Because M&A activity is on the uprise, we’ve been covering compensation in a world of bank mergers and acquisitions in a 2-part blog series. To make all aspects of the transaction go more smoothly for both sides, financially as well as socially, there are steps buyers and sellers need to take prior to a change in control. Our last post focused on what to do if your bank is the seller. In this post, we’ll cover the steps that buyers should take regarding compensation practices. As a buyer, you are acquiring an organization and its compensation practices, which you must then integrate with your own.

To get you started on the right path, below is a buyer’s to-do list:

1. Make sure your compensation practices are accomplishing the stated objectives.

This is a given: your compensation practices should be accomplishing their stated objectives. The matter becomes more pressing when you are planning to buy. If new personnel are joining your workforce, you don’t want them to immediately make negative judgements on your compensation practices. A formalized process that is consistent and has been proven to be effective is more likely to be readily accepted. Having a clear compensation philosophy will help; it will assure your compensation practices accomplish the right objectives, in addition to benchmarking reviews for all general employees and the executive management team. Without a formalized process in place, it can be very difficult to integrate new cultures, and you’re likely to run into complications, miscommunications, and lost productivity.

2. Review agreements for IRC 4999/280G exposure.

Frequently in the event of a change in control, vesting of benefit plans is accelerated, leading to excise tax concerns for the employee and non-deductibility for associated payments for the bank. There are instances where an acquisition has triggered a buyer’s benefits to accelerate, despite them being the “surviving” entity. Thus, it is important to make sure banks and employees understand the consequences of a change in control. Review agreements for IRC Section 4999/280G exposure. This is a best practice, and if it does nothing else, it will at least ensure consistency related to structuring compensation packages for new executives throughout the acquisition process.

3. Conduct appropriate due diligence related to the skill and responsibilities each employee brings.

As a buyer, you may be inheriting a significant amount of talent from the bank you’re acquiring, and you need to figure out where these employees will fit into your organization. This is necessary before you begin thinking about how you will compensate them. Simply looking at job titles may not tell you enough about what they actually do for the bank, what their skills are, and how they can be utilized. For instance, an employee titled “Teller” or “Operations” may have other duties such as community liaison; thus, knowing where they fit and how they can add value is critical. Review each employee’s skills and responsibilities to ensure you’re getting the full value the employee can provide. The transition will also go more smoothly if employees feel that the buying bank fully recognizes their contributions.

4. If layoffs occur due to duplication of positions, have an action plan in place.

Layoffs are an unfortunate but sometimes necessary part of mergers and acquisitions. If you discover (while analyzing employee skills and responsibilities) that some positions will be redundant, you need an action plan in place for layoffs. Speak with recruiters, provide adequate severance, and be clear as to timelines. Having a package assembled for employees who must be let go should help answer their questions. Ambiguity with employees may critically impact your bank’s reputation in the community.

By addressing these 4 items, you’ll find that not only will the process go more smoothly for your bank as a buyer, but you’ll also be better equipped going forward regarding your continuing compensation practices. However, they are merely starting points. If you’re planning to acquire a bank, it is wise to work with an advisor who can give you guidance and ensure that your compensation practices provide the most value with the least risk. An advisor can help you strategize compensation packages and address funding so you remain competitive and attract and retain key talent.