Compensation in a World of M&A Part 1: 4 Steps for Sellers

Mergers and acquisitions are on an uptick in the financial sector. There are a variety of reasons for this trend of M&A activity. Among the most common causes are: fatigue among bankers, regulatory burdens that result in smaller profits, competition for loans leading to compressed margins, shareholders wanting out, and talent shortages. Some banks are distressed and simply have no other choice. If your bank is planning on selling for any reason, there are a number of necessary preparations you must make.The question is: Are you prepared for the financial concerns as well as all the “social” issues associated with the M&A process?

In speaking with investment bankers, attorneys, and CPAs, we are often informed of how well a merger would have gone if it was not for the “social” dynamics of the transaction. Although not all human capital issues can be eliminated from M&A transactions, they can at least be mitigated and managed if both banks, the buyer and seller, are willing to be a little proactive related to compensation practices. I’ll be covering how to prepare for mergers and acquisitions in a two-part blog series. The first post will focus on preparations for sellers, and the second will discuss the steps a buyer must take to prepare for an acquisition.

Below are 4 steps a seller should take:

1. Make sure your compensation practices are consistent throughout the organization.  

Consistent compensation practices should be the goal of any bank, regardless of whether or not they’re planning to sell. There will be differences in how individual employees are compensated, especially if you tailor your compensation packages to the employee (something that enables many banks to compete for talent by offering the most value). Still, your compensation practices should follow similar logic that is consistent with your bank’s values as well as its compensation philosophy. There is nothing worse for an acquirer than having to clean up a mismanaged compensation structure. Typically, when changes are made to existing benefits, resentment builds amongst the acquired bank’s employee base, but this situation can be mitigated by establishing consistency.  

2. Review all agreements for any IRC 4999/280G issues.

In the event of a change in control, IRC Codes 4999 and 280G can cause significant problems with accelerated vesting of certain programs. The participant risks excise tax exposure due to the code sections, and the bank risks non-deductibility for payment made in conjunction with an excess parachute payment. As a best practice, banks should review their tally sheets annually and have a 280G analysis conducted. If the bank is positioning for a sale, IRC 4999/280G issues should be addressed expediently. There are a number of strategies to help mitigate the exposure. Work with a skilled M&A institutional advisor to help with analysis and implementation.

3. Communicate to key individuals about the incentive they’ll receive.

Communication is possibly the most important part of the social aspect of the M&A process. Even if documentation is financially sound, proper communication is the key to making the M&A process go smoothly. Converse with key individuals that will receive an incentive to help make the transaction go smoothly—especially if these individuals are working themselves out of a job.  Since this may be a sensitive matter, be upfront, honest, and considerate of appropriate timing.

4. Have all employees clearly identify their job responsibilities.  

Duplication of positions can occur during the M&A process, resulting in layoffs, but an employee’s responsibilities may differ from their official job descriptions. Have your bank’s employees clearly identify their duties so you have a clear picture of what they actually do day-to-day. The goal is to make sure that the acquiring company has a better understanding of the value each employee brings to the organization so they can make appropriate decisions based on the most accurate information.

The steps I’ve listed here are just a few items to help get the process started. If your bank is preparing to sell, it’s a good idea to get in touch with an advisor who can provide M&A consulting and make sure all concerns are addressed well in advance. Proactive preparation will bring potential problems to the forefront, afford timely decisions, and make all transactions more successful for everyone involved.

Buying rather than selling? Check out Part 2: 4 Steps for Buyers.