How to develop a benefits strategy post merger or acquisition

The volume of merger and acquisition (M&A) activity is generally seen as a benchmark for the health of the economy as a whole, so it is no surprise that such deals are now at their highest point than at any time since the downturn struck in 2007.

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  • The volume of mergers and acquisitions is growing, meaning more HR and benefits teams are having to think about integrating different benefits propositions.
  • Whereas once organisations would leave the benefits of an acquired or merged business alone, this is now less common.
  • If employers do decide to integrate, they will need to decide whether to harmonise up or down, or use this as a chance to review all benefits and implement a new suite.
  • Effective communication is important, particularly if some people will be worse off under the new system.

According to the Mergers and acquisitions review, published by Thomson Reuters in September 2015, global M&A activity for the first nine months of 2015 was 32% higher than the same period a year earlier, while analysis from Deloitte, published in September 2015, found deals involving UK companies have increased by 58%.

Employee benefits are unlikely to form part of the rationale behind such deals, although these can be a source of savings, but they do present both opportunities and potential headaches for the new business. In years gone by, organisations generally took the approach of leaving the two entities largely separate, but this can cause issues, says Chris Wakely, senior vice-president, Europe, Middle East and Africa (EMEA) sales at Thomsons Online Benefits. “Over time, they build up a huge array of different benefits, rules and eligibility, which can become problematic because it gets so complex,” he says. “It can also build up mistrust and create a them-and-us situation.”

But this does not mean such an approach should not be considered. When Coca-Cola took full control of Innocent Drinks in 2013, for example, ensuring that the smoothie manufacturer retained its own unique culture and approach to people, including its benefits provision, was vital to maintaining staff engagement. Its workplace philosophy of embracing healthy living, which is entwined with its reward and benefits package, is a key part of this.

Colm Coffey, director in KPMG’s People Powered Performance team, says a benefits strategy will often be dictated by the broader strategy around post-deal integration. “In some mergers, it will be business as usual for a period of time, and then it will be a step-by-step integration,” he says. “But there are other examples where the chief executive officer is charging forward and wants to drive an integrated organisation, almost from day one.”

Employee opinion

The starting point behind any attempt to integrate benefits should be to identify what is currently in place in both organisations. “Look at what the costs are, what the level of usage is and to what degree there is active participation in the benefits offerings, and whether there any differences on either side,” says Coffey.

After this, the approach should be to speak to employees, possibly through council meetings or less formal sessions, to find out what they really want, as well as identify any benefits they are not too concerned about. “That can generate some really powerful insights in terms of what people value and appreciate, and can form the basis of any changes that [an employer] wants to make,” he adds.

Jana Mercereau, a senior consultant in Towers Watson’s M&A practice, says the period immediately after a deal has gone through could be a good time to conduct a benchmarking exercise. “Employees are expecting change so it’s an environment where everything is on the table, so [an employer] can benchmark against the market and then offer what the employees want, as opposed to what they have had,” she explains.

Benefits harmonisation

Whether organisations look to scale benefits up or down will depend on the exact circumstances of the two businesses, says Wakely. “If [it’s] a rich technology [organisation] and not burdened with massive grandfather benefits, and doesn’t have a defined benefit pension scheme, [it] could probably afford to bring everyone up to [its] provision,” he says. “But if [it] has a generous benefits plan and the business [it’s] acquiring doesn’t, [it] might not want to do that because that’s potentially an extra £2 million [it] can avoid spending.”

In these instances, it could be a case of having one over-arching brand for a benefits package, but with different eligibility rules, he adds.

This may also be necessary in cases where employee contracts in the acquired organisation specify the exact terms and conditions they are entitled to, meaning it would be extremely costly to try to integrate the two. “A lot of old-school contracts stated [an employee] would be eligible for four-times life assurance, 66% income protection and 10% company pension contribution,” says Wakely. “The challenge then is that this is not just about changing the benefits plan but re-jigging all contractual terms and conditions, and that can put people off.”

In such circumstances, the two benefits provisions continue to exist side by side until something comes up that sparks off an attempt to review the situation further down the line; as has happened as a result of organisations making changes to defined benefit pension schemes.

A flexible benefits package can also help here, because it can effectively disguise any differences in provision between groups of employees, as well as letting individuals pick elements that matter to them. Duncan Brown, head of HR consultancy at the Institute for Employment Studies, says: “If someone has three days’ more fixed holiday than someone else, people are going to find out very quickly.

“But with a flex package, it’s much less obvious, and also it’s a really good vehicle for reducing differences. So over the next three years the standard holiday provision might go down. But [employees] can keep the three extra days; it’s just that [they’ve] got to pay for it.”

Such a forum also provides a platform that can evolve over time, should a business decide to move towards a more harmonised provision.

Employee communication

Thought also needs to be given to the communication that should accompany any changes to benefits or working conditions, especially if some employees will lose out in certain aspects as a result. “The key thing is not to spin it,” says Wakely. “If there’s a bad message [employers] need to address it head on.”

It helps if there is a consolation message that can also be delivered. One employer, for example, made a one-off lump sum payment to anyone who would be affected in recognition of the fact they would be getting a worse deal, says Wakely. “Alternatively, the [chief executive officer] CEO might say they don’t want any losers and then hunt out those who are losing out and implement some specific arrangement for them,” he adds. “The challenge there is that [employers] are moving away from this one-size-fits-all arrangement, but sometimes that can happen.”

Encouraging employees to see the bigger picture is also important, says Mercereau. “The wording I hear more than not is ‘same and aggregate’, so there will be winners and losers but the benefits will be the same in aggregate,” she says. “So [an employee] might be moving to a less generous medical plan but [they’ll] get a better pension plan. That seems to be the simplest road of least resistance in these big efforts.”

If HR and benefits professionals can get employees to a point where they feel reasonably content with their benefits provision while still bringing in the required efficiencies and harmonisation, employee benefits can even go some way towards smoothing the broader process of integration. As Iain McMath, chief executive officer of Sodexo Benefits and Rewards Services, says: “The importance of employee benefits should not be underestimated. Motivating employees throughout the merger or acquisition will make the transition process easier and more streamlined for the business. Consequently, employees will feel included, informed and more productive in a time of uncertainty.” 

Case study: Informa involves HR and benefits team in acquisitions informa

Publishing and events business Informa has made a number of acquisitions in recent years, including US exhibition firms Hanley Wood and Virgo, and UK book publisher Ashgate. Tom Humphris, global support HR director, gets involved around a month before any deal goes through. “We get access to all the information, and we actually run a piece of analysis looking at what our current benefits offering is versus what theirs is,” he says.

Informa has a comprehensive benefits offering, including elements such as financial planning, gym membership and critical illness cover, so usually has more generous provisions than prospective additions. Any employees coming into the business simply join its existing scheme. This extends to including a medical history disregarded policy around private medical insurance, although the business does operate different access levels to reflect previous policies that have been in place.

A bigger issue, however, is around pensions, particularly where the business being acquired operates a defined benefit scheme. “We get all the information and then liaise directly with the trustees of the target acquisition to make sure that when [members] are transferred to a defined contribution scheme it’s a fair and reasonable offering,” he says.

When a new business is acquired, Humphris and his team, and sometimes core providers, head out to that organisation and talk directly to employees who will be joining. “It means they can put a face to the name so they can reach out if they have any concerns,” says Humphris. “It builds that trust very early on.”

 

Case study: Workplace Wellness adopts parallel working after acquisitionEB_011115_018.pdf

In September 2015, RehabWorks bought Right Management Workplace Wellness from Right Management, a ManpowerGroup company.

As soon as the deal was announced, the HR teams from both organisations started to think about how to approach the benefits issue, and decided to initially adopt a period of parallel working. Jayne Carrington, managing director of what is now Workplace Wellness, says: “It gives us the opportunity to assess the level of benefits that both organisations have and to consult and evaluate the impact of any changes.” 

Crucially, this has also allowed Carrington to say to her team that no one will be joining on worse terms. “For example, Right Management staff had a higher level of [private] medical insurance [cover] than we now have in RehabWorks, so RehabWorks paid over and above for a new scheme just for Right Management employees,” she says.

Over the next few months, the two teams will decide how to proceed around harmonising benefits. Much of this will come from discussions with staff. “We’re going to ask which benefits really make a difference to them and, if it comes down to a budgetary conversation, then what would they like to keep,” says Carrington.

EB_011115_017.pdfViewpoint: Dr Valeriya Vitkova: HR involvement is key in mergers and acquisition deals

HR-related issues can be the primary cause of failure for many merger and acquisition (M&A) deals. In fact, Cass Business School’s M&A Research Centre’s study, Successful dealmaking, published in December 2014, shows that HR involvement and key employee retention are among the main drivers of successful M&A deals.

Large M&A transactions result in the need to reconcile two (usually) different reward systems. As part of the study, M&A Research Centre conducted interviews with company executives and found that 93% of respondents believed that issues faced by the organisation post-deal could be resolved if HR teams were involved in deals and that an HR component should be included in the deal team as early as the targeting stage.

Understanding how employees were rewarded in the past and defining the objectives of the reward system that the employer should have following the acquisition is vital. A key guiding principle throughout this process should be the value proposition that the employer wants to offer to existing and potential employees because this affects the type of people that stay and join the organisation.

At one end of the spectrum of reward systems are those that offer relatively equal base pay, thereby promoting cooperative behaviour and job security. At the other end are systems that offer more varied pay, which reward individual performance and encourage a more competitive environment.

Therefore, the type of culture that is to be promoted post-M&A needs to be considered. The study found that the number-one issue cited as a contributor to the failure of a deal was culture; an area that HR would be ideally placed to judge.

Last but not least, the post-deal reward system should not only be in line with the overall strategic direction of the business but it should also be used as a tool to achieve key strategic goals. Irrespective of the type of reward system that is to be implemented, communication to employees is crucial. When people know what is happening, how and why it affects them, they are more willing to accept changes.

Dr Valeriya Vitkova is research fellow at the M&A Research Centre (MARC) at Cass Business School