Towers Watson study shows poor retention after lock-in agreements expire
Creating the ideal employee-retention strategy remains elusive for Southeast Asian companies that have recently completed either a merger or acquisition or exercised employee-retention agreements, with expectations not met on most occasions, according to
The survey findings for Southeast Asia were extracted from Towers Watson’s "2014 Global M&A Retention Study", which examined the tactics applied by employers during a transaction in a bid to retain key staff, and assessed the make-up and effectiveness of retention agreements.
More than half (59 per cent) of Southeast Asia respondents indicated they retained a high percentage (more than 80 per cent) of employees who signed a retention agreement over the course of the full retention period.
However, fewer than one-third (29 per cent) said they retained that same percentage one year after the period expired.
The primary factor for employees who left before the end of the retention period centred on their concern over a changing organisational culture (75 per cent). Their discomfort with the new culture was far greater than that of their peers globally (48 per cent).
"Far more so than elsewhere in the world, more than half (52 per cent) of companies in Southeast Asia cite the need to acquire talent and new capabilities as their key reason for undertaking M&A [merger and acquisition] activity," said Massimo Borghello, Towers Watson’s head of M&A services in Asia-Pacific.
"Yet given their poor retention rates post-deal, it’s reasonable to deduce that acquirers fail to get the most out of such transactions.
Companies involved in M&As need to understand the organisational and/or cross-border cultural implications of the deal, |build employee engagement and work individually with key employees as early in the deal process as possible.
"Retention agreements are useful in that they offer a way to buy time, but the time must be used productively and wisely."
Survey participants in Southeast Asia stressed the importance of identifying candidates who are most vital to the deal and eligible for retention agreements. The ability to affect the success of the transaction and high-potential status were the main factors.
However, unlike elsewhere in the world, companies in this region tend to focus more on job title (41 per cent), reporting level (41 per cent) and business unit (37 per cent). It suggests these organisations are focusing on potentially ineffective selection criteria.
"Retaining the right people can make or break a deal. After all, human capital is very often a company’s most important asset," Borghello said.
"Retention starts with properly identifying the talent, roles and functions most critical to the success of the transaction.
"It’s clearly more efficient to take the steps necessary to keep key talent in place than it is to find, hire and integrate new employees during or just after an acquisition."
Pichpajee Saichuae, managing director of Towers Watson Thailand, said: "Southeast Asia, including Thailand, is experiencing a high volume of M&A activities.
The [full] implementation of the Asean Economic Community in 2015 is likely to attract more foreign investors, intensifying M&A activities around the region.
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"To ensure a successful M&A, HR [human resources] is required to take leadership in multiple aspects including talent, culture and communication."
Seventy-four per cent of the respondents said engaging with the target company’s senior leadership was the most useful source in drawing information about which individuals should sign retention agreements.
Getting senior leadership on board to sign retention agreements as early as possible can help keep executives engaged throughout the entire process.
More than two in five (42 per cent) disclosed that they asked senior leadership to sign retention agreements before the transaction’s initial signing, while 21 per cent did so at the initial signing.
"Retention should start with executives," Borghello said. "It’s critical for them to be completely on board and aligned with the goals and strategies of the acquisition.
Their behaviour is essential to the retention and engagement of employees.
"They can’t be distracted by concerns about their future employment, so it’s helpful to provide them with a clear personal stake in the success of the new company."
The survey indicates that companies in Southeast Asia set aside considerably more budget for retention planning than their global counterparts.
More than one-third (38 per cent) have retention budgets that account for more than 5 per cent of the total transaction cost, compared with 20 per cent of companies globally.
When considering retention budgets, most participants said their companies aimed for a sweet spot that encouraged retention by an optimal number of key employees, not the maximum number of employees, so individual rewards would be most meaningful to those retained without overspending in the aggregate.
Not surprisingly, cash bonuses were the most common type of financial award used in retention agreements, at 76 per cent, for senior management and 80 per cent for other employees.
But somewhat strikingly, high-retention companies used cash bonuses in retention agreements far more often than low-retention companies.
Towers Watson conducted a similar retention survey two years ago and found that only 1 per cent said their company offered retention agreements based purely on performance, whereas today that number stands at 14 per cent for senior leadership and 16 per cent for other employees.
The new survey found that companies typically used retention agreements that feature a combination of pay-to-stay and pay-to-perform metrics for senior leaders, while utilising purely time-based agreements for close to half (48 per cent) of their other employees.
