© 2000 Corporate Executive Board

54 M&A Talent Management

Recommendation: Establish Clear Guidelines for the Use

of Retention Bonuses in the Short Term
In addition to targeted communication tactics, companies must ensure that retention strategies,
such as bonuses, are implemented as effectively as possible. Many companies employ retention
bonuses during M&A without a principled approach for maximizing this investment. Basic
guidelines, such as those used by U.S. Bancorp, will help the line examine its talent requirements
more critically and limit bonus use to the most critical situations.

Case Example: Retention Bonus Guidelines, U.S. Bancorp

Company Background
• U.S. Bancorp is a bank holding company with $8.4 billion in assets and over 30,000 employees.
• Since 1997, U.S. Bancorp has made 15 acquisitions.
Situation
• The company found that during M&A many managers try to please everyone by offering
small bonuses to most acquired employees.
• Analysis of average bonus amounts in past deals indicated that greater selectivity enabled
managers to recognize the most critical talent with larger bonus amounts, thereby
increasing the retention of that key talent.
Action
• In the 1980s, HR developed the first iteration of guidelines based on typical employee
motivations during M&A and business line input.
• Guidelines have evolved from deal to deal depending on the key motivators of the
acquired talent and the retention goals.
• The process consists of two steps:
Step #1—Determine the “Value” of the Employee
Step #2—Consider the Financial Necessity and Structure of the Bonus
Impact
• Guidelines have helped line managers to differentiate which talent should and should not
receive retention bonuses.
• The company is now experiencing fewer “false positives” when offering bonuses. The line
reports that retention bonuses are now easier to manage.

Every Employee Is Not the Same

“Too often managers don’t differentiate which talent should and should not receive bonuses.
Instead they want to spread money around to please everyone. This makes bonuses seem like an
entitlement. That’s not the goal. Retention bonuses are meant to ensure the focus and commitment
of key talent, not just their presence.”
SVP, Human Resources
U.S. Bancorp

Source: U.S. Bancorp; Corporate Leadership Council research.

 © 2000 Corporate Executive Board

Design Customized Retention Strategies for Key Talent 55

Step #1—Determine the “Value” of the Employee

Before selecting individuals for retention bonuses, line managers must confirm that the talent
is critical to the organization, at least over the short term. This determination will depend on
previous analysis of the strategy of the deal and evaluation of the individual talent. (For more
information on these activities, members should refer to Imperative #2, page 27.)

Retention Bonus Guidelines,* page 1

Basic information
When should bonuses be offered?
At anytime prior to deal close, to employees who are not anticipated to continue
ongoing employment.

What is the purpose of a retention bonus?

To retain key employees who are critical to the success of the business or function
during an important period of time (e.g., the period before or following transaction close
or systems conversion). Affected managers must clearly understand the talent needs of
the new organization to make this determination.

Valuation of the Individual

Key Considerations
How critical is this position/individual
to the successful integration or
reorganization?
Will dates or time lines be delayed if this
employee leaves?
What will be the business impact if the
employee leaves during the transition
period?
How will customers or processes be
impacted?
How long will the individual be required
to fill the position?
Decision Guidelines
This overall evaluation will depend upon the deal strategy
and skill needs assessment done previously. The questions
below will also add insight into this determination.
If the delay would be significant, then a bonus is called for
to prevent related business losses.
If actual business impact will be minimal, then a bonus is
not called for.
The biggest risk to losing talent is a subsequent loss of
customers. Thus any profound impact on customers
resulting from talent defection is a strong
recommendation for a retention bonus.
If an employee is needed over the long term, a retention
bonus may not be the best option. In such cases, if used at
all, bonuses would only be in addition to more long-term,
focused retention efforts (such as senior attention).

* Adapted from information provided by U.S. Bancorp. Source: U.S. Bancorp; Corporate Leadership Council research.
© 2000 Corporate Executive Board

56 M&A Talent Management

Step #2—Consider the Financial Necessity and Structure

of the Bonus
In addition to gauging the necessity of individual talent, the line should confirm the financial
necessity and feasibility of a retention bonus. Although the resources for such measures will differ
from deal to deal and company to company, U.S. Bancorp’s general considerations are useful
guides for making such determinations.

Retention Bonus Guidelines,* page 2

Gauging the Necessity of a Retention Bonus

Key Considerations
If the individual leaves before the end of the
retention period, can his or her skills be replaced and
at what cost?
Can this position be covered in a more cost-effective
manner during this period (e.g., temporary help or
another option)?
Is the individual already motivated to stay for the
necessary time frame (e.g., are they eligible for a
severance package)?
Determining the Bonus Amount
Key Considerations
How long does the employee need to be retained?
How competitive is the local labor market?
How much can we afford to offer given the bonus
budget size and other constraints?
How many employees at the target have similar skills?
Establishing Performance Criteria
Key Considerations
What performance criteria will the bonus
payment be contingent upon?
How will these criteria be measured?
Decision Guidelines
If the cost of replacing the talent would be less than the bonus
cost, then an offer should not be made.
For common skills (especially internally), the expenditure of
retention bonuses may not make sense.
In some cases, valuable talent may have reasons to stay with
the company for a while even without the lure of a retention
bonus. In these instances, the company can save money by not
offering bonuses. (Caveat: employees of a group are usually all
offered bonuses.)
Decision Guidelines
Typically, longer retention time frames will necessitate larger
bonuses (or perhaps bonuses with milestone payments).
If the labor market is very competitive, talent could easily leave for
a more lucrative offer. Thus, the bonus offer may need to be
increased.
It is not feasible to extend disproportionately large bonuses, as this
will cripple the company’s ability to use bonuses for other key talent.
Generally, bonuses are offered to all members of a group with
similar knowledge, skill and abilities. Thus, the bonus size may need
to remain smaller to account for this overall expense.
Decision Guidelines
To ensure that retained talent is producing against necessary
tasks instead of just filling seats, all bonuses should be contingent
on performance goals.
Criteria should be objective and quantifiable and must be outlined
in the bonus offer letter.

The Benefit of Structure

“In the past, HR spent a lot of time educating the line about the distribution of retention bonuses. With the
guidelines, line managers all have a structure to follow in making their own decisions. This saves the effort of
HR oversight while avoiding mistakes in usage.”
SVP, Human Resources
U.S. Bancorp

* Adapted from information provided by U.S. Bancorp. Source: U.S. Bancorp; Corporate Leadership Council research.
 © 2000 Corporate Executive Board

Design Customized Retention Strategies for Key Talent 57

Council Assessment:
Retention Bonus Guidelines
Differentiating Features
• Instead of the more haphazard practice of offering bonuses to all potentially critical
talent, guidelines provide line managers with a framework for determining the most
appropriate targets for retention bonuses.
• In addition to considering the value of the talent, guidelines also instruct the line to
consider if more cost-effective options than a bonus exist.
• Guidelines increase consistency across the business lines in the distribution of
retention bonuses.
Implementation Tips
• Although guidelines should be put into writing, they should not be constructed as a
contract. Also, the structure must not conflict legally with other policies (e.g., severance,
employment at will).
• Companies should be clear about the purpose of the retention bonus and outline
performance criteria accordingly.
• Managers must not be allowed to change the conditions (e.g., length of retention period)
of the bonus after it has been offered. Such action could greatly reduce the acquiring
company’s credibility with newly acquired employees.
• The structure of retention bonuses may be modified to suit the motivations of the
acquired employees. For example, in some cases, employees may value equity over
cash payments.
Caveats
• Companies should limit recipients of retention bonuses in order to ensure that resources
are allocated in meaningful amounts.
• Ultimately, retention bonuses are only a complement to other retention measures. They
are most effective for those individuals only needed for a limited period. For any talent
critical over the long term, companies should focus their efforts on the types of
personalized retention efforts used for internal retention of key talent.
Applicability
• Guidelines are particularly useful for more decentralized organizations where M&A
decision making regarding talent is devolved to the line.
Additional Benefit
• Guidelines enable HR to spend more time on more value-added M&A activities instead
of repeatedly answering questions from the line regarding retention bonuses.