existing equity award plan or it may not have enough extra shares available for awards. In such cases, the organization could structure cash incentives to pay out based on the final price paid for each share or interest in the company. This is known as “phantom equity.” While phantom equity is taxed as regular compensation, it provides an incentive value that is more like an equity award than a retention or transaction bonus.
- Performance-based awards. While performance-based awards, such as sales incentives and productivity bonuses, are an important part of any well-rounded compensation program, they can be particularly useful for keeping employees engaged in their roles when a sale is pending. Adding a new short-term performance plan that ends with the closing of the transaction can show that the company remains committed to its employees’ success.
Depending on how these awards are structured, they may constitute “non-qualified deferred compensation” as defined under Section 409A of the Internal Revenue Code. In general, non-qualified deferred compensation is compensation that an employee earns in one year but that is not paid until a later year. Section 409A contains complicated rules for structuring non-qualified deferred compensation so that it remains non-taxable until it is paid. Employers should consult with employee benefits legal counsel when designing incentive compensation strategies to ensure compliance with Section 409A.
Managers and owners who design and implement thoughtful incentive compensation programs in order to retain and motivate employees while a sale or merger is pending are likely to gain rewards for the organization. Offering these bonuses and awards not only acknowledges that employees’ stress levels may be high as they navigate the uncertainty of the situation, but also provides them with a reason to stay engaged with the company. With several incentive compensation options to choose from, it is important to select the proper combination; doing so can make the difference in ensuring a successful transaction.
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