Keeping Key Leaders

Encouraging executives from acquired companies to stay on and help with the transition involves more than compensation and perks. Cultural and role considerations are also essential.

Thursday, December 6, 2012
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Over the last three years, KSL Resorts, based in La Quinta, Calif., acquired four properties. The latest purchase occurred in May, when it added The Grove Park Inn Resort and Spa in Asheville, N.C., to its portfolio.

While HR at KSL intended to retain the majority of executives from Grove Park, it encountered several obstacles early on during the acquisition process. Much to its dismay, the property's parent company, Sammons Enterprises Inc., offered the executives a significant severance package that would encourage some not to join KSL, recalls Ed Eynon, vice president of HR at KSL. To make matters worse, executives had grown accustomed to a very unique perk that actually surprised HR -- free and unlimited use of any room in the resort.

"This was a new perk we hadn't seen," says Eynon, explaining that properties usually offer a discount program for friends and family. "This is a very popular resort, with high occupancy. [Executives] would give out [free] rooms to friends and family and say 'no' to guests who want to come. It was a no-win either way."

During acquisitions, it is fairly common for companies to retain existing executives at the acquired organization to help ease the transition and avoid business interruptions. While executive salaries may be matched or even sweetened a bit, the employment offer can still fall short. Besides salary, HR must focus on three other factors -- incentives, culture and role -- to retain talented executives instead of driving them toward the competition.

In the KSL scenario, the unusual room perk was replaced with a KSL incentive offered to all employees, a discount plan that could be applied at any of KSL's sister companies nationwide. So instead of free rooms at Grove Park, the executives would now receive discounts at 10 premium resorts, more than 150 country clubs, nine upscale athletic clubs, two world-class ski resorts and an Australian high-end cruise line. This was a huge hit with the execs, says Eynon, adding that out of the 10 to 15 executives HR wanted to retain, all but a handful joined KSL.

As part of its onboarding process, he says, KSL, which now supports 6,000 employees, routinely uses industry survey results to benchmark its resorts against other similar properties. Executive salaries, incentives, company culture and other aspects of an executive's job are evaluated and compared. HR also spends time interviewing key players at the properties they're buying, asking, "What are the great things that keep you here?" So, before the deal is done, he says, HR understands what's important to them and what they value.

Typically, it's not just about the money.

Offering growth opportunities and respecting the existing culture can sometimes be powerful magnets. Before the acquisition, Grove Park was the only resort owned by Sammons, says Eynon. Part of the attraction to KSL was that executives would now have the opportunity to join a family of unique resorts, not a resort chain, and contribute to KSL's future growth.

Perhaps the perk that really won them over is something not offered every day. By coming on board, Eynon says, they would be granted equity ownership in Grove Park, which can produce annual distributions and other significant financial returns.

"It is an incentive," he says, "that can absolutely transform an executive's view of the business -- as if it was his or her own -- and emphasizes the importance of treating employees and guests very well and avoiding wasteful expenditures."

Meanwhile, KSL had planned on disbanding the resort's "culture council" because it wasn't in sync with KSL's standard business practices. The council was composed of hourly and salaried workers who reviewed employee issues and promoted the resort's service culture. When the general manager, HR director and other executives at Grove Park learned that the committee might be let go, Eynon says, they lobbied senior KSL officials to keep it intact.

"When you've got an iconic property, there is a great deal of pride among the execs . . . [who] are the authors of the programs and processes you'd like to keep but . . . are in conflict with your best practices," he says. "It was an exception we freely granted based on the desires of their leaders."

Although Eynon doesn't believe any executive would have refused to join KSL if the committee had been dissolved, what his company did, he says, demonstrated good will and respect for Grove Park's culture. Executives were happy with the decision and perhaps more satisfied with their new employer.

"Getting the compensation right gets you to good but what gets you to great is the cultural, intangible things that are so important to people . . . ," Eynon says.

Cash and Cultural Divides

In addition to juggling those intangibles, savvy business leaders often vary the lengths of time that acquired executives are retained, depending on the scenario.

"Some people are required in the transition process, maybe the first six to 18 months as the two companies are being integrated," says Gregg Passin, partner and U.S. executive rewards leader at Mercer in New York. "Then, some people are important long-term going forward. All of those different flavors of people might get some type of different retention bonus, both in terms of level of bonus as well as form and structure of bonus."

Although the acquisition team may not include HR, Passin says, HR still needs to be consulted regarding executive retention and must ask the team some tough questions: How critical are these executives to the organization's success? What's the risk of these people leaving? What HR programs are currently in place that might retain them?

"You're playing corporate psychologist here," he says. "Look at what's on the table, what do they have that they would lose if they left [such as] stock options or restricted stock or deferred compensation? Then [determine] how good their current benefits and other pieces of the value proposition -- the nonfinancial ones -- are . . . . [Would] they want to leave?"

If the answer is "yes," more flexibility may be needed. Maybe bonuses can be awarded every six months instead of annually. Perhaps the executives can receive cash instead of stock options if they meet specific performance goals.

HR needs to consider other factors as well, such as reporting relationships and the executives' degree of autonomy.

"What's going through people's minds is, here's what they had and liked and might lose versus this great uncertainty [over] a new organization, new bosses ... [whether] their job is going to be made redundant," Passin says. "That's what they care about most. That's what you're fighting against."

Other issues can kill the deal, too, such as a misalignment of priorities and values. In all cases, HR needs to step back and identify the value driver behind the acquisition. Is it increased revenues? Diversification? Innovation? Incentive plans for leaders must be tied tightly to that value driver, says Bob Landis, partner at ArchPoint Consulting, a global management firm based in Lafayette, La.

Likewise, how executives achieve those goals also matters.

Landis tells the story of when candy company Mars Inc. acquired a pet-care company in 2006 that operated with strict financial guidelines. Culture took a back seat. At Mars, however, culture was No. 1. Being branded as a caring company was more important than financial metrics. The two management teams had to be aligned in their thinking before any metrics or even incentives could be discussed. "HR chaperoned the conversation because the cultural divide was so significant to resolve," he says.

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Although HR is typically conversant in culture, Landis says, it struggles when diving deep into discussions about profit and loss and the impact they have on culture.

"[HR] may lose control of the conversation because it quickly becomes too fuzzy, too aspirational, then the finance guys say, 'Look, we just have to get these numbers, you can figure this out as we go along,' " he says. "That's a big mistake. Everything you read about the success of acquisitions will talk about how important alignment of cultures is because it affects the employees' decisions about feeling safe and secure and wanting to play."

Landis says HR needs to referee the alignment session, identifying corporate values and ensuring that attitudes and behaviors on both sides match. But that typically doesn't occur, he says, adding that the focus is usually on corporate metrics, such as establishing sales goals.

" . . . Understand each of these people at the senior-management level and their culture today and how that resonates or doesn't with your culture," he says. "No amount of money you throw at someone is going to make them tolerate being unhappy every day."

Harsh Reality

Problems can also occur when executives transition from CEO jobs at small companies to managing business units where they report to bosses several layers under their new CEO, says Rebecca McCathern, senior HR manager at San Jose, Calif.-based Cisco.

"They come from an organization where they create everything, are the ultimate decision-makers, pick the [company's] direction, lead, and do all these fun and great things," she says. "That's the value proposition we're battling against."

Each year, Cisco engages in a deep, competitive analysis of all elements of total direct compensation and rewards in each of the roughly 40 countries it operates in to develop a competitive package.

"We target the market's 75th percentile in all countries [the top three-quarters of the labor market]," adds Mary Beth Towne, senior manager of executive compensation at Cisco.  "How close or far away are we from that particular target?"

For acquired executives outside the United States, she says, the company tends to focus more on base pay than incentives. For acquired U.S. execs, sometimes it's the opposite, since that's more the norm here. Overall, she says, the company experiences a greater comfort level with offering variable pay and payouts versus fixed pay, and has a history of being fairly generous over time. However, if retention or turnover for acquired executives ever becomes an issue, she says, that balance would be re-evaluated.

Not surprisingly, says Towne, all executives want more money and less risk. Years ago, Cisco revised a portion of its incentive plan for executive vice presidents. They now had a performance-based component tied to their equity program. Since last year, so do Cisco's senior vice presidents. Both executive and senior vice president can now earn restricted stock if they reach specific financial metrics each year and over a three-year period.

"It's all about balance," she says. "We want to keep them focused on short-term and long-term goals and why they have a short-term annual cash incentive. Shareholders want more pay for performance and want all execs to have some skin in the game right along with them."

What acquired executives want are answers, adds McCathern. How will their role, authority and independence change? Will their new job be big enough, broad enough or interesting enough? What new opportunities exist?

"From the first moment we're able to engage with the target company, we're assessing where the match is and where the mismatches are as quickly as possible," she says. "Culture is very important. If there's a bad fit . . . [incentives] won't keep executives there."

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