An M&A executive compensation checklist: steps to ensuring a successful transaction.

Executive compensation is a powerful tool for motivating a company's management team to grow the value of the corporation and accomplish its strategic objectives. Executive compensation can also be a powerful tool to influence positive outcomes in M&A activity. However, recent transactions like the acquisition of Merrill Lynch by Bank of America remind us of the potential for executive pay to get out of hand during a deal. Improperly structured incentives and golden parachutes can also present expensive roadblocks to otherwise desirable transactions. With the recent public outcry over executive compensation, directors now more than ever need to be vigilant when overseeing the role of executive compensation during M&A events. The following checklist covers the key questions that should be addressed by boards when considering a major corporate transaction:

[ILLUSTRATION OMITTED]

I. What is the responsibility of the board during a merger or acquisition (in terms of exercising duty of care and sound business judgment)?

A. In the case of a sale: ensure that the shareholders get the best possible price for the company.

B. In the case of a purchase: transaction is aligned with shareholder interests, paying a fair price, appropriate strategic fit, appropriate cultural fit, and everyone knows what they are buying (due diligence).

II. What are the key issues a board should consider in terms of executive pay during the transaction?

A. If selling the company:

1. Ensure that the appropriate incentives are in place to motivate key management to stay with the company, maximize its value, and facilitate a smooth sale.

2. Do employment contracts exist? Then revisit change-in-control provisions in employment contracts to ensure that they:

a) Protect key members of the management team,

b) Are attractive to potential buyers (eliminate potential deterrents and poison pills).

c) Will generally be perceived as fair and reasonable.

B. If purchasing a company:

1. Ensure that the appropriate incentives are in place to motivate key management to stay with the company through the acquisition.

2. Ensure that the company is paying a fair price for the incoming management team.

a) Careful due diligence and review of salary levels, incentive plans and employment contracts

1) Who has them?

2) Are there any special 'side deals' or retention bonuses?

b) Carefully analyze all golden parachute provisions:

1) How much will senior management be paid:

a) At the time of the transaction?

b) If terminated after the transaction?

2) Are the parachutes beneficial or detrimental to the transaction?

3) Does management have an incentive to stay with the company, or receive so much money they can easily leave?

4) Can the terms be re-negotiated to your benefit?

c) Assess the compatibility of the compensation programs:

1) How do pay philosophies and practices of the two companies compare?

2) How will differences be resolved?

III. Preparation is essential:

A. Stay on top of succession planning. This will help you understand where the key talent lies within your organization and identify any gaps. Understand who would be attractive to a potential buyer--figure out who the company needs to keep during a potential sale or merger.

1. Are employment contracts necessary or will a well-designed incentive plan be sufficient to motivate and retain talent?

2. Employ purpose-driven change-in-control planning to make sure parachute provisions are not excessive and are beneficial to the company and shareholders.

B. Establish "Rules of the Road" for existing incentive plans.

C. Define guidelines for how major and minor transactions will be incorporated into performance measurement for annual and long-term incentive plans (For example, will additional revenue and earnings generated from an acquisition be counted towards annual incentive plan goals? These issues should be addressed and resolved before embarking on the M&A trail.)

Don Delves is founder and president of The Delves Group, a Chicago-based consultancy dedicated to working with boards, compensation committees, sensor executive teams, and sales forces to improve their effectiveness and the way they are organized, directed, and rewarded. He has advised more than 100 board compensation committees over 23 years, and attends 50-60 compensation committee meetings per year. Delves' book, Stock Options and the New Hales of Corporate Accountability: Measuring, Managing, and Rewarding Performance (McGraw-Hill, 2003; WorldatWork, 2006) in its second edition, is considered a "must-read" for board members, executives, and investors. Delves also published Accounting for Compensation Arrangements (CCH, 2006,2007,2008], the definitive guide for accounting for stock options, equity incentives, and other forms of compensation.

Richard Thoroe recently joined the Delves Group as a Senior Consultant after acquiring his MBA in Analytic Finance and Accounting from the University of Chicago, Graduate School of Business. Richard has over 13 years professional consulting experience with Mercer, Accenture, and Watson Wyatt. Rich is also on the board of the Chicago Symphony Orchestra Associates and is a member of the Union League Club of Chicago.

Print Get the Mag Weekly Updates